The IRS has issued final regs that provide guidance on determining who is an owner of a passive foreign investment company (PFIC), the annual filing requirements for shareholders of PFICs, and statements required to be filed with IRS by persons who are excepted from certain foreign corporation return rules.
A PFIC is any foreign corporation if:
At least 75% of its gross income for its
tax year is passive, or, at least 50% of the assets it held during the year produce passive income or, are held for the production of passive income. (Code Sec. 1297(a))
Code Sec. 1291 through Code Sec. 1298 set forth three tax regimes for PFIC shareholders:
The excess distribution rules under Code Sec. 1291 (the “Code Sec. 1291 regime”), which impose a special tax and interest charge on a U.S. person that is a shareholder of a PFIC and that receives an “excess distribution” (defined as the extent to which a current year distribution received by a shareholder on PFIC stock exceeds its ratable portion of 125% of the average amount received with respect to the stock during the three preceding years or, if shorter, the shareholder’s holding period prior to the tax year) from a PFIC or recognizes gain derived from a disposition of stock in a PFIC that is treated as an excess distribution under Code Sec. 1291(a)(2);
Code Sec. 1293’s qualified electing fund (QEF) rules, under which an electing shareholder must currently include in income his share of the PFIC’s earnings and profits (with appropriate basis adjustments), and the fund’s ordinary income and net capital gain are passed through to the shareholder as ordinary income and long-term capital gain; and Code Sec. 1296’s mark to market (MTM) rules, under which an electing shareholder includes in income each year an amount equal to the excess, if any, of the fair market value (FMV) of the PFIC stock as of the close of the tax year over the shareholder’s adjusted basis in the stock, and is allowed a deduction for the lesser of The excess, if any, of the adjusted basis of the PFIC stock over its FMV as of the close of the tax year, or The “unreversed inclusions”, as defined, with respect to the PFIC stock.
All amounts so included in income or deducted, as well as any gain or loss on the actual sale or disposition of the PFIC stock, are treated as ordinary income or loss.
Form 5471. Code Sec. 6038 and Code Sec. 6046 require certain U.S. persons to file an information return on form 5471
In December 2013, IRS issued temporary regs with respect to PFIC ownership and filing requirements and Form 5471 filing requirements. (T.D. 9650, 12/30/2013) The text of those temporary regs also served as the text of proposed regs. (Preamble to Prop Reg12/30/2013)
Final regs issued.
The IRS has now issued final regs that provide guidance on determining who is an owner of a PFIC, the annual filing requirements for shareholders of PFICs, and statements required to be filed with IRS by persons who are excepted from Form 5471 filing.
Passive Foreign Investment Company Tax Guidance from Freeman Tax Law
Please contact our office if you have questions regarding the IRS regulations above, or if you have other questions in regards to the tax filing requirements of Passive Foreign Investment Companies.