For some Americans, placing investments and assets inside a foreign entity is a great way to protect them while gaining flexibility with estate planning.
But professional guidance is needed to minimize taxes and comply with various reporting requirements.
What Is a PFIC?
The US tax system defines Passive Foreign Investment Companies as foreign corporations that meet specific assets or income tests. These rules are designed to govern entities that generate passive income such as dividends, interest, rents, and royalties.
Asset Test
A foreign corporation is considered a PFIC if 50% or more of the average value of its assets are made up of assets that produce passive income.
Income Test
A foreign corporation is considered a PFIC if 75% or more of its gross income is passive.
Special Rules
It can be difficult to increase the amount distributed from the PFIC without triggering punitive tax rates. “Excess distributions” – those significantly larger than the PFIC’s average distribution – are taxed at special rates.
Moreover, you cannot receive long term capital tax treatment on the sale of stock, no matter how long you have owned it.
Tax Planning Opportunities – Qualified Electing Fund (QEF)
PFIC rules are very complex and the tax consequences for mistakes can be very harsh.
Many PFIC owners elect to have their share of ordinary income and net capital gains of the PFIC treated as through it was earned through a US entity – even if the income is not distributed.
The Consequences
US persons who are direct or indirect shareholder of a PFIC must file IRS Form 8621 along with their tax return.
Want Help with Form 8621?
Our tax consultants are ready to help.