Archive for Passive Foreign Investment Corporation

Form 8621, Information Return By A Shareholder Of A Passive Foreign Investment Company Or Qualified Electing Fund

Form 8621, Information Return By A Shareholder Of A Passive Foreign Investment Company Or Qualified Electing Fund
What Is A PFIC?

A  foreign corporation is a passive foreign investment company (PFIC) if it meets either of the following two tests:

  1. 75% or more of its gross income for the taxable year is passive income (generally  investment income such as interest, dividends, royalties, rents and annuities), or
  2. At least 50% of its assets  are held to produce passive income.

This definition describes most foreign mutual funds, since mutual funds outside the United States tend to be organized as corporations (or organizations deemed corporations under US tax law). PFICs can also be ETFs, bond funds, currency tracking funds, precious metal funds, investment trusts, hedge funds, private equity funds, startups and more. Many expats own PFICs, either directly or indirectly, without understanding their toxic treatment under US tax law. Here is a look at Form 8621 and here are the Instructions. But really, forget about the instructions. You are not going to want to try this on your own.

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U.S. Shareholders Of A Passive Foreign Investment Company

OLIVIER WAGNER - US Expats With Passive Foreign Investment Company

The IRS found the way to congratulate U.S.expats who are shareholders of a Passive Foreign Investment Company(PFIC) by adding one additional form you need to file. Together with your tax return, you need to file Form 8621.

This applies for each separate PFIC you are a shareholder if you:

-Receive direct or indirect distributions from a PFIC.
-Recognize a gain on a direct or indirect disposition of PFIC stock.
-Report information with respect to a QEF or section 1296 mark-to-market election.
-Make an election reportable in Part II of the form.
-File an annual report pursuant to section 1298(f).

Who must file Form 8621?
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Passive Foreign Investment Corporation “PFIC” And Form 8621

Olivier Wagner - PFIC

US citizens living overseas naturally invest in foreign investment vehicles as that’s where they live. With it may come some bad surprise, a punitive taxation regime that can sidetrack you if not planned. Anyone who has made investment outside the USA or is considering making an investment in foreign companies, it is important for him/her to understand associated tax obligations. This blog post covers a summary of US tax rules related to passive foreign investment companies or PFIC. The PFIC rules apply to US persons i.e. individuals, corporations, estates and trusts who are US residents or US citizens.

So, what is a PFIC and why should you care about it?
Congress dislikes the idea that taxpayers would be able to defer income, especially when it comes to foreign investment vehicles. As such, it created a very punitive excess distribution regime, taxing income at the maximum tax rate and adding interest to it.

A relief was that it allowed US persons to treat income earned through PFICs in the same way as the income through US mutual funds is treated, which would be a QEF election. Or alternatively on a mark-to-market basis, which would be a mark-to-market election.
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