US UK Tax Returns Preparation With German and Dutch Accounts

US UK tax returns preparation for a US citizen living in London who still holds German and Dutch bank, brokerage and fund accounts means building two returns from one set of euro records: a US package with Form 1040, the FBAR, usually Form 8938 and often a Form 8621 for every EU-domiciled fund, and a UK Self Assessment return whose foreign pages (SA106) report the same interest, dividends and gains in sterling. The short answer to most readers' question is that every one of those euro accounts stays reportable in both countries for as long as you keep it, even though you no longer live in Frankfurt or Amsterdam. The hard parts are the funds, treated harshly by both the IRS and HMRC, and the tax Germany and the Netherlands keep withholding at source.

The reader we have in mind is an investment banker or executive who was posted to Germany or the Netherlands, moved to London, and kept the euro accounts open. In the returns we prepare for this group the pattern repeats: a German current account, a German securities account mixing German shares and UCITS ETFs, a Dutch savings account and sometimes a Dutch brokerage account.

Why do German and Dutch accounts complicate US UK tax returns preparation?

A US citizen in London is taxed by the United States on worldwide income because of citizenship, and by the United Kingdom on worldwide income because of residence. German and Dutch accounts add a third and sometimes fourth tax system on top: the source country withholds tax on interest and dividends before you see the money, and both the US and the UK then tax the same income again and give credit for some or all of the foreign tax. Each country also has its own rules for collective investment funds, and they do not line up. A fund that is perfectly ordinary for a German investor can be a passive foreign investment company (PFIC) for US purposes and a non-reporting offshore fund for UK purposes at the same time.

Which US forms do German and Dutch accounts trigger?

For a typical former Frankfurt or Amsterdam executive now in London, the US filing set looks like this:

• FinCEN Form 114 (FBAR): every German and Dutch account, including current, savings, securities and fund accounts, once the combined maximum value of all foreign accounts exceeds 10,000 dollars at any time in the calendar year. UK accounts count towards the same total.
• Form 8938 (Statement of Specified Foreign Financial Assets): filed with the Form 1040 when foreign financial assets exceed the higher thresholds that apply to taxpayers living abroad.
• Form 8621: generally one form for each PFIC held, which in practice means each EU-domiciled fund or ETF in the German or Dutch securities account.
• Schedule B: interest and dividends from the euro accounts, plus the foreign account questions in Part III.
• Form 1116: the foreign tax credit, claiming German and Dutch withholding and UK tax on the same income, split between the passive and general categories.
• Form 8949 and Schedule D: sales of individual German or Dutch shares held directly, which are not PFICs and are reported as ordinary capital transactions.

How do you report German and Dutch accounts on the FBAR?

The FBAR is a FinCEN filing, not part of the tax return. The IRS comparison page at https://www.irs.gov/businesses/comparison-of-form-8938-and-fbar-requirements confirms that the FBAR is required when the aggregate value of foreign financial accounts exceeds 10,000 dollars at any time during the calendar year, that it is filed electronically through FinCEN's BSA E-Filing System rather than with the 1040, and that it is due on 15 April with an automatic extension to 15 October. The same page confirms that foreign mutual funds are reportable on both the FBAR and Form 8938.

For each euro account you report the maximum value during the year, converted to dollars at the year-end exchange rate. We convert using the Treasury Reporting Rates of Exchange for the last day of the calendar year, which is the conventional rate for this purpose, and we record the rate used in the workpapers so the FBAR and Form 8938 are built on the same number. A securities account and its linked cash settlement account often carry separate numbers and both must be listed, and a dormant account with a few hundred euros is still reported once the combined total crosses the threshold.

When is Form 8938 required for a US citizen living in London?

Form 8938 uses higher thresholds for taxpayers who live abroad. According to the same IRS comparison page, a single filer or married person filing separately who lives abroad must file when specified foreign financial assets exceed 200,000 dollars on the last day of the tax year or 300,000 dollars at any time during the year. For married couples filing jointly the thresholds are 400,000 dollars and 600,000 dollars. A London-based banker with a German securities account of any size usually crosses these levels once UK accounts are added.

Form 8938 and the FBAR overlap but are not interchangeable, so we prepare both from the same schedule. The penalties differ too: the IRS page describes a 10,000 dollar penalty for failure to disclose on Form 8938, with further penalties after an IRS notice, while FBAR civil penalties are separate and adjusted annually for inflation.

