United States: IRS Issues PFIC Regulations: A New Start To An Old Beginning

New Rules Address Reporting Obligations of US Shareholders in Foreign Funds and Certain Other Foreign Corporations

On December 30, 2013, the US Treasury Department (the "IRS") published a package of proposed, temporary, and final regulations relating to Passive Foreign Investment Companies ("PFICs") and their shareholders. The most significant component of the package is its guidance on the new annual filing requirements for PFIC shareholders, but the package also includes other, generally minor, changes to existing rules governing PFICs and their shareholders.

The IRS issued the regulations just in time to meet a self-imposed year-end deadline: the IRS wanted the new reporting rules to become effective before 2013 ended so that the new reporting rules would apply during the next filing season. Still, the package includes good news for some PFIC shareholders since the new regulations eliminate a retroactive filing requirement for 2011 and 2012 taxable years that had been threatened in a 2011 IRS notice.

The new regulations address in a limited way a package of technical PFIC regulations originally proposed by the IRS in 1992. Because the new package includes, in a modified form, a small portion of the 1992 proposed regulations, the new package withdraws that portion of the 1992 proposed regulations. The remaining (and outstanding) portion of the 1992 proposed regulations includes provisions that have been severely criticized. So, US investors and tax practitioners must await further IRS action to clarify the status of those proposed provisions and the interpretation of the applicable statutory rules.

PFICs Generally

A non-US corporation is generally a PFIC if:

  1. 75% or more of its gross income for the taxable year is passive income or
  2. the average percentage of assets it holds during the taxable year which produce passive income or which are held for the production of passive income is at least 50 percent.

Special US federal income tax and reporting rules apply to US investors that are considered to hold shares in a foreign company that produces sufficient passive income or holds sufficient passive assets to meet the definition of a PFIC, even if the foreign company met the definition for only one year during the investor's holding period. The rules applicable to PFIC shareholders are detailed and complicated. For example, three different sets of rules, or regimes, apply to US shareholders in a PFIC: a basic (or default) regime that subjects "excess distributions" from a PFIC to additional US income taxes on the income considered to be deferred or one of two alternative elective regimes (the "Qualified Electing Fund" and "mark-to-market" regimes) for shareholders in PFICs that qualify for those elective regimes. Stated simply, the goal of the PFIC rules is to deny the potential deferral of US tax that might otherwise be available to a US person that invests in a foreign investment fund that accumulates income. The PFIC rules effectively force US shareholders in a PFIC, no matter how small their interests may be, to recognize income earned by the PFIC currently (whether that income is distributed to the shareholder or not) or else pay US tax at the highest possible rate, plus interest, on the income once it is distributed to the PFIC shareholder.

PFIC shareholders generally have been required to file a Form 8621, "Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund," in certain circumstances, such as when they receive amounts that are considered "excess distributions" or, for those shareholders that have made the Qualified Electing Fund (or "QEF") election, annually, A statutory change enacted in 2010, however, broadened PFIC reporting requirements to require PFIC shareholders to file annual reports containing any information required by the IRS. Failure to report the requested information to the IRS causes the shareholder's US federal income tax return to remain open until three years after the relevant information is in fact provided to the IRS. Whether the shareholder's entire tax return or just the portion of the tax return related to the investment in the PFIC remains subject to IRS audit during this period depends on whether the shareholder is eligible for the "reasonable cause" exception for failing to file the required information.

In Notice 2010-34 and Notice 2011-55, the IRS stated that it was developing future guidance on this new annual PFIC reporting requirement and would release a revised Form 8621. The IRS instructed PFIC shareholders to continue reporting in accordance with the current form and instructions. Once the new Form 8621 was released, however, PFIC shareholders which were not required to report under the old Form 8621 but which were required to report under the new Form 8621 would be required to file "catch-up" reports for the intervening years and attach the completed forms to their next US federal income tax return.

The New Regulations

The most noteworthy aspect of the new regulations is their implementation of the annual filing requirements for PFIC shareholders. In particular, the new regulations make it clear that PFIC shareholders are subject to the new, broader PFIC reporting rules only for the 2013 taxable year. Accordingly, the regulations do not implement the IRS's previously announced intention to require PFIC shareholders subject to the new reporting rules to file Forms 8621 for pre-2013 years with their 2013 income tax returns.

The new PFIC reporting rules are fairly detailed. They include some exceptions, particularly for US persons that hold PFIC stock through another US person or that hold relatively small amounts of PFIC stock. Nonetheless, because the rules for determining ownership in a PFIC are complicated and apply to indirect ownership, determining whether one qualifies for an exception may not be obvious at first blush. For example, the temporary regulations include an exception for a PFIC shareholder that:

  1. holds, in the aggregate, no more than $25,000 in PFIC stock ($50,000 if married filing jointly) or
  2. owns PFIC shares 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. 

But this exception applies only if the PFIC shareholder has not:

  1. made an election to treat the PFIC as a QEF,
  2. made an election to subject the PFIC shares to mark-to-market treatment, and
  3. received any amounts that are treated as "excess distributions" from the PFIC.

US persons that own, directly or indirectly, interests in foreign corporations will therefore need to undertake a careful review each year to determine whether they own interests in a PFIC and whether a reporting exception applies. Of course, even if a reporting exception applies in a given year, the reporting exception does not provide any relief from the general PFIC taxation rules that apply to the shareholder.

The package also includes, in updated form, some regulatory definitions first proposed in 1992 related to different types of PFICs and to determining ownership (especially indirect ownership) of interests in a PFIC. The regulations also formalize guidance promised in prior IRS announcements, such as limiting duplicative reporting that would otherwise occur if shares owned by a US person constituted both a PFIC and a specified foreign financial asset, each with its own set of reporting rules. They also make some very minor changes to reporting for controlled foreign corporations, or "CFCs". In addition, the preamble to the temporary regulations promises more guidance for trusts and estates.

Conclusion

Because a single share of stock in a PFIC is enough to subject a shareholder to the PFIC rules and a person can be a PFIC shareholder through indirect ownership, US investors should review their holdings to determine whether they own interests in PFICs and, if they do, whether they are in compliance with the US tax and reporting rules that apply. Failure to do so could result in serious US tax exposure. Even if the amount of US income tax attributable to the PFIC is itself small, the failure to report the PFIC information can toll the statute of limitations, allowing the shareholder's entire tax return to stay open and subject to audit for as long as the PFIC information goes unreported, plus three years.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
22 Jan 2019, Seminar, San Francisco, United States

Dentons is pleased to offer a full day of classes, just in time for the California MCLE compliance period deadline of January 31, 2019.*

23 Jan 2019, Seminar, Los Angeles, United States

Dentons is pleased to offer a full day of classes, just in time for the California MCLE compliance period deadline of January 31, 2019.*

24 Jan 2019, Other, New York, United States

Join Dentons’ Health Care Partner Lori Mihalich-Levin and White Collar & Government Investigations Counsel Christine Genaitis as they lead conference sessions at AHLA Academic Medical Centers and Teaching Hospitals Institute.

 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions