ELITE ADVISOR BEST PRACTICES
Passive Foreign Investment Company (“PFIC”) Reporting Rules - Part Two
PFIC reporting exceptions
By Michele Carter and Neel Modha
- Although there is currently no monetary penalty imposed on a failure to file Form 8621, failure to file will result in an extension of the taxpayer’s statute of limitations for the entire tax return until three years after the form is properly filed.
- An exception to Form 8621 reporting may apply when the taxpayer’s aggregate value in all PFICs is $25,000 or less on the last day of the tax year.
- There are four main exceptions to the PFIC reporting requirements.
As we discussed in Part One of this article series, the IRS has substantially expanded the reporting rules for Passive Foreign Investment Companies (PFICs) since 2013. In most cases, U.S. shareholders who receive distributions from PFICs—or gain from sales of PFIC shares—are subject to tax at ordinary rates. But as we’ll see below, there are several important exceptions. Make sure your advisor is up to speed on these:Exception #1: Reporting satisfied through U.S. indirect owner
There is an exception to filing Form 8621 for certain indirect owners through a U.S. entity when the U.S. indirect PFIC shareholder through one or more U.S. entities if the indirect shareholder has:
- Income from a QEF or
- Income from an MTM.
Generally, when a U.S. person owns a U.S. entity and that U.S. entity owns a QEF or an MTM, the U.S. person is not required to file Form 8621 provided that the U.S. entity properly files Form 8621 for the QEF and MTM. For example, a U.S. individual invests in a U.S. partnership that invests in a PFIC and the U.S. partnership makes a QEF election for the PFIC. Under this example, if the U.S. partnership files Form 8621, then the U.S. individual will meet an exception to filing and does not need to include Form 8621 with his or her tax return.Exception #2: Aggregate value of shareholder’s PFIC, QEF or MTM stock is $25,000 or less
Under this exception the taxpayer can avoid filing Form 8621 for a PFIC/Section 1291 Fund. This exception does not apply to reporting for QEFs, MTMs or PFICs from which a distribution is received or a sale has been made. To meet this exception, the taxpayer must aggregate the value of direct and indirect ownership in all PFICs, QEFs or MTMs. If the combined value is $25,000 or less on the last day of the tax year, then the taxpayer will not be required to file Form 8621 for those PFICs from which no income is recognized.
Often, a taxpayer may own a PFIC that owns another PFIC, or the taxpayer may own a PFIC through another U.S. person. In both of these cases, for purposes of determining whether the shareholder satisfies the $25,000 exception, PFIC stock owned through another U.S. person or through another PFIC is not counted.Exception #3: Value of shareholder’s indirect PFIC stock is $5,000 or less
Under this exception, reporting for the ownership in the indirect PFIC may not be required. A taxpayer owning a PFIC which in turn owns another PFIC (“PFIC 2”) is not required to file Form 8621 for PFIC 2 if the taxpayer’s proportionate share of PFIC 2 is $5,000 or less on the last day of the tax year and no distributions are received from PFIC 2. This exception does not apply to PFICs held indirectly through foreign entities that are not also PFICs.Exception #4: Shareholder is a tax-exempt entity
A PFIC shareholder who is a tax-exempt entity is not required to file Form 8621 unless the income from the PFIC shares is taxable to the organization
Although the PFIC reporting requirements were expanded, the four exceptions discussed above may lighten the filing requirement for some taxpayers.