Passive Foreign Investment Company (PFIC)
A foreign entity/form of investment is a PFIC if it meets either the income or asset test described below.
- Income test. 75% or more of the corporation’s gross income for its taxable year is passive income (as defined in section 1297(b)).
- Asset test. At least 50% of the average percentage of assets (determined under section 1297(e)) held by the foreign corporation during the taxable year are assets that produce passive income or that are held to produce passive income.
Penalties for Failure to File Form 8621
Section 1298(f) and the regulations do not impose a specific penalty for failure to file Form 8621. However, the regulations coordinate the Form 8621 filing requirements with the Form 8938 filing requirements. Section 6038D requires a U.S. individual to disclose any directly held foreign financial assets on Form 8938 if the aggregate value of the individual’s foreign financial assets exceeds the filing threshold. An exception to the disclosure requirement applies to any foreign financial asset the individual reports on another disclosure form such as Form 8621. A U.S. individual shareholder who fails to disclose a directly held PFIC investment on either Form 8621 or Form 8938 when required can be subject to a $10,000 penalty under §6038D(d).
In addition, failure to file a required Form 8621 can result in the suspension of the statute of limitations with respect to the U.S. shareholder’s entire tax return until the shareholder files Form 8621. This means the IRS could have an unlimited amount of time to audit the U.S. shareholder’s tax return and assess tax if the U.S. shareholder fails to file a required Form 8621. However, the statute of limitations is suspended only with respect to the unreported PFIC investment and not to other unrelated portions of the U.S. shareholder’s tax return if the shareholder has reasonable cause for the failure to file Form 8621.
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The most important, and perhaps the most difficult, step in complying with the new §1298 Form 8621 filing requirements, is simply identifying investments that qualify as PFIC stock.
Taxpayers should pay particular attention to investments in foreign mutual funds, particularly when investing through foreign banks and brokerages. Foreign mutual funds are generally considered a PFIC holding.
If you need help determining whether a Form 8621 filing obligation exists, or if you need assistance with compliance, please give us a call or send us an email.