On December 30, 2013, 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.
New PFIC 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. This is a relief for many as previous IRS notices had threatened to make these complex reporting requirements retroactive for pre-2013 years and to be filed with their 2013 income tax returns. Instead The new regulations clarify that a PFIC shareholder is subject to the new PFIC reporting rules only for the 2013 taxable year.
The new rules also provide definitions of who is a ‘shareholder’ (direct and indirect) of a PFIC, including cases of ownership of PFIC through partnerships and trusts.
Also clarified under the new rules, an exception has been granted by the IRS from reporting when PFIC stock that is worth under $25,000 ($50,000 for joint returns) has been incorporated.
What is a PFIC?
A PFIC (Passive Foreign Investment Corporation) is defined as any foreign corporation if 75 percent or more of its gross income for the taxable year consists of passive income, or 50 percent or more of its assets consists of assets that produce, or are held for the production of, passive income. Generally, a foreign mutual fund or similar investment will be characterized as a PFIC.
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.
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.
How does failure to comply with PFIC affect me?
A single share of stock in a PFIC can bring a shareholder under the regulatory umbrella of PFIC rules and filing requirements. US investors should review their holdings to determine whether their investments meet the legal definition of PFIC’s 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. This is even if the amount of tax attributable to the PFIC is itself small… failure to report PFIC information can extend 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.
For questions or additional information related to PFIC filing rules and regulations, please contact Christopher J. Byrne for a discussion of your unique cross-border compliance issues.