Are UCITS ETFs and EU funds PFICs, and what are the options?

A passive foreign investment company is a non-US corporation whose income or assets are mainly passive. Almost every fund and ETF domiciled in Germany, Ireland, Luxembourg or the Netherlands and sold under the EU UCITS framework falls within that definition for a US shareholder, because the fund is a foreign corporation for US purposes and its assets are investment assets. This is the largest source of cost and risk in US UK tax returns preparation for this group.

The Form 8621 instructions at https://www.irs.gov/instructions/i8621 state that a separate Form 8621 must be filed for each PFIC in which stock is held directly or indirectly. The instructions describe three regimes, and which one applies depends on elections made, or not made, in earlier years:

• Default excess distribution regime (section 1291): applies when no election has been made. Gains on sale and distributions above a threshold are treated as excess distributions, spread over the holding period, and the amounts allocated to earlier years carry a separate tax and an interest charge. This is the most expensive outcome and the one most former expatriates are in without knowing it.
• Qualified electing fund election (section 1295): you include your share of the fund's ordinary earnings and net capital gain each year. It requires a PFIC Annual Information Statement from the fund. In our experience EU fund managers rarely produce one for US investors, so the QEF route is usually unavailable for UCITS products.
• Mark-to-market election (section 1296): available for marketable stock, meaning PFIC shares regularly traded on a qualifying exchange. Exchange-listed UCITS ETFs are often eligible. Each year the increase in value is taxed as ordinary income, and decreases are deductible only to the extent of earlier mark-to-market gains.

For most clients the realistic choice is between selling out of the default regime or making a mark-to-market election for listed ETFs going forward; a late election does not clean the past, because the earlier holding period is still dealt with under section 1291. The instructions also contain a limited exception from completing Part I of Form 8621 where the aggregate value of PFIC stock is 25,000 dollars or less on the last day of the tax year, or 50,000 dollars for joint filers, provided no excess distribution was received and no gain recognised from a section 1291 fund. That exception is narrower than many people assume and does not help an executive with a six-figure ETF portfolio.

How is German withholding tax treated on a US return?

Germany taxes investment income through a flat final withholding tax, the Abgeltungsteuer, collected by the paying institution, with the solidarity surcharge added on top and, for members of a registered church, church tax. When a German institution still holds you on file as German resident, or has not processed a non-resident status, it will usually keep withholding the full domestic charge on interest and dividends. Once it records you as a UK resident, German tax on bank interest generally falls away, but German tax on dividends from German companies continues at source and can exceed the rate allowed under the treaty, leaving a reclaim to be made in Germany.

For the US return, German income tax and the solidarity surcharge withheld on dividends are generally creditable foreign income taxes on Form 1116, but only up to the amount actually owed under the US-Germany treaty. The IRS treaty list at https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z confirms that the United States has income tax treaties with Germany, the Netherlands and the United Kingdom, and explains that treaties can reduce foreign tax on certain foreign-source income of US residents and citizens. Tax withheld above the treaty rate is reclaimable from Germany and is not a creditable tax in the US. Claiming the full withholding without considering the reclaim is a common error. Church tax is a different matter: whether it qualifies as a creditable income tax is uncertain, and we treat it conservatively rather than claim it by default.

German fund investors will also have seen the Vorabpauschale, an annual advance lump sum on which German-resident investors are taxed even if the fund distributes nothing. It is a purely German concept, not income for US or UK purposes, so it must not be carried across to either return as if it were a dividend. Any German tax withheld on it needs separate review before any credit is claimed.

What about Dutch dividend withholding and the old Box 3 position?

The Netherlands withholds dividend tax on dividends paid by Dutch companies, including when the shares are held by a non-resident, and the treaty rate available to you depends on your residence. Dutch bank interest is generally not subject to withholding. While you lived in the Netherlands, your savings and investments were probably taxed in Box 3 on a deemed or calculated return rather than on actual income. That regime matters less once you are non-resident: Box 3 is a resident's tax on worldwide savings and investments, and a non-resident is generally taxed in the Netherlands only on a narrow list of Dutch assets, which ordinarily does not include a Dutch bank or securities account.

The gap we see is that clients assume leaving Box 3 also ended their reporting. It did not. The Dutch accounts stay on the FBAR and Form 8938, Dutch dividends stay on Schedule B and the SA106, and any Dutch-domiciled fund stays a PFIC and an offshore fund.

How does the foreign tax credit work when three countries tax the same dividend?

