If you own stock in a passive foreign investment company, you may be subject to certain complex Internal Revenue Service guidelines. Many investors may not be aware that they are subject to these strict regulations when they purchase foreign stock. It is important to understand how these regulations work or risk facing a serious tax penalty in the future. If you or a family member need help with a passive foreign investment company filing, you should consult with an experienced US tax accountant today.
At US Tax Help, we are dedicated to providing you with the service that you deserve. Tax accountant Ted Kleinman understands the intricacies of U.S. tax law, and he is prepared to help you streamline your PFIC filings. To schedule a confidential consultation, call US Tax Help at (541) 923-0903 or contact us online.
Identifying a Passive Foreign Investment Corporation
A foreign-based corporation qualifies as a passive foreign investment company (PFIC) if they meet the requirements of one of two tests developed by the IRS. The first test is the income test. This test states that a foreign company qualifies as a PFIC if at least 75% of the corporation’s gross income is considered passive income. For example, income derived from investments is passive income. Alternatively, money that is earned from the corporation’s business endeavors is not passive income.
The second way that a foreign company may be deemed a PFIC is if it meets the requirements of the asset test. This test states that if at least 50% of a foreign corporation’s assets are assets that generate passive income like dividends or capital gains, the corporation is a PFIC.
The purpose behind IRS regulation of PFICs is to dissuade a U.S. person from attempting to store investments offshore to avoid U.S. taxation laws. Many U.S. persons would attempt to circumvent U.S. tax laws by establishing a foreign corporation and using that entity to invest in passive investments. As a result, the IRS created harsh tax penalties and interest charges for U.S. persons who would try to hide their income in this manner.
To learn more about how PFIC tax laws work, you should contact an experienced PFIC accountant.
When to File a PFIC Form
To report income derived from a PFIC, an investor must use IRS Form 8621, titled “Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.” There are five circumstances that determine whether a U.S. taxpayer must file a Form 8621:
- The U.S. person receives a direct or indirect distribution from a PFIC
- The taxpayer makes a profit on the direct or indirect disposition of stock from a PFIC
- The U.S. person is reporting information related to a Qualified Electing Fund
- S. person makes an election reportable in Part II of Form 8621
- The U.S. person must file an annual report
As mentioned, a U.S. person must file this form if they are a direct or indirect shareholder. A direct shareholder is a U.S. person that owns a share of stock in a PFIC that does not own stock in another PFIC. A U.S. person can be identified as an indirect shareholder in several different ways:
- The U.S. person is at least a 50% shareholder of a foreign corporation that is not a PFIC, but that holds stock in a PFIC
- The stock is owned in a PFIC that also holds stock in another PFIC
- The U.S. person is at least a 50% shareholder in a domestic corporation that owns a section 1291 fund
- The taxpayer is a direct or indirect owner of a pass-through entity (partnership, S-corporation, trust, or estate) and that entity is a shareholder in a PFIC
A Form 8621 can be filed with the shareholder’s tax return, partnership return, or exempt organization return. If you do not have to file an income tax return for a particular year, you must still file a Form 8621 with the IRS.
According to the IRS, it could take well over 40 hours to successfully file a Form 8621. Making a mistake on a form like this can result in serious tax consequences. That is why it is important to contact an experienced tax accountant that can handle this process for you.
Work with a U.S. Tax Accountant to File Your Form 8621
If you believe that you are required to make a PFIC filing, you should contact an experienced U.S. tax accountant today. Ted Kleinman, the founder of US Tax Help, possesses over 30 years of experience handling a wide range of U.S. tax issues for residents of the United States and residents of foreign countries. US Tax Help can help you evaluate your tax liability and determine whether you must make a PFIC filing. To schedule a confidential consultation, call us at (541) 923-0903, or contact us online.