Requirement to File Informational Return Form 8621 Even If Below Filing Thresholds

Per the instructions for forms 8621, When and Where To File, Attach Form 8621 to the shareholder's tax return (or, if applicable, partnership or exempt organization return) and file both by the due date, including extensions, of the return at the Internal Revenue Service Center where the tax return is required to be filed. If you are not required to file an income tax return or other return for the tax year, file Form 8621 directly with the Internal Revenue Service Center, Ogden, UT 84201-0201.

PFIC Background

Generally, a foreign corporation is a PFIC which exhibits either one of two conditions

• Income test. 75% or more of the corporation's gross income for the tax year is passive income (as defined in section 1297(b)). Which generally includes dividends, interest, rents, royalties, annuities and net gains from a certain property, commodities,  and foreign currency transactions
• Asset test. At least 50% of the average  annual value of its total assets consist of income producing assets (determined under section 1297(e)) For example cash, working capital and non inventory investment in stock are generally considered to be passive income-producing assets

Who Should File?

General Instructions Who Must File Generally, a U.S. person that is a direct or indirect shareholder of a PFIC must file Form 8621 for each tax year under the following five circumstances if the U.S. person:

 1. Receives certain direct or indirect distributions from a PFIC,
 2. Recognizes gain on a direct or indirect disposition of PFIC stock,
 3. Is reporting information with respect to a QEF or section 1296 mark-to-market election,
 4. Is making an election reportable in Part II of the form, or
 5. Is required to file an annual report under section 1298(f).

See the Part I instructions, later, for more information regarding the person that must file under section 1298(f).

A separate Form 8621 must be filed for each PFIC in which stock is held directly or indirectly. In the case of a chain of ownership, under the five circumstances described above, unless otherwise provided, if the shareholder owns one PFIC and through that PFIC owns one or more other PFICs, the shareholder must file a Form 8621 for each PFIC in the chain.

Consolidated Form 8621 filings are not permitted. As a result, penalties could arise for those who continue to file in such a manner

A single Form 8621 may be filed with respect to a PFIC to report the information required by section 1298(f) (that is, Part I), as well as to report information on Parts III through VI of the form and to make elections in Part II of the form. For example, a U.S. person that has made a section 1296 mark-to-market election with respect to a PFIC will file a single Form 8621 and complete Part I and Part IV. Indirect shareholder.

Definition for Indirect Shareholder of a PFIC

 Generally, a U.S. person is an indirect shareholder of a PFIC if it is:

• A 50%-or-more shareholder of a foreign corporation that is not a PFIC and that directly or indirectly owns stock of a PFIC,
• A shareholder of a PFIC where the PFIC itself is a shareholder of another PFIC,
• A 50%-or-more shareholder of a domestic corporation where the domestic corporation owns a section 1291 fund, or
• A direct or indirect owner of a pass-through entity where the pass-through entity itself is a direct or indirect shareholder of a PFIC. For more information on determining whether a U.S. person is an indirect shareholder, see Temporary Regulations section 1.1291-1T(b)(8) and Notice 2014-28.

For purposes of these rules, a pass-through entity is a partnership, S Corporation, trust, or estate.

Taxation of PFIC shareholders

PFIC shareholder can be taxed under one of three tax schemes

1. Sec 1291 Fund - the tax and interest scheme

Under this scheme, the shareholder is not only subject to a special tax but also an interest charge when the shareholder receives either gain from the sale of PFIC stock or payment from the PFIC that is an excess distribution

2. Qualified Electing funds - the current taxation schemes

Under this scheme, shareholders must make a qualified electing fund election with the IRS. This scheme taxes a PFIC income in the tax year that the PFIC income was earned.

3. The Mark to Market Schemes

This scheme can be used by PFIC shareholders whose stock is marketable on a reputable stock exchange. Similar to QEF, the mark to market tax scheme taxes a PFIC shareholder on the PFIC income or loss annually.

The Exception to filing Form 8621

However, a U.S. person that owns stock of a PFIC through a tax-exempt organization or account described in the list below is not treated as a shareholder of the PFIC:

• An organization or an account that is exempt from tax under section 501(a) because it is described in section 501(c), 501(d), or 401(a),
• A state college or university described in section 511(a)(2)(B),
• A plan described in section 403(b) or 457(b)
• An individual retirement plan or annuity as defined in section 7701(a) (37), or
• A qualified tuition program described in section 529 or 530. Interest holder of pass-through entities.

Other exception to the annual filing requirement

1. Exception if the aggregate value of Shareholder’s PFIC stock is $25,000 or less or the value of shareholder’s indirect PFIC stock is $5,000 or less

$25,000 and $5,000 stock value exceptions: This exception applies only to PFIC shareholders who are subject to tax under the tax and interest charge scheme (Sec 1291 Fund).

• The combined value of all PFIC stock at the end of the PFIC shareholder’s tax year does not exceed $25,000 ($50,000 for joint filers); or
• The PFIC shareholder owns the PFIC (e.g., PFIC1) through another PFIC (e.g., PFIC2) and the value of the PFIC shareholder’s proportionate interest in PFIC2 through PFIC1 does not exceed $5,000, then the PFIC shareholder is not required to file Form 8621 in that tax year.

2. Exception for dual resident taxpayers

The new regulations provide a welcome change for certain foreign nationals who maintain tax residency in treaty countries. 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 under 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. (Form 8833).

A similar exception is provided for a dual resident taxpayer that determines any US income tax liability as a nonresident alien for only a portion of the tax year under treaty tie-breaker provisions and files a so-called ‘dual-status’ income tax return. This exception requires Form 8621 to be filed (and PFIC tax consequences to apply) only for the portion of such taxable year that Form 1040NR does not apply.

3. Certain PFIC held for 30days or less

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. During this period, no distributions were made to shareholders.

4. Exception for a bonafide resident of certain US territories

A shareholder of a PFIC is not required to file Form 8621 for a taxable year if the person is:  

• a bona fide resident of Guam, the Northern Mariana Islands, or the United States Virgin Islands, and is not required to file an income tax return with the IRS for such taxable year.

In general, the following interest holders must file Form 8621, unless an exception applies:

• A U.S. person that is an interest holder of a foreign pass-through entity that is a direct or indirect shareholder of a PFIC,
• A U.S. person that is considered (under sections 671 through 679) the shareholder of PFIC stock held in trust, and
• A U.S. partnership, S corporation, U.S. trust (other than a trust that is subject to sections 671 through 679 for the PFIC stock), or U.S. estate that is a direct or indirect shareholder of a PFIC.

Note. U.S. persons that are interest holders of pass-through entities described in 3 above must file Form 8621 if the pass-through entity fails to file such form or the U.S. person is required to recognize any income under section 1291.

Penalties:

IRC § 1298(f) and the applicable regulations do not provide for a specific penalty for failure to file Form 8621

The consequence of failing to file Form 8621 is the suspension of the statute of limitations for the U.S. shareholder’s entire federal income tax return until the shareholder files Form 8621. The suspension of the statute of limitations will be limited to the unreported PFIC interest and will not apply to other portions of the U.S. shareholder’s tax return so long as the shareholder can show “reasonable cause” for the failure to file Form 8621.