It is highly likely people associate US expats with places like the UK, Hong Kong and Canada.
But Germany is also home to around 300,000, according to the country’s Federal Institute for Population Research.
Given the sizeable expat population, financial planning should be straightforward.
Right?
Differences
Brian Dunhill, founder of international planning firm Dunhill Financial, spoke to International Adviser about the issues high net worth US clients may face in a country like Germany.
Unlike the UK and Canada, “the pension system in Europe isn’t viewed as a retirement account on the US side”, said Dunhill.
“This will give them ramifications when they get a foreign pension.
“Essentially, they get considered as grantor trusts in the US. Suddenly, they get double taxed when there should have been a tax reprieve.
“In Germany, or any place in continental Europe, we found that it is extremely hard to do pension planning for clients.”
This is why his business focuses on building investments that are “conservative and simply structured rather than trying to go towards some exotic or localised function”.
Mismatch of rules
There are several common challenges US expats forget to look into when in Germany, Robert Paul, partner of the US family office team at London & Capital, told IA.
“Although you would think many Americans are aware of their reporting obligations it still surprises us how many still do not realise what they require,” said Paul. “More common even than that is that most don’t understand how to manage their assets considering both jurisdictions and tax regulations and how to optimise their global strategy considering both countries’ rules.
“The most common challenge is the mismatch of rules between the US and Germany. This falls across different areas such as the ability to manage FX gains in both jurisdictions and reporting information.”
Two-sided coin
Advising a client with dual citizenship or multiple places of residence requires greater collaboration between advisers in both jurisdictions or going to a single firm with a deep understanding of both markets.
“Advisers in the US often do a good job offsetting gains and losses from a US perspective however they do not consider the international tax implications, likewise German planners are not taking into account the US dollar rules and effects of their actions,” Paul added.
“German accounts will report in euros and will not consider the US reporting requirements and timescales associated with filing US taxes; US accounts will produce US reports which are largely irrelevant for euro reporting.
“Think about every capital gain being reported in US dollars, if the currency has moved over the period of holding that asset then that US dollar gain may well be a euro loss. This means it is not just a simple matter of converting the final information to the correct currency but actually looking at each individual sale.
“Many of the local tax efficient savings vehicles, whilst a good planning tool in Germany, may be deemed to be highly taxable in the US. A local German banker, completely understandably, wouldn’t consider these implications when putting together a strategy for the client.”
Withdrawn offering
Sadly, many financial institutions in places like Germany take the decision not to deal with US expats because of the complications an adviser can face when taking them on as clients.
A major complication comes in the form of the US Foreign Account Taxation Compliance Act (Fatca), which was enacted late in 2010. The US taxes expats regardless of whether or not they have spent any of their adult life or earned any money in the country.
Other complexities include 1099 reporting, which informs the Internal Revenue Service (IRS) of miscellaneous payments, such as income from interest and dividends; plus reporting foreign bank and financial accounts (FBAR) and the ownership of shares in passive foreign investment companies (PFIC).
Dunhill added: “When it comes to the investment side, I find it is easier to keep your money on the US front because then you avoid any of the situations that come about from buying foreign investments.
“On top of that, what tends to happen is most of the banks won’t accept any American clients. For instance, you walk into Deutsche Bank as an American who wants to invest money.
“They will turn them down because they won’t take US clients.”
Life of Fatca
There have been several questions about whether anything can be simplified for US expats, including eradicating Fatca. A dedicated group of Americans living overseas have committed themselves to repealing Fatca, but to little avail.
France, however, has said it may renegotiate its tax treaty with the US, according to a report from a cross-party group of senior politicians.
Andrew Fisher, president and chief investment officer of US-based Worldwide Wealth Advisors, told IA: “Taxes are always the biggest complexity, given that they are now subject to both the tax authority in Germany, but also the IRS, and they must navigate a complex system of tax credits and deductions in the US tax code related to expats.
“Fatca is a strong and far reaching law, which really only the US could have pushed on the rest of the world.
“While most foreign institutions resent having to follow the rules of Fatca, most foreign governments are generally very favourable to it, because there is a phased-in element of reciprocity whereby over time the inter-governmental information sharing will increase dramatically.
“Most foreign governments are very happy about this. The reality is that Fatca was just the impetus for far greater information sharing, which will be the new reality in international banking and investment.
“Rather than lighten up for US expats, I believe it would become more restrictive and transparent for globally mobile people from other countries as well.”
Expansion plans
As more challenges arise for US expats, London & Capital’s Paul spoke about the possibilities for the firm expanding its European operation to Germany.
It recently sold its UK wealth arm to focus on US expats across Europe, which came months after the firm ventured into France.
“Over the past three years, we have expanded our offering from the UK to France and now are looking to increase this reach across Europe, including Germany,” said Paul. “We have historically picked up business passively in these jurisdictions and this has shown us that there is a real need for specialist help.
“Given our history and expertise in understanding the process and framework required in order to help international US families, we believe there is real scope for us to add a high-quality service and assist these families.
“As the world has become more transparent the number of firms who are able to, or interested in, managing these international US families has shrunk.
“As it is such a strength and focus for us, this creates a huge opportunity to provide a high-quality offering to European based US families and so grow our business.”
While London and Capital see the market as an opportunity, not everyone agrees.
Fisher said: “There are a lot of American expats in Germany but related to wealth management I would say that it is not a huge market for Worldwide Wealth Advisors.
“There are not a lot of large companies bringing over well-paid American executives.
“However, another facet of this market are Germans who have come to the US and been very successful (often in the technology sector), who then return to Germany either to continue their careers or in retirement.
“Many of these globally mobile executives have obtained a green card (which they keep on return), or they’ve obtained dual citizenship, or they’ve married an American spouse, all of which put them in a similar tax situation as an American-born expat….in fact they effectively are an American expat.”
Easing the burden
In a bid to provide a broader range of planning products in Europe, Dunhill Financial recently teamed up with platform provider Praemium to provide investment models that are built solely with US investments and aimed at American expats.
The minimum investment is €25,000 (£21,375, $28,344) and portfolios will be comprised of approved investments that are registered in the US, which will prevent them from being categorised as PFICs.
Praemium is then able to issue a 1099 at the end of the year, which takes care of the IRS reporting requirements.
“Our offering with Praemium gives financial advisers access to our accounts,” said Dunhill. “They can buy US-centric investments in our portfolios and we raise them in four different currencies.
“You can get an allocation that would look like a European allocation but bought in America and managed by myself. We rolled that out and to me it is very accessible with a $25,000 minimum.
“We are able to cater to most of the emerging affluent, we are trying to push that minimum down, we just don’t want to do it until we can get the fees down to a reasonable level, so it is affordable.”
