PFIC Filing Requirements, Who Must File PFIC Form 8621 & For What Tax Years
Recently released temporary regulations reverse prior IRS guidance relating to retroactive filing requirement for investments in Passive Foreign Investment Company (“PFIC”). Section 1298(f) requires all owners of PFIC stock to file Form 8621, but the reporting requirement does not effective until the 2013 tax year.
The below provides a background to PFICs and a review of the filing requirements under the PFIC regime.
What is a PFIC?
A foreign corporation is a PFIC if it meets one of two tests. Under the income test, a foreign corporation is a PFIC if 75% or more of the corporation’s gross income for the taxable year is passive income. Under the asset test, a foreign corporation is a PFIC if the average market value of the corporation’s passive assets during the taxable year is 50% or more of the corporation’s total assets.
What is “passive” under the PFIC regime?
In defining a passive income, the PFIC rules incorporate the definition of passive income from the subpart F regime under section 954(c), with certain exceptions. Under section 954(c), passive income generally includes dividends, interest, royalties, rents and annuities.
What were the PFIC reporting requirements prior to section 1298(f)?
The PFIC regime was originally enacted as part of the Tax Reform Act of 1986. As originally enacted, the PFIC rules did not require an information filing for all PFIC shareholders. Specifically, for taxable years beginning before March 18, 2010, a U.S. direct or indirect shareholder in a PFIC was required to do special reporting for that PFIC, such as to make elections (QED or mark-to-market); or to compute the tax on excess distributions; or to determine inclusions from a QEF or the special interest charge from deferring a QEF inclusion.
What are the reporting requirements under section 1298(f)?
Included as part of the 2010 Hiring Incentives to Restore Employment (“HIRE”) Act, section 1298(f) expands the PFIC filing requirement. The text of section 1298(f) reads, “Except as otherwise provided by the Secretary, each United States person who is a shareholder of a passive foreign investment company shall file an annual report containing such information as the Secretary may require.”
For what tax years are the reporting requirements under section 1298(f) effective?
Section 1298(f) was enacted in 2010. The PFIC filing requirement under section 1298(f) was temporarily suspended while the IRS develops further guidance on this new reporting requirement. In Notice 2011-55, the IRS provided that although the filing requirements under section 1298(f) were suspended, persons with a reporting obligation would have to file retroactive returns to comply with section 1298(f), once the new form was released.
New PFIC regulations eliminate retroactive PFIC filing for 2011 & 2012 tax years.
On December 30, 2013, the IRS released temporary, final and proposed regulations under section 1298(f). These regulations were published in the Federal Register on December 31, 2013, and are therefore effective as of that date. The regulations provide that all PFIC shareholders must file Form 8621 with their 2013 income tax returns and for all subsequent years. However, the reporting requirement for 2011 and 2012 PFIC holdings, which was previously suspended, now does not apply.
Thus, no retroactive reporting for years prior to 2013 is required.
Who had a Form 8621 filing requirement for a PFIC held prior to the 2013 tax year?
Prior to the 2013 tax year, a taxpayer was generally required to file Form 8621 if the investor: (1) wished to make a variety of elections, chief among them being a QEF election for the PFIC, and some subsidiary elections in connection with that such as one of the “purging” elections; (2) had QEF earnings to include in income, or was marking the shares to market in lieu of a QEF election; or (3) had an excess distribution.
Starting from the 2013 tax year, a taxpayer has a PFIC filing requirement if any of the above apply, or if the taxpayer merely holds an interest in a PFIC.
Is a de minimis exception to the filing requirements under section 1298(f) included in the new regulations?
The new regulations provide a de minimis exception to the Form 8621 filing requirement under section 1298(f) for certain PFIC shareholders. This exception applies only if: (1) no QEF or mark-to-market MTM election has been made in relation to the PFIC; (2) The shareholder is not subject to tax under section 1291 with respect to any excess distributions from the PFIC, or gains treated as excess distributions during the tax year; and (3) either (a) the aggregate value of all PFIC stock owned by the shareholder at the end of the shareholder’s tax year does not exceed $25,000 or (b) the PFIC stock is owned through another PFIC and the value of the shareholder’s proportionate share of the upper-tier PFIC’s interest in the lower-tier PFIC does not exceed $5,000. The $25,000 threshold is increased to $50,000 for taxpayers who file a joint return.
International Tax Attorneys Determine if You Own a PFIC.
Determining PFIC status requires an in depth understanding of the PFIC regime. Based in greater Seattle, international tax and PFIC attorneys at Harlowe & Falk can help you determine whether you own a PFIC, help determine your filing requirements, and assist you in minimizing your U.S. tax exposure related to your foreign investment holdings. In addition, we can help you determine your rights and obligations to the extent you have missed passed filings, including explaining the potential benefits of the Offshore Voluntary Disclosure Program (see also http://www.internationaltaxseattle.com/#!offshore-accounts-fatca--the-offshore-/c1zu).
See more information at Form 8621 PFIC Reporting: Navigating the Highly Complex IRS Passive Foreign Investment Company Rules, with a link at: http://media.straffordpub.com/products/form-8621-pfic-reporting-navigating-the-highly-complex-irs-passive-foreign-investment-company-rules-2016-01-07/presentation.pdf
IRS CIRCULAR 230 NOTICE: ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY HARLOWE & FALK LLP TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.