Take a dividend from a German company received by a US citizen resident in London. Germany taxes it at source. The UK taxes it as foreign dividend income and gives credit for German tax up to the rate allowed by the UK-Germany double taxation agreement. The US taxes it as passive category income and gives credit for foreign tax up to its own limitation. Because the dividend is not US-source, the US can credit both the German tax and the UK tax on that dividend, subject to the Form 1116 limitation.

For a higher earner the UK tax on investment income usually exceeds the US tax on it, so the US liability on euro dividends is often eliminated. The order matters: we limit German tax to the treaty rate, credit it first on the UK return, then claim the German tax and the residual UK tax on the US return. Claiming the full German withholding in both countries regardless of treaty limits is the error we correct most often.

How does a UK resident report German and Dutch income on the SA106?

GOV.UK guidance at https://www.gov.uk/tax-foreign-income explains that a UK resident normally pays tax on foreign income, that it is usually reported through Self Assessment, and that relief may be available where the same income is taxed in more than one country. The relief is claimed on the foreign pages, the SA106, alongside the income. Foreign savings interest and foreign dividends are entered with the foreign tax paid on each, and the credit is limited to the treaty rate rather than the tax actually withheld. Readers who arrived in the UK recently should check whether the four-year Foreign Income and Gains regime applies to them, because it changes what goes on the return in the early years of residence.

Reporting fund or non-reporting fund: why does it matter for UK tax?

HMRC's helpsheet HS265 at https://www.gov.uk/government/publications/offshore-funds-self-assessment-helpsheet-hs265/hs265-offshore-funds sets out the UK treatment. A reporting fund reports its income to HMRC and to UK investors for each period, and UK investors are taxed on their full share of reportable income even if it has not been distributed; the undistributed part is excess reported income. A gain on selling a reporting fund is a capital gain, and excess reported income taxed during ownership is deducted so it is not taxed twice. A non-reporting fund is different: gains on disposal are generally an offshore income gain, and HS265 states that you are subject to Income Tax, rather than Capital Gains Tax, on it. Offshore income gains are reported on SA106 under other overseas income and gains.

HS265 also explains that a fund company with more than 60 percent of its investments in interest-bearing assets is treated as a bond fund, so its income is taxed as interest rather than dividends. HMRC publishes and updates monthly a list of funds approved as reporting funds at https://www.gov.uk/government/publications/offshore-funds-list-of-reporting-funds, searchable by ISIN. Share classes created for the German or Dutch retail market frequently lack UK reporting status. We check every ISIN against the list for every year of ownership, because a fund that was non-reporting for any period of your holding can still produce an offshore income gain.

Worked scenario: an ex-Frankfurt banker with German and Dutch accounts

Illustration only. All figures are hypothetical and the exchange rates are assumptions chosen for arithmetic simplicity, not published rates: 1 euro equals 1.10 dollars and 0.85 pounds. A US citizen managing director, single, moved from Frankfurt to London several years ago after an earlier posting in Amsterdam. Over the US tax year her euro accounts look like this:

• German current account: maximum balance 40,000 euros, year-end 32,000 euros, no interest.
• German securities account holding German listed shares: maximum value 90,000 euros, dividends 6,000 euros with German tax of 1,500 euros withheld (illustrative amount, before any reclaim).
• Same securities account holding UCITS ETF A, on the HMRC reporting fund list, value 120,000 euros, excess reported income for the UK year of 1,200 euros, no distribution.
• UCITS ETF B, not on the reporting fund list, held for five years with no US election, sold during the year for a gain of 12,000 euros.
• Dutch savings account: maximum balance 25,000 euros, interest 500 euros, no Dutch tax withheld.
• Dutch brokerage account holding Dutch listed shares: maximum value 60,000 euros, dividends 3,000 euros with Dutch dividend tax withheld (illustrative 450 euros).

US side. The aggregate maximum value of the euro accounts alone is several hundred thousand dollars, so the FBAR is required and every account is listed, including the cash settlement account linked to the German securities account. Year-end specified foreign assets exceed 200,000 dollars, so Form 8938 is required. ETF A and ETF B each need a Form 8621. ETF B's 12,000 euro gain, about 13,200 dollars at the assumed rate, is an excess distribution under section 1291: it is spread over the five-year holding period, and the earlier-year portions carry a separate tax and an interest charge. For ETF A we would consider a mark-to-market election going forward. Dividends of 9,000 euros and interest of 500 euros go on Schedule B, and the German and Dutch tax, limited to treaty rates, plus the UK tax on the same income goes on Form 1116 in the passive category.

