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Shane Clark is President of EuroAmerican Financial Advisors (EAFA), which provides personalized financial planning and investment advice for Americans living in Spain. Shane is appearing at an upcoming financial event for US expats in Barcelona, stay tuned for details!
Embracing the vibrant culture of Barcelona as an American expat is a thrilling and transformative experience, presenting opportunities for personal growth, career advancement and cultural immersion. However, alongside these benefits, there are particular financial challenges that expats have to navigate, such as when it comes to investing as an American living abroad. In this article, we explore some of the principal considerations for US expat investors in Barcelona, emphasizing the importance of adapting not only to a new culture but also a new financial and tax landscape.
Investing as an American Living in Barcelona
For US citizens and green card holders residing in Barcelona, investment decisions are typically more complex compared to in the US. One reason is because regardless of where we live, US citizens remain subject to US tax reporting and taxation. This means that financial accounts and investments held in Spain need reporting to Uncle Sam, and some types of Spanish investments can lead to US tax liabilities.
On the other hand, EU residents, including Americans living in Barcelona, face challenges building diversified portfolios with US funds due to EU regulations like MIFID II, or Packaged retail and insurance-based investment products (PRIIPS). This regulation prohibits EU residents from purchasing non-EU (e.g. US) based funds that don’t have certain characteristics. However, there are specialist financial advisory firms that offer solutions to this seeming Catch 22, working to tailor investment portfolios based on each individual’s current situation, future plans and goals.
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The Investment Implications of Tax Rules for Americans Abroad
While the US and Spain have income tax treaties and social security totalization agreements, the worldwide income of American expats in Barcelona is theoretically taxable by both the US and Spain. There are however measures such as tax credits that you can claim to resolve this issue.
Special Expat Tax Regime (SETR)
Spain offers a special expatriate tax regime sometimes referred to as the Beckham Law. This allows Spanish residents, including Americans living in Barcelona, to be taxed as non-residents for a limited period, typically up to six years, including their year of arrival. Under the regime, taxation primarily applies to Spanish-sourced income and assets. The taxation rates for Spanish income and capital gains also differ, providing potentially a preferential tax scenario for American expats in Barcelona that may influence your investment decisions during this time.
Investment Advice and Taxation
Balancing Us Tax-Advantaged Accounts with Spanish Taxation
When it comes to American expats living in Spain, the tax consequences and ability to contribute to an IRA, Roth IRA, or 401(k) account can vary depending on their specific circumstances. In Spain, where tax rates may differ across regions, expatriates might experience varying tax treatment for IRA contributions. For example, in Barcelona, taxpayers may not be able to claim a deduction on their local tax return when contributing to an IRA, further, they may not be able to contribute to one depending on where their income is sourced from.
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Ownership of Foreign Mutual Funds (PFICs)
American expats in Barcelona should exercise caution when considering investing in foreign mutual funds, which the IRS classifies as passive foreign investment companies (PFICs). These investments can lead to complex tax implications and potentially result in unexpected US taxation. A more tax-efficient approach for American expats is to opt for US-domiciled funds, and stocks, through an advisor specializing in expat services, who will know which funds also comply with investment rules for EU residents. This strategy can help in saving and building wealth while minimizing the complexities associated with foreign mutual funds.
Currencies
Another important consideration when investing as an American living in Spain is to minimize fees when transferring between different currencies, both when investing and when drawing on investments. This often means seeking to work with specialist currency brokers.
Spanish Pension Plans
Many American expats in Spain have Spanish pension plans. While some countries’ tax treaties with the United States simplify tax reporting and allow deductions and tax deferrals on foreign pension plans, your specific situation should be analyzed by a tax advisor with specialty knowledge of the joint tax treaty, to avoid punitive treatment. Therefore, American expats in Spain must be aware of the consequences of contributing to these pension plans.
Investment Exposure and Diversification
Where it’s best to invest and save as an expat in Spain will often depend on where you receive your income and your long term plans (in terms of when and where you will eventually want to draw on your investments), however, the principle of diversification to mitigate risk is still important, although it may be applied differently, again depending on you particular situation and long term plans.
In conclusion, Barcelona offers an excellent experience and lifestyle for American expats, however while you're living abroad, seeking guidance from financial advisors experienced in international investments and cross-border taxation can help American expats in Barcelona navigate these complex financial considerations effectively and prosper.
This article is for informational purposes only; it is not intended to offer advice or guidance on legal, tax, or investment matters. Such advice can be given only with full understanding of a person’s specific situation.
You can learn more about EuroAmerican Financial Advisors on the website at eurousafa.com, follow on Twitter at @AdvisorsEuro and Facebook at @EuroAmericanFinancialadvisors and connect on LinkedIn.
Sponsored by EuroAmerican Financial Advisors.