PFIC Reporting (Passive Foreign Investment Company)
The US tax code refers to any kind of corporate mutual fund or investment company outside the U.S. as a passive foreign investment company or a PFIC.
The IRS rules for Passive Foreign Investment Companies are almost unmatched in complexity and in their rigid yet confusing elements. Many of our clients with PFIC reporting requirements have come to us to prepare a seemingly simple tax return only to find themselves completely overwhelmed. Even a small investment made in a non-US mutual fund can cause a taxpayer to endure the calculus imposed on them by the PFIC filing requirements of IRS form 8621 and its implicit tax obligations.
One of the primary reasons for this confusion is the difference in the treatment of foreign investment companies, mutual funds, and unit investment trusts as compared to U.S. based mutual funds. The US tax laws are clearly designed to deter US citizens from investing in mutual funds outside the USA where the income or gains of the foreign funds are not subject to current taxation, In addition, the tax law clearly seeks to deter US taxpayers from using a foreign corporation as an investment fund.
For instance, if you are invested in US based mutual funds you get a simple 1099 from the fund at tax time. Your reported income is determined by the proportion of the fund you hold and calculated for you by the mutual fund. If however you maintain a foreign investment, they do not provide this reporting or accounting, nor do they want to. So the IRS puts the burden entirely on the shareholder to figure out their share of the foreign investment and their tax obligation under it.
While PFIC definitions and legislation have been part of the tax code for many years, they have recently evolved as part of the Hiring Incentives to Restore Employment (HIRE) Act, P.L. 111-147, enacted in March 2010. In this legislation, Congress expanded the passive foreign investment company (PFIC) reporting requirements by adding new Sec. 1298(f). Under this provision, “[e]xcept as otherwise provided by the Secretary, each United States person who is a shareholder of a passive foreign investment company shall file an annual report containing such information as the Secretary may require”.
While initially vague on reporting requirements, a number of official IRS Notices have clarified the reporting obligations since then, and they have had the effect of requiring more taxpayers to file form 8621.
For those interested in understanding their obligations and potential exposure under the evolving rules of PFIC, you are encouraged to contact Christopher J. Byrne PLLC at (212) 239-1931.