UK side. On the SA106, the German and Dutch dividends, about 7,650 pounds at the assumed rate, are entered as foreign dividends with credit for German and Dutch tax up to the UK treaty rates. The Dutch interest goes in as foreign savings income. ETF A's excess reported income of 1,200 euros, about 1,020 pounds, is taxable even though nothing was paid, and is added to the base cost for capital gains purposes later. ETF B's gain, about 10,200 pounds, is an offshore income gain charged to income tax, not capital gains tax, and appears on SA106 under other overseas income and gains. Each UK figure is drawn from transactions in the UK tax year, not from the calendar-year statement.

In this illustration the ETF B sale is taxed as income in both countries, with the US interest charge on top. Had it been a reporting fund with a US mark-to-market election from purchase, the UK gain would have been a capital gain and the US cost spread across the years without an interest charge. That is why the fund review comes first.

Why should one reconciled schedule feed both returns?

The cleanest files we see are built from one master schedule in euros, with separate dollar and sterling columns, that every form on both returns draws from. The schedule should contain:

• Every German and Dutch account with its account number, type, maximum value and year-end value in euros, plus the conversion rate used for the FBAR and Form 8938.
• Every holding, flagged as direct share, PFIC fund or both, with its ISIN, UK reporting status for each year held, and US election status.
• Every interest and dividend payment with its date, gross amount, German or Dutch tax withheld, treaty rate and reclaimable excess.
• Every sale with trade date, proceeds, cost, holding period in days and the UK and US tax year it falls into.
• A reconciliation line showing that the sum of reported income on the US return and on the UK return differs only by timing and exchange rate, never by omission.

On currency, the IRS foreign currency page at https://www.irs.gov/individuals/international-taxpayers/foreign-currency-and-currency-exchange-rates says to use the exchange rate prevailing when you receive, pay or accrue an item, and that the IRS does not publish its own official rate. We therefore convert income items at the rate for each payment date and document the source.

What if you are behind on US filings for these accounts?

Many former expatriates discover only after moving to London that the euro accounts should have been on FBARs and Forms 8938 for years, and that their German ETFs needed Forms 8621. Where the failure was non-willful, the usual catch-up route is the IRS Streamlined Filing Compliance Procedures, described at https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures where the IRS describes non-willful conduct as conduct due to negligence, inadvertence or mistake, or conduct resulting from a good-faith misunderstanding of the law, and the procedures are unavailable to anyone already under IRS civil examination or criminal investigation.

For a US citizen living in London who meets the non-residency requirement, the Streamlined Foreign Offshore Procedures carry no penalty: you pay the tax and interest due, file the missing FBARs, and certify non-willful conduct. The miscellaneous offshore penalty applies only under the domestic version. Late FBARs on their own are filed through FinCEN's BSA E-Filing System with a reason for late filing. Rebuilding PFIC purchase histories from old German and Dutch statements is usually the longest part of a catch-up file.

What mistakes do we correct most often in US UK tax returns preparation?

• Treating UCITS ETFs as ordinary shares on Form 8949 instead of filing Form 8621 for each one.
• Reporting a non-reporting fund gain as a capital gain on the UK return instead of an offshore income gain.
• Claiming German withholding in full as a foreign tax credit when part of it was above the treaty rate and reclaimable in Germany.
• Leaving a cash settlement account, a small Dutch savings account or a dormant German account off the FBAR.
• Carrying the Vorabpauschale across to the US or UK return as if it were income.
• Assuming that leaving the Dutch Box 3 regime, or ceasing German residence, ended the reporting obligations.

Related reading and tools

• US Tax Services & IRS Compliance
• UK Tax Services
• IRS Streamlined Filing
• UK Income Tax Calculator
• US Federal Income Tax Calculator

Every situation is different. Book a cross-border tax consultation to discuss how these rules apply to you.

Authoritative sources

IRS — Streamlined Filing Compliance Procedures

FinCEN — Report of Foreign Bank and Financial Accounts (FBAR)

HM Revenue & Customs

GOV.UK — Tax on foreign income

IRS — Foreign Earned Income Exclusion

IRS — Foreign Tax Credit

ICAEW

Chartered Institute of Taxation (CIOT)

AICPA

MoneyHelper (UK)