Since the company does not yet have IP or other business assets, it will be deemed a PFIC under the asset test. In order to avoid this treatment, here are some solutions: Keep the cash in a non-interest bearing account. Not having passive income will automatically disqualify the company from the income test. Acquire business assets.
Full Answer
Does PFIC get better with treatment?
Severe PFIC disease does not necessarily get better with medical therapy, although medical therapy may be essential to prevent complications of the underlying liver disease (e.g. nutritional problems). There are different treatments which depend on the severity, subtype of PFIC and the type (s) of symptoms.
Are there planning alternatives to the PFIC regime?
This item assesses various planning alternatives that may help U.S. taxpayers avoid the negative aspects of the PFIC regime, including qualifying electing funds, mark-to-market elections, and various planning strategy options. This site uses cookies to store information on your computer.
How do I stop the application of the PFIC rules?
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.
How can I reduce the tax rate on my PFIC investments?
There are some options for an investor in a PFIC that can reduce the tax rate on the shares. One such option is to seek to have a PFIC investment recognized as a qualified electing fund (QEF). However, doing so may cause other tax problems for shareholders. 7
How do I avoid PFIC status?
If the startup meets either of the PFIC tests (the asset test or income test), one method of avoiding the PFIC rules is to ensure that all U.S. shareholders own their interest through a corporation holding a 10% or more interest in the startup.
Who is subject to PFIC?
Only U.S. persons are affected by the PFIC rules. A U.S. person includes a U.S. citizen, U.S. green card holder and U.S. resident. A Canadian who spends a significant amount of time in the U.S. (i.e. more than 183 days in the calendar year) may be considered to be a U.S. person for purposes of the PFIC rules.
How do you determine if a fund is a PFIC?
So how do I know if I have a PFIC? The two criteria given in the PFIC definition in Section 1297(a) are known as the “income test” and the “asset test”. The income test tells you to determine if 75 percent or more of the gross income of the corporation is passive. If it is, the corporation is a PFIC.
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 are PFIC rules?
A passive foreign investment company (PFIC) is a corporation, located abroad, which exhibits either one of two conditions, based on either income or assets: At least 75% of the corporation's gross income is "passive"—that is, derived investments or other sources not related to regular business operations.
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).
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.
Is an investment trust a PFIC?
So, what is a Passive Foreign Investment Company (PFIC)? This has the effect of bringing most, if not all, non-US collective investment assets into the PFIC rules. Examples of such investments are UK unit trusts, investment trusts, Funds, ETFs and similar collective investment products.
What is passive income for PFIC purposes?
Passive income is any income of a kind that would be foreign personal holding company income (“FPHCI”) as defined in section 954(c), subject to certain exceptions in the PFIC rules.
Are REITs PFICs?
trusts (REITs) that do not primarily carry on an active business are PFICs.
Can an IRA own a PFIC?
If you have invested in a PFIC, you are required to disclose the investment to the IRS using Form 8621. However, the instructions to Form 8621 clearly state that an IRA is not treated as a shareholder of a corporation for PFIC purposes, and, hence, is not obligated to file IRS form 8621 on behalf of the IRA.
Are RRSPs PFICs?
The PFIC rules are silent on whether they apply to RRSPs, RRIFs and their locked-in equivalents. Most tax advisors are of the view that these registered funds (RRSPs, RRIFs and their locked‑in equivalents) would be excluded from the PFIC rules if a special tax deferral election is filed.
What is a PFIC?
A foreign corporation that meets either the income test or the asset test under IRC §1297 (a) is a PFIC. The asset test asks whether 50% or more of the company’s assets are passive or are held for the production of passive income.
Does the preceding sentence apply to a passive foreign investment company?
The preceding sentence shall not apply if the taxpayer elects to recognize gain (as of the last day of the last taxable year for which the company was a passive foreign investment company (determined without regard to the preceding sentence)) under rules similar to the rules of section 1291 (d) (2).
Is PFICs only biweekly?
Effective today, the PFICs Only newsletter will become a bi-weekly newsletter. Everything will be the same, except that you will receive it every other week instead of every week from now on.
Is a passive foreign investment company a passive foreign investment company?
Stock held by a taxpayer shall be treated as stock in a passive foreign investment company if, at any time during the holding period of the taxpayer with respect to such stock, such corporation (or any predecessor) was a passive foreign investment company which was not a qualified electing fund.
