Guidance Issued on Form 8621 Filing Requirements for Passive Foreign Investment Companies

Jan. 30, 2014

On Dec. 31, 2013, the IRS released temporary and proposed regulations under Internal Revenue Code (IRC) Sections 1291 and 1298. The regulations provide guidance on the filing requirements for U.S. persons with ownership in a passive foreign investment company (PFIC), which is reported on Form 8621, “Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund” (QEF). The temporary regulations are effective for tax years ending on or after Dec. 31, 2013. A foreign corporation is a PFIC if 75 percent or more of its gross income is passive income or if 50 percent or more of the assets held by the corporation produce passive income or are held for the production of passive income.

The IRC provides three different tax regimes for shareholders of a PFIC:

  • The QEF rules
  • The mark-to-market (MTM) rules
  • The excess distribution rules

Under elective MTM and QEF rules, a PFIC shareholder must file Form 8621 annually until either the foreign corporation is no longer considered a PFIC or the shareholder no longer holds the stock. In the absence of a QEF or MTM election, the excess distribution rules apply. Under previous regulations, a shareholder subject to the excess distribution regime had to file Form 8621 only in years that the shareholder received an excess distribution or disposed of the investment.

The temporary regulations require a U.S. person who is a PFIC shareholder at any time during the year to file Form 8621. They also generally require the U.S. person who is at the lowest tier in a chain of ownership to file Form 8621. In addition, a U.S. person who owns PFIC stock through another U.S. person also is required to file Form 8621 in certain circumstances. The temporary regulations provide for three exceptions to the Form 8621 filing requirement:

  • Shareholders of a PFIC without a QEF or MTM election who do not receive an excess distribution in the current year do not need to file Form 8621 if the value of stock held in one or more PFICs owned by the shareholder does not exceed $25,000 ($50,000 for shareholders filing a joint return). Form 8621 also is not required if the shareholder owns stock in a PFIC that is owned by another PFIC and the value of the shareholder’s proportionate share in the lower-tier PFIC does not exceed $5,000. The regulations provide that shareholders are not required to obtain an appraisal but may rely on periodic account statements to determine value.
  • Form 8621 is not required to be filed by an indirect shareholder for amounts included in income under the QEF or MTM regimes provided the PFIC shareholder through which the indirect shareholder holds the PFIC stock timely files a Form 8621. This exception does not apply if the shareholder made a QEF election with respect to the PFIC stock and then transferred the stock to a domestic partnership or S corporation and the domestic partnership or S-corp did not make the QEF election.
  • The new regulations also provide an exemption from Form 8621 reporting for tax-exempt organizations under IRC 501(a), state colleges or universities under Section 511(a)(2)(B), plans described in Sections 403(b) or 457(b), individual retirement plans or annuities, or qualified tuition programs under Sections 529 or 530 if the income is not included in unrelated business taxable income.

Filing Form 8621 under Section 1298(f) does not relieve a shareholder from filing Form 8938, “Statement of Specified Foreign Financial Assets.” In order to avoid duplicative reporting, a PFIC shareholder who files Form 8621 in relation to its PFIC stock may indicate on its Form 8938 that its interest in a PFIC already has been reported on Form 8621.

In addition to establishing filing requirements under Section 1298(f), the new regulations generally adopt the proposed regulations issued in 1992 under Section 1291, which, among other things, provide definitions of a pedigreed QEF, a Section 1291 fund, a PFIC shareholder, and an indirect PFIC shareholder. Most important, the new regulations clarify that the attribution principles apply to both domestic and foreign partnerships, estates, and trusts for purposes of determining indirect ownership in a PFIC. Moreover, a controlled foreign corporation (CFC) that is not a PFIC due to the CFC-PFIC overlap rules is considered a PFIC for purposes of the attribution rules.

Under prior guidance issued by the IRS, U.S. persons who became subject to the filing requirements under the temporary regulations would have been required to file Form 8621 to report PFIC investments in 2010, 2011, and 2012. The temporary regulations indicate the IRS will not require PFIC reporting for any tax years ending before Dec. 31, 2013.

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