Filing Obligations - PFIC's

Passive Foreign Investment Companies (PFIC's)

PFIC Filing Obligations - Couple filing taxes with AccountantA Passive Foreign Investment Company is any foreign based mutual fund, pooled investment or partnership which has at least one U.S. investor, provided that either 75% of the earnings or 50% of the assets giving rise to earnings are in passive investments.

There are complex rules which must be followed when investing in a PFIC, the result of which is designed to discourage U.S. persons from making investments in this type of asset.  In general, form 8621 must be filed every year for every PFIC with the objective of determining the nature and amount of additional income or tax to be reported in connection with the investment.

Unless a shareholder elects to treat the PFIC as a "qualifying electing fund" or unless a "mark to market election" is made, a U.S. shareholder who receives an "excess distribution" or who disposes of stock in the year must allocate the income or gain ratably to each day the investment was held.

Here are some definitions used in connection with PFIC's:

Excess Distribution:
An excess distribution is the amount of a distribution received from a Sec 1291 fund which is over 125% of the average of the last three year's distributions (or shorter if held less than three years).  The amount of an excess distribution is allocated to each year in which the stock was held, and taxed as normal income at the highest rate applicable for that year, plus interest.  (No part of the first year's distribution can be treated as an excess distribution.)

Mark To Market Election:
Where the investment is in a marketable stock or mutual fund, a shareholder may elect to make a "mark to market" election.  If this election is made, changes to the market value of the holdings are reported as ordinary income (or deducted as an ordinary loss) each year after the election is made.

This election must be made by the filing due date of the return in any year, and remains in effect for all future years.

Election to Treat PFIC as QEF:
Instead of paying tax on excess distributions, a shareholder may elect to have the PFIC treated as a Qualifying Electing Fund (QEF).  If this election is made, the shareholder's pro rata share of earnings are included in income as ordinary income, and the pro rata share of net capital gains of the corporation are included as long term capital gains.

Under certain circumstances, the payment of tax on undistributed earnings of a QEF may be deferred, if interest is paid.

This election must be made by the filing due date of the return in any year, and remains in effect for all future years.

Other miscellaneous rules also apply related to the taxation of accumulated earnings, subpart f income, stock attribution, start up companies, leasing of tangible personal property, and intangible assets.

Information Needed to File form 8621:
If you have an investment in a PFIC, we will likely require the following information to prepare form 8621.  For each mutual fund, pooled investment, or partnership held, please provide:

  1. Name of Fund, and any 1099 or similar form received showing income allocated for the year;
  2. Amount of distribution received for the current year, plus each of the prior three years (or holding period if shorter);
  3. Market value of the investment at the beginning and at the end of the current year.

If you require further information concerning your obligations when reporting PFIC assets, please contact us.