Is Sam's PFIC still a PFIC?
Sam’s PFIC continues to be a PFIC for 2015 simply because it qualified as a PFIC in the past, even though it no longer qualifies as a 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.
What is a PFIC?
A generic, nontechnical description (although not a federal income tax definition) of a PFIC is a pooled investment that is registered outside of the United States, containing such assets as mutual funds, hedge funds, and insurance products. It is possible, however, for a foreign-operating (i.e., noninvestment) corporation to be classified as a PFIC; this might occur when a foreign corporation, lacking business opportunities that would produce operating income, invests excess cash in passive assets to provide an income stream until its business opportunities improve. The presence of certain amounts of passive assets and income makes the corporation vulnerable to PFIC classification under U.S. federal income tax law.
What is the purpose of the article on PFIC?
The purpose of this article is to provide CPAs with a body of knowledge about PFICs sufficient to recognize the factors that make a foreign corporation a PFIC and to enable taxpayers to make decisions that will mitigate the U.S. federal income tax consequences of direct or indirect PFIC ownership.
What is a passive foreign investment company?
The term “passive foreign investment company” (PFIC) suggests a sophisticated, highly specialized non-U.S. investment medium that the majority of U.S. persons probably would not select as an investment. In reality, the scope and applicability of PFIC federal income tax provisions have developed to such an extent that U.S. persons may unwittingly become PFIC shareholders (e.g., by being unaware an entity is a PFIC or ownership attributed through another entity) and thus subject to unexpected federal income tax and reporting requirements. Furthermore, the IRS has demonstrated increased vigilance of international investments by U.S. persons in an effort to reduce the international tax gap (Vadim Blikshteyn, “Passive Foreign Investment Companies,” Tax Adviser, 2011, http://bit.ly/2Erqo1x ).
Is a PFIC a shareholder?
If a U.S. person owns stock of a PFIC through a tax-exempt organization, the U.S . person is not treated as a shareholder with regard to the PFIC stock.
Is QEF distribution taxable?
Actual distributions from a QEF are nontaxable to the extent that they are distributions of previously taxed QEF earnings, and IRC section 1293 (d) (2) provides that these nontaxable QEF distributions reduce the shareholder’s stock basis.
Why are start up companies at risk of PFIC?
Certain start-up companies are also at risk of being subject to the PFIC rules because they typically have loss-making operations in their beginning years and may have small sources of passive income such as interest income from bank accounts.
What is PFIC income?
PFICs are foreign corporations that generate 75% or more of their gross income from passive sources or that own assets that are primarily held for the production of passive income (i.e., more than 50% of the entity’s asset value is represented by assets that generate passive income) (Sec. 1297 (a)). For purposes of PFIC determination, passive income is foreign personal holding company income (FPHCI) as defined in Sec. 954 (c). Principal forms of FPHCI are interest, rents, royalties, capital gains, currency gains, and dividends (Sec. 954 (c)). Active banking and insurance income, as defined by Secs. 954 (h) and (i), is excluded from passive income for purposes of PFIC determination (Sec. 1297 (b) (2)).
What are the tax consequences of investing in foreign equities?
Foreign investments by U.S. taxpayers can be subject to the punitive tax consequences of investments in passive foreign investment companies (PFICs). Under the default Sec. 1291 PFIC taxation regime, excess distributions received from PFICs are allocated pro rata to each day in the investor’s holding period and are subject to interest charges on taxes deemed to be owed in preceding tax years (Sec. 1291 (a) (1)). In order to avoid Sec. 1291, U.S. taxpayers can make timely qualifying electing fund or mark-to-market elections. Other various planning alternatives are also available to help U.S. taxpayers avoid the punitive aspects of the PFIC regime.
Is a CFC a PFIC?
U.S. shareholders owning more than 10% of a controlled foreign corporation (CFC) that otherwise would be considered a PFIC are exempt from the PFIC regime for the years they remain U.S. shareholders of a CFC (Sec. 1297 (d)).
Can you avoid Sec 1291?
In order to avoid Sec. 1291, U.S. taxpayers can make timely qualifying electing fund or mark-to-market elections. Other various planning alternatives are also available to help U.S. taxpayers avoid the punitive aspects of the PFIC regime.
What is a PFIC?
