Americans considering investing in Euros should weigh the potential benefits of exposure to Europe’s diverse markets against risks including currency fluctuations, growth potential, and regulatory and tax regime differences. Understanding the intricacies of investing in Euros, including the impact of exchange rates and geopolitical ebbs and flows of a single currency with 27 governments, is essential for making informed decisions. In this article, we explore the most important considerations for American investors looking invest in euros to help you better understand the potential risks alongside the upsides.
1. Beware of foreign investment tax traps (PFIC & PRIIPs)
Many European mutual funds and ETFs are classified as Passive Foreign Investment Companies (PFICs) under US tax law, creating burdensome reporting requirements and potentially unexpected US tax liabilities.
To simplify tax reporting and avoid PFIC-related issues, consider sticking to either US-listed ETFs (such as those that contain European stocks, for example), or alternatively invest in individual European stocks and bonds. Seek advice from an expat investment specialist to form a strategy that takes these factors into account within the context of your wider financial goals.
2. US tax reporting of overseas investments
As a US citizen, you’re subject to worldwide taxation regardless of where you live. If you have foreign financial accounts, including bank and investment accounts, with combined balances that exceed $10,000 at any time, you must file a Foreign Bank Account Report (FBAR), also known as FinCEN Form 114. Additionally, if your foreign assets exceed certain thresholds, you must file IRS Form 8938 under the Foreign Account Tax Compliance Act (FATCA). Failure to file these forms can result in high penalties, starting at $10,000.
3. The risk of double taxation
Many European countries tax income generated in the country, even if you’re not a resident there. As a US citizen, this can mean the risk of double taxation (by the US and the country where you’re investing), both on income derived from local investments in Euros, and on capital gains. Some countries may also impose a wealth tax on assets in the country, particularly in you qualify for tax residence there (in which case, most countries will tax your worldwide income).
Most Eurozone countries have tax treaties with the US; however, they don’t prevent expats from having to file. A few, notably Belgium and France, contain provisions that maintain the tax benefits of US retirement accounts. In general, to avoid double taxation, you can claim US tax credits to offset taxes paid abroad. It’s important to understand and comply with the tax laws in the European countries you invest in, though.
4. Estate taxes differ in Europe
Many European countries impose inheritance taxes that can be more aggressive than US estate tax laws. Without proper estate planning, US expats could leave heirs with significant tax burdens. Each country has different rules and tax rates, making it important to seek advice from a trustworthy local tax professional plan accordingly.
5. Currency risk & investment diversification
Investing in Euros often means converting your funds from US dollars (and vice versa). This creates two risks: first, that you lose money when you transfer between the two currencies, and second, that fluctuations in the dollar/Euro exchange rate affect the relative value of your investments in relation to the other currency. So, a weaker dollar erodes the value US-denominated investments, while a stronger dollar similarly affects Euro-based assets.
Using currency brokers and platforms such as Moneycorp and Wise can reduce losses when transferring internationally, while holding a balanced mix of US and Euro-denominated investments can help hedge against currency risk. In short, by diversifying across both currencies, you can protect your portfolio from the impact of exchange rate fluctuations.
6. European dividend stocks offer higher yields
European blue-chip stocks often provide strong dividend yields even when compared to US stocks, offering stable income streams in a low-interest-rate environment. European companies typically prioritize dividends over stock buybacks, providing more predictable cash flow for long-term investors.
Inversely, US stock typically see higher overall growth, so again diversifying your portfolio in both currencies can offer a balanced approach to risk and reward.
Final thoughts
Investing overseas offers both opportunities and challenges in a complex international investment environment. Seek advice from an investment advisor who is licensed in both the US and EU and experienced working with investments for international Americans to ensure that you invest in a way that help you achieve your overall financial goals and supports your current and future lifestyle.
If you have any questions about financial planning as an American living in the EU, get in touch.
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.
