Each U.S. person owning shares of a PFIC may be required to file IRS Form 8621 annually. In certain situations, if you receive income from a PFIC you may be subject to an aggressive tax and interest regime. In some cases the interest charges and prior year tax amounts may exceed the actual income recognized if the shares have been held long enough.
A PFIC can be present if you own any of the following investments with at least one U.S. shareholder.
A foreign-based corporation that has one of the following attributes:
- At least 75% of the corporation’s income is considered “passive,” which is based on investments rather than standard operating business
- At least 50% of the company’s assets are investments that produce interest, dividends and/or capital gains. A foreign-based mutual funds
- A partnership or other pooled investment vehicle
What You Need To Know
PFIC provisions are very complex and can become a trap for the unknowing. If you are an investor in a foreign mutual fund or any other passive foreign holding company, you will have a potentially higher tax bill than an investor in domestic (US) assets.
PFICs are subject to complicated and strict tax guidelines by the Internal Revenue Service (IRS), which covers the treatment of these investments. Both the PFIC and the shareholder must keep accurate records of all transactions, including share basis, dividends and any undistributed income earned by the company.
If you are the owner of a PFIC, there are a number of potential tax elections that need to be considered in order to mitigate the possible punitive provisions that can kick in when you receive distributions from your investment or upon sale of your investment.
Traps for the Unwary
It should be noted that there are a number of situations whereby taxpayer’s may have reportable PFICs and are not aware of it. A few examples would be as follows:
- Foreign pension plans (I.e. a Superannuation) that holds foreign mutual funds. The earnings in the pension are not taxed in the foreign country but can be taxable and reportable in the U.S.
- S. citizens living abroad that own shares in a private company that has passive investments.
- S. citizens living in Canada with investments in Tax Free Savings Accounts (TFSAs) or Registered Education Savings Plans (RESPs) that hold foreign mutual funds.
While there are many other situations that may arise, it is important to realize that any US citizen holding a foreign financial investment should review their holdings in such accounts to ensure they are not running afoul of the PFIC reporting regime.
What to Do If You Own a PFIC
While the provisions can be confusing to those who are unfamiliar with the Internal Revenue Code, Freed Maxick’s International Tax Team can assist you regarding:
- Determining if you have exposure to the punitive PFIC provisions
- Reviewing possible PFIC elections
- Assisting with prior noncompliance and reviewing available options for filing
- Completing your annual Form 8621 filing
- Help you navigate and plan around the PFIC provisions
Our International Tax Team has considerable experience helping taxpayers determine whether PFIC provisions affect them. We can help you navigate the IRS guidelines and minimize potential penalties.