Since 2018, all EU residents, including US expats living within the EU, must adhere to new EU-wide regulations known as PRIIPs under MiFID II. These rules aim to enhance the transparency of financial products and protect EU resident investors. In this article, we explain what MiFID II and PRIIPs are and explore the implications for American expat investors.
- What is MiFID II?
- What is a PRIIP?
- What is a KID?
- The dilemma for American expat investors
- Investment solutions for US expats in the EU
What is MiFID II?
MiFID II (Markets in Financial Instruments Directive) was introduced by the European Union in January 2018 as a response to the 2008 financial crisis. Building on its predecessor, MiFID, which primarily focused on equities, MiFID II extends EU-wide regulatory oversight to encompass all types of securities and derivatives trading to better protect EU resident investors. It introduced stricter reporting requirements for trading firms to increase market transparency and reduce opaque trading practices such as over-the-counter (OTC) trading and dark pools. Key provisions include the creation of new trading venues like organized trading facilities (OTFs) and multilateral trading facilities (MTFs) to standardize and regulate previously unregulated trades. MiFID II also mandates comprehensive reporting on transaction details and enhances investor safeguards by separating costs for research and transactions. The regulations were designed to modernize EU financial markets, improve market integrity, and align practices across member states.
What is a PRIIP?
A PRIIP, or Packaged Retail Investment or Insurance-Based Product is a type of investment defined in the MiFID II legislation. PRIIPs encompass various financial instruments including funds, insurance products, and pensions. These products link their returns to underlying assets like shares, bonds, indices, or other securities.
Under the PRIIP Regulation, any entity creating a PRIIP offered to EU residents must provide a Key Information Document (KID) in a specific format for investors. Additionally, advisors or sellers targeting EU residents must ensure that PRIIPs they offer have a KID, which serves to inform investors about essential aspects of the product before purchase.
What is a KID?
A Key Information Document (KID) is a standardized document required under the PRIIPs regulation. It provides essential information about the investment product to potential investors. The KID includes detailed descriptions of the investment itself, the target investor profile, the investment’s objectives, and comprehensive details about costs such as fees. It also outlines the potential risks associated with the investment, including a summary risk indicator (e.g., low, medium, high) and how it is calculated. Additionally, the KID presents three performance scenarios to illustrate potential outcomes for the investor under different market conditions and outlines procedures for handling investor complaints.
The dilemma for American expat investors
Since January 2018, American expatriates residing in the European Union have encountered a perplexing investment dilemma. As EU residents, they face restrictions on purchasing US funds, as most US funds don’t compile EU-compliant KIDs for their financial products. Conversely, as US citizens, expat in Europe face limitations on purchasing many EU pooled investment such as ETFs and mutual funds, as these fall under the IRS PFIC definition and as such as subject to stringent US reporting and higher US tax rates.
A PFIC, or Passive Foreign Investment Company, is an investment entity that derives at least 75% of its income from passive sources like dividends, or if 50% of its assets generate passive income. For Americans, reporting investments in PFICs involves filing a complex form (Form 8621) if their total investments in PFICs exceed $25,000, or if they receive distributions from a PFIC.
Investment solutions for US expats in the EU
US expat investors residing in the EU facing PRIIPs regulations have several solutions available to manage their investments effectively:
EU-compliant US products
Some US investment products have been structured to comply with PRIIPs regulations, making them accessible to EU residents. These products include a Key Information Document (KID) that meets EU standards.
Non-PRIIPs investments
Investors can opt for US investment options exempt from PRIIPs regulations, such as individual stocks or bonds. These investments do not require a KID and can provide flexibility in constructing a diversified portfolio.
Specialized financial advice
As a US expat investor in the EU, it’s important to seek advice from an expat specialist financial advisor who has a detailed understanding of both EU and US rules. They may offer investment options and portfolios that comply with both, as well as advice tailored to you situation to help you achieve your investment and overall financial goals.
If you have any questions about financial planning or investing 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.
