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PFIC Compliance: Introduction | International Tax Lawyer & Attorney

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In the intricate realm of US international tax law, few areas are as challenging and potentially costly as PFIC compliance. Understanding the nuances of Passive Foreign Investment Companies (PFICs) is crucial for US taxpayers with foreign investments. This article provides an introduction to PFIC compliance, outlining key concepts and reporting requirements.

What is PFIC Compliance?

PFIC compliance refers to adhering to the US tax rules and reporting requirements for Passive Foreign Investment Companies. A PFIC is a foreign corporation that meets one of the following tests:

  1. Income Test: 75% or more of its gross income is passive income
  2. Asset Test: 50% or more of its assets generate passive income or are held for the production of passive income

Passive income typically includes dividends, interest, royalties, rental income (unless renting is the active business of the corporation) and capital gains.

The Importance of PFIC Compliance

PFIC compliance is a critical issue for US taxpayers, because the tax consequences of owning PFICs can be severe. The US tax code imposes punitive tax rates and interest charges on certain PFIC distributions and gains, making this area of US tax compliance a high-stakes area of tax law.

Key Aspects of PFIC Compliance

1. Identification: The first step is to identify whether you own any PFICs. This is not an easy process, but, generally speaking, all foreign mutual funds and ETFs are almost automatically PFICs.
2. Annual Reporting: A taxpayer must disclose the ownership and income from PFICs annually on Form 8621 for each PFIC owned. Actually, each block of each PFIC will require a separate Form 8621.
3. Tax Calculations: Depending on the chosen PFIC regime, complex calculations may be necessary to determine the tax owed on PFIC income.
4. Record Keeping: Meticulous record-keeping of all PFIC transactions and values is an absolute must for proper PFIC reporting.

PFIC Compliance Regimes

There are three main tax PFIC reporting regimes (there are other regimes, but we will not deal with them in this article, because these regimes come into effect only in special cases):

1. IRC Section 1291 Fund (Default Method): This is the default PFIC calculation regime which may result in a high tax burden with distributions and gains taxed at the highest ordinary income rate plus an interest charge (called “PFIC interest”).

2. Qualified Electing Fund (QEF): This PFIC regime requires an election and cooperation from the foreign corporation but can result in more favorable tax treatment. Unfortunately, the cooperation from the foreign corporation is going to be the most difficult part.
3. Mark-to-Market (MTM): This is another PFIC regime that requires an election. It is available for marketable PFIC stock only and involves annual recognition of gains or losses, even in situations where a PFIC is not sold.

Common Challenges in PFIC Compliance

US tax reporting concerning PFICs presents several challenges:
1. Identification: Many taxpayers are unaware of the fact that they own PFICs, leading to inadvertent noncompliance. A failure to properly identify PFICs often forms the basis for a subsequence offshore voluntary disclosure.
2. Complexity: PFIC rules are highly complex and often require professional assistance from an international tax law firm, such as Sherayzen Law Office.
3. Information Gathering: Obtaining the necessary information for proper PFIC reporting can be difficult, especially in cases where PFICs have been held for many years.
4. Retroactive Compliance: Addressing past noncompliance can be particularly complex and costly. This point is especially important in a context of an IRS offshore voluntary disclosure, such as Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

PFIC Compliance Penalties

A failure to properly report PFICs can result in significant penalties:
1. Failure to file Form 8621 can result in the extension of the statute of limitations.
2. Substantial understatement penalties may apply if PFIC income is not properly reported.
3. In severe cases, criminal penalties could be imposed for willful noncompliance.

PFIC Compliance for Specific Situations

Taxpayers should be aware that different scenarios may require unique approaches to PFIC compliance. Here are a few common examples:
1. Inherited PFICs: Special rules apply when PFICs are acquired through inheritance.
2. PFICs Held in Foreign Pensions: The interaction between PFIC rules and foreign pension regulations can be complex.
3. PFICs Owned Through Partnerships: Additional reporting may be required for PFICs owned indirectly through partnerships.

Contact Sherayzen Law Office for Professional Help with PFICs

Navigating the complexities of PFIC compliance can be daunting for any taxpayer. This is why you need to contact Sherayzen Law Office for help. We are a leading firm in PFIC compliance in the United States. Our deep understanding of international tax law and extensive experience in PFIC matters allows us to help ensure your PFIC compliance is accurate and up-to-date.

Whether you’re dealing with PFIC identification, annual reporting, or addressing past noncompliance, Sherayzen Law Office provides tailored solutions to meet your specific needs. Our team of specialists can guide you through the intricacies of PFIC tax regimes, help you choose the most advantageous compliance method and assist with complex calculations and reporting requirements.

We have helped hundreds of US taxpayers around the world to resolve past PFIC noncompliance in the context of an IRS offshore voluntary disclosure option, such Streamlined Domestic Offshore Procedures, Streamlined Foreign Offshore Procedures, Delinquent International Information Return Submission Procedures, et cetera. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

4th Quarter 2017 Underpayment, Overpayment & PFIC Interest Rates

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On September 8, 2017, the IRS announced that the 4th Quarter 2017 underpayment and overpayment interest rates will remain the same as they were in the third quarter of 2017. The IRS underpayment interests also govern the PFIC interest rates under the default Section 1291 method of calculation. PFIC interest rates are very important not only to taxpayers who currently hold PFICs, but also to the US taxpayers who are participating in the Streamlined Domestic Offshore Procedures and, to a lesser extent, the IRS Offshore Voluntary Disclosure Program (“OVDP”) now closed.

Recent History of the IRS Underpayment, Overpayment and PFIC Interest Rates

Following the global financial meltdown, the Federal Reserve quickly dropped its interest rates to almost zero. The IRS underpayment, overpayment and PFIC interest rates are set to follow the Federal Reserve short-term rates on a quarterly basis.

For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

Hence, from the 4th quarter of 2011 through the first quarter of 2016, the IRS underpayment, overpayment and PFIC interest rates remained at 3%. Once the Federal Reserve started to raise its short-term rates, however, the IRS raised the interest rates in the second quarter of 2016, from 3% to 4%. Since then, the rates remained the same.

4th Quarter 2017 IRS Underpayment, Overpayment and PFIC Interest Rates

4th quarter 2017 IRS underpayment, overpayment and PFIC interest rates will be as follows:

four (4) percent for overpayments (two (3) percent in the case of a corporation);
four (4) percent for underpayments;
six (6) percent for large corporate underpayments; and
one and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000.

These interest rates were computed based on the federal short-term rate determined during July of 2017 to take effect on August 1, 2017, plus daily compounding. The 4th Quarter IRS underpayment, overpayment and PFIC interest rates will apply during the period of October 1, 2017, through December 31, 2017.