Global Tax Forum: More on Investing in Mutual Funds Across Borders

Also, a look at the rules for closed-end funds and exchange-traded unit investment trusts.
Publish date:

Global Tax Forum shifts to a Q&A format this week to tackle some follow-up questions to our latest column on passive foreign investment companies, also known as PFICs.

We'll examine whether the rules also apply to closed-end funds and exchange-traded unit investment trusts, and we'll also look at the rules for investing in U.S. mutual funds if you're a foreign investor.

Anything else you'd like us to address? Send your thoughts and questions to Please include your full name and resident country. Global Tax Forum appears every other Wednesday.

PFIC Follow-Up

Nice article on passive foreign investment companies. But one burning question was left unanswered. Do foreign closed-end funds count as PFICs for these purposes? I own closed-ends that trade in Canada and the U.K. Is that a big mistake? -- Alan Lewis


For U.S. tax purposes, both open-end and closed-end foreign mutual funds are treated as passive foreign investment companies. That means they will be subject to the same ugly PFIC rules, notes Bruce Reynolds, a partner in the international tax services group at

Deloitte & Touche

in Washington.

Investing in U.S. Mutual Funds

I have some friends who live in a foreign country and they would like to invest in a U.S. mutual fund such as the (VFINX) - Get Report Vanguard 500 Index fund. However, the prospectus states that it is for U.S. residents only. Can you tell me what other fund families will allow foreign investors? -- Alex Chao-Chiang Meng


Quite frankly, until the tax rules are changed, it's not very tax-efficient for foreigners to invest in U.S. domestic mutual funds anyway. That's because income that is not taxable to foreigners when generated by stocks and bonds is taxable when distributed by a mutual fund. As a result, nonresident aliens might be better off, tax-wise, owning individual stocks and bonds rather than shares of a mutual fund. See this previous

Global Tax Forum for more details.

But the reason foreign investors can't get into U.S. funds is that most funds are not registered for offering outside the U.S., says John Collins, spokesman for the

Investment Company Institute

, the mutual fund trade organization.

A security must be registered in a foreign country before it is sold there, and a fund company must make sure it's in compliance with the local laws. "Many U.S. funds don't want to be running afoul

of foreign laws by offering funds in other countries, so they don't do it," Collins says.

There are a few options through


, though.


Vanguard Group Ireland

, based in Dublin, offers index mutual funds that track U.S. markets to institutional and individual investors around the world, according to spokesman John Woerth.

Vanguard Investments Australia

also offers index funds that track U.S. markets and investment-management services to individuals and institutional clients around the world.

Tangled in WEBS and Spiders

In a recent column, you urged foreign investors (nonresident aliens) to stay away from investing in mutual funds due to their unfavorable tax treatment. Now what about those "index-fund-like" stocks like WEBS, QQQ, SPY or DIA? Those seem to be depositary receipts based on unit investment trusts. For a foreign investor, are those treated like mutual funds or ordinary stocks when it comes to taxes? -- David-Michael Lincke


These investments are taxed just like a stock, says Richard Shapiro, an

Ernst & Young

securities tax partner in New York.

So, for nonresident aliens who trade shares of these securities, that means no tax on capital gains or interest, and only

withholding tax on dividends. (Note that we're not talking about trading options on these investments. Those tax rules are different.)

For more information on the World Equity Benchmark Shares (WEBS), Standard & Poor's Depositary Receipts (SPDRs), Diamonds

(DIA) - Get Report

, which track the

Dow Jones Industrial Average

, and the

Nasdaq 100

tracking stock

(QQQ) - Get Report

, check out this

section of the

American Stock Exchange

Web site.

Finding Foreign Exchange Rates

Hi, I'm hoping you can help me. I'm a Canadian subscriber and investor, and I need to find somewhere that I can look up what the U.S.-Canadian currency exchange rates were on certain days so I can determine where I stand overall in Canadian dollars, and for capital-gains tax reporting. Is there somewhere you know of where I can do this? -- Walt Trenner


We couldn't find any historical exchange-rate sources. Current daily exchange rates are listed in major U.S. business papers, such as

The Wall Street Journal

. You can find them on the Web at

Yahoo! Finance's

currency conversion section or


currency rates area.


Federal Reserve Bank

of New York runs a Web

site, that includes a table charting exchange rates over the past 120 days. You'll have to ballpark the amounts; only the period's high and low is given.

Anyone know any better sources?

TSC Tax Forum aims to provide general tax information. It cannot and does not attempt to provide individual tax advice. All readers are urged to consult with an accountant as needed about their individual circumstances.