Last week the IRS released Treasury Decision 9650, which includes Treas. Reg. §1.1298-1T, temporary regulations regarding Passive Foreign Investment Companies (“PFICs”). A PFIC is defined as any foreign corporation if 75 percent or more of its gross income for the taxable year consists of passive income, or 50 percent or more of its assets consists of assets that produce, or are held for the