Clarifications On PFIC Rules
Can PFIC losses offset PFIC gains?
PFIC losses do not offset PFIC gains. These are capital losses, subject to the rules for capital losses, which include loss carry-forwards to offset future capital gains.
What qualifies as a PFIC?
A foreign corporation is a deemed passive foreign investment company (PFIC) if 75% or more of its gross income is from non-business operational activities (the income test), or at least 50% of its average percentage of assets is held for the production of passive income (the asset test). 1
What is PFIC threshold?
Threshold for Reporting PFIC
The person who is single or married filing separate has to file form 8621 in any year that their total number of PFICs exceed $25,000.
Do I need to report PFIC?
PFIC reporting is the requirement that US citizens or green card holders, who indirectly or directly own shares in a PFIC at any time during the year, must file Form 8621 with the IRS. As this is an additional and often complex form, you will need to pay your tax advisor additional fees to prepare these.
How do I get rid of PFIC?
The only way you can stop the application of the PFIC rules to the stock of a former PFIC is to make a purging election. There are two possible purging elections that a shareholder could make to remove the PFIC treatment: a deemed sale election or a deemed dividend election.
What happens when you sell a PFIC?
All capital gains from the sale of PFIC shares are treated as ordinary income for federal income tax purposes and thus are not taxed at preferential long-term capital gain rates (Sec. 1291(a)(1)(B)).
Who Must File PFIC?
A U.S. person that is a direct or indirect shareholder of a passive foreign investment company (PFIC) files Form 8621 if they: Receive certain direct or indirect distributions from a PFIC. Recognize a gain on a direct or indirect disposition of PFIC stock.
Who should file PFIC?
In general, a shareholder of a PFIC must file a four-page annual report with the IRS unless an exception applies. That annual report is Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund).
IS CASH considered passive asset for PFIC?
Notice 88-22 deemed all cash as a per se passive asset for PFIC-testing purposes; the proposed rule reflects the fact that some amount of cash is needed as working capital to support the day-to-day operations of an enterprise.
How are PFICs taxed?
Instead, income from PFICs is now taxed at not just any ordinary income tax rate but at the highest one. This income is automatically taxed at the maximum tax rate normally reserved for only the highest earners. At the time of publication, this tax rate was 37%.
What is the penalty for not filing form 8621?
Penalties for failure to file Form 8621 could include a $10,000 penalty (under Form 8938), and suspension of the statute of limitations with respect to the U.S. shareholder’s entire tax return until Form 8621 is filed.
Do I have to file 8621?
U.S. Tax Form 8621 for Shareholders of Passive Foreign Investment Companies. As a U.S. citizen living and working abroad, you may have opened a foreign mutual fund investment account. If you’ve received any income from these funds in the past year, you’re required to report it using U.S. tax Form 8621.
Can you hold a PFIC in an IRA?
General rules
As a result, for instance, a US person owning stock of a PFIC through an individual retirement account (IRA) described in Section 408(a) will not be treated as the shareholder of the PFIC stock, and in turn, is not subject to the PFIC rules.
Are all foreign mutual funds PFIC?
The IRS strictly enforces PFIC Rules. Each of Your funds is considered to be a PFIC (Passive Foreign Investment Company). That is because the IRS hates Mutual Funds from overseas — so much so, that foreign mutual funds have been designated as PFICs for tax reporting purposes, which is very bad for tax purposes.
Can you be a PFIC and a CFC?
CFC-PFIC Overlap Rule
As a result, a U.S. person that owns stock of a foreign corporation that is a CFC and a PFIC is subject to the CFC regime but not the PFIC regime for taxable years in which the foreign corporation is a CFC and the U.S. person is a U.S. shareholder under Sec.
What is difference between CFC and PFIC?
DK: A PFIC is a Passive Foreign Investment Company. It’s a foreign corporation that mostly has passive income or assets that produce passive income. Unlike the CFC rules, there is no ownership threshold to determine whether a foreign corporation is PFIC or not.
Can a trust be a PFIC?
From a U.S. tax perspective, foreign mutual funds and unit investment trusts are generally characterized as corporations under the U.S. entity classification rules. As a result, foreign mutual funds and unit investment trust are likely to be considered PFICs.
Is a foreign trust a PFIC?
A foreign corporation is a PFIC (i) if at least 75% of the gross income in a particular year is passive income40, or (ii) at least 50% of the assets produce or are held for the production of passive income in a particular year.
Can US trust own foreign assets?
US Trusts can also hold foreign assets, although it should be noted that such assets would normally be held through one or more foreign corporate entities rather than by a US Trustee directly.
Does a foreign trust pay US taxes?
All trusts that are not grantor trusts are considered nongrantor trusts for US purposes. Foreign nongrantor trusts are not generally subject to US tax, unless the trust earns US source or effectively connected income.
Is income from a foreign trust taxable?
Income from a foreign grantor trust is generally taxed to the trust’s individual grantor, rather than to the trust itself or to the trust’s beneficiaries. For a U.S. owner, this means that the trust’s worldwide income would be subject to U.S. tax as if the owner himself earned such income.
How do I report income from a foreign trust?
The foreign trust or foreign estate must provide a copy of the Form 8805, as provided by the partnership, to each of its beneficiaries. Each beneficiary may claim the tax credit by attaching the Form 8805 to the beneficiary’s U.S. income tax return.
Can a non US citizen be a trustee?
Since “all” substantial decisions must be made by a US person, choosing a non-US family member (i.e., a non-US citizen or foreign national who is a non-US resident) as trustee will mean the trust will fail the control test.