A PFIC is a Passive Foreign Investment Company. When it comes to international tax, the IRS PFIC (Passive Foreign Investment Company) is one of the most complex and challenging areas of tax law. In fact, most CPAs want nothing to do with PFIC, which is why oftentimes our team is retained to handle both the legal analysis and tax preparation ...
What is PFIC in investment?
PFIC is the passive foreign investment company regime. The purpose of the rule is to ensure the IRS get its proper piece of the tax pie. When it comes to individual investors, one of the most common types of PFIC is ownership of a foreign mutual fund.
What is the difficulty of preparing 8621?
Preparing the Form 8621. If a person does not have any excess distributions, then the form’s difficulty is average. As long as a person can get a general idea of the number shares, the NAV value, it is not too treacherous.
Is a stock account a PFIC?
This is in sharp contrast to other types of investments such as a stock account, which may be accumulating dividends within the account (assuming it is not a PFIC) and is being taxed on the accrued income each year.
Is PFIC included in TurboTax?
The PFIC forms are not included with most software programs. Unless TurboTax or TaxAct changed the forms they offer, the form 8621 was never offered as part of the program. Moreover, the IRS does not provide much in the way of instructions when it comes to preparing the form, or how to prepare the PFIC tax calculation.
How long do you hold a PFIC?
The regulations provide a new exception to filing Form 8621 if the taxpayer acquires a PFIC fund in the taxable year or the immediately preceding taxable year, and only holds that fund for 30 days or less. Specifically, this test focuses on the period beginning 29 days before the first day of the shareholder’s taxable year and ending 29 days after the close of the taxable year. For this exception to apply, the taxpayer must not have been treated as receiving any excess distributions from the PFIC (for example, no distributions were made to the shareholder.)
What is the exception to filing 8621?
There is now an exception to filing Form 8621 for dual resident taxpayers that determine any US income tax liability as a nonresident alien for the taxable year pursuant to treaty tie-breaker provisions. Under this exception, the taxpayer must file either Form 1040NR (US Nonresident Alien Income Tax Return) or Form 1040NR-EZ (US Income Tax Return for Certain Nonresident Aliens With No Dependents), including a treaty-based return position disclosure in accordance with regulations.
Do foreign pension funds have to file Form 8621?
The temporary PFIC regulations provided an exception for certain foreign pension funds. Specifically, no Form 8621 must be filed for PFIC interests that are owned through a foreign trust that is a foreign pension fund operated principally to provide pension or retirement benefits where an income tax treaty essentially provides that the earnings from the pension fund are not taxable until distribution. Effectively, this exception only applied to those foreign pension funds treated as foreign trusts under entity classification rules for US tax purposes.
Can a foreign corporation file a protective 8621?
comment requested that the final regulations allow a ‘protective’ Form 8621 to be filed by shareholders of a foreign corporation that are unsure whether such entity is a PFIC due to factors beyond their control (e.g., no access to the entity’s books and records). Such protective filing would be aimed at deferring any potential filing requirements so as not to suspend the period of limitations on assessment for the shareholder’s entire return if the foreign corporation were subsequently determined to have been a PFIC in the year to which the protective filing relates.
What are some examples of PFICs?
Typical examples of PFICs include foreign-based mutual funds and startups that exist within the scope of the PFIC definition. Foreign mutual funds typically are considered PFICs if they are foreign corporations that generate more than 75% of their income from passive sources, such as capital gains and dividends. 1 .
When did PFICs become recognized?
Understanding a Passive Foreign Investment Company—PFIC. PFICs first became recognized through tax reforms passed in 1986. 3 The changes were designed to close a tax loophole, which some U.S. taxpayers were using to shelter offshore investments from taxation.
How long does it take to fill out a PFIC tax form?
The tax form 8621 is a lengthy, complicated form that the IRS itself estimates may take more than 40 hours to fill out. 6 For this reason, PFIC investors are generally advised to have a tax professional handle completion of the form.
Can you step up cost basis on PFIC?
However, the step up in cost basis is not typically allowed in the case of shares in a PFIC.
Can failure to register a PFIC reduce tax?
However, failure to register may render a whole tax return incomplete. There are some options for an investor in a PFIC that can reduce the tax rate on the shares. One such option is to seek to have a PFIC investment recognized as a qualified electing fund (QEF).
