As most PFIC attorneys will readily affirm, US persons with Swiss accounts often hold at least a portion of their deposits in various types of investments, some of which may be subject to the heavily burdensome US passive foreign investment company (“PFIC”) tax regime. Determining whether a particular investment is a PFIC is not always an easy task, and sometimes the services of both foreign brokers and a US-based international tax attorney experienced in PFICs is likely to be necessary in order to make such an assessment.
This article will briefly explain the basics the US passive foreign investment company (“PFIC”) tax regime with the emphasis on UBS financial products. It is not intended to constitute tax or legal advice. If you hold, or potentially hold PFICs in your Swiss or other foreign accounts, you are advised to seek the assistance of competent, experienced tax experts. Owner Eugene Sherayzen is an expert international tax PFIC attorney at Sherayzen Law Office, Ltd. who can help with your all of your tax and legal needs.
PFIC Attorneys: The PFIC Tax Regime
Under Internal Revenue Code Section 1291, persons subject to US tax receiving income from a PFIC will be subject to a special tax and interest regime. IRC Section 1297(a) defines a PFIC to mean any corporation if, “(1) 75 percent or more of the gross income of such corporation for the taxable year is passive income, or (2) the average percentage of assets (as determined in accordance with subsection (e)) held by such corporation during the taxable year which produce passive income or which are held for the production of passive income is at least 50 percent.” If a US person is required to report PFIC income, the Form 8621, “Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund” will need to be filed for each PFIC held.
In general, US persons will be required to file if they are direct or indirect shareholders of a PFIC (various attribution and ownership rules may need to be analyzed to make such a determination in certain cases), and any of the following apply: (1) Certain direct or indirect distributions are received from a PFIC, (2) gain is recognized on a direct or indirect disposition of PFIC stock, or (3) if the taxpayer is making an election reportable in Part II of the form.
Under IRC Section 1291 (the “default” PFIC rules), US taxpayers receiving “excess distributions” will be subject to the special PFIC tax and interest regime. An excess distribution is defined by the IRS to mean the portion of a distribution received in the current year, “[T]hat is greater than 125% of the average distributions received in respect of such stock by the shareholder during the 3 preceding tax years (or, if shorter, the portion of the shareholder’s holding period before the current tax year). No part of a distribution received or deemed received during the first tax year of the shareholder’s holding period of the stock will be treated as an excess distribution.” (Conversely, the entire amount of any gain recognized on a disposition of PFIC shares will be treated as an excess distribution).
Other PFIC reporting methods may be available as a result of an election, but you need to consult the experienced PFIC attorneys to determine whether these elections constitute a valid option in your case.
PFIC Attorneys: UBS Financial Products and PFICs
As most PFIC attorneys who deal with Swiss clients know, UBS bankers are likely to recommend to their clients to open accounts that may contain PFICs. Sometimes, it is easy to recognize a PFIC; oftentimes, a mutual fund or an investment fund is directly identified and PFIC attorneys can classify these instrument properly.
On the other hand, PFIC attorneys are familiar with a number of cases where UBS and other Swiss banks would offer products which are much harder to classify. For example, UBS AG sells a large variety of investments that may or may not be PFICs, depending upon various factors specific to the type of product involved: UBS Certificates, UBS Bonus certificates, Discount Certificates, UBS PERLES (such as, Sector PERLES, Country Index PERLES, and Multinational Index PERLES), UBS Rolling Certificates, Open End Index Certificates on global stock exchanges (such as the “DAX” (Deutscher Aktien Index)), and Trigger Performance Securities linked to an underlying index or a weighted basket of indices, among many others.
If you have such investments, you should consult the experienced PFIC attorneys of Sherayzen Law Office to determine whether you need to do PFIC compliance.
PFIC Attorneys: US Program for Swiss Banks and PFICs
With the new US Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (the “Program”) in effect, the US Department of Justice and the IRS have significantly increased their tools for locating undisclosed foreign bank accounts held by US taxpayers. Given the pattern of investments conducted by Swiss bankers, there is a very high chance that these accounts may hold PFICs even if the accounts are held in banks other than UBS (which is not eligible to participate in the Program).
In light of the tight deadlines that U.S. accountholders face in order to disclose their Swiss accounts before the Swiss Banks do it under the Program, it is essential that an international tax attorney experienced in Swiss PFICs is retained to handle your voluntary disclosure.
If you have undisclosed financial accounts in Switzerland, you may need to do proper PFIC reporting as part of your voluntary disclosure. This is why it is advised that you contact Eugene Sherayzen at Sherayzen Law Office, an experienced PFIC attorney for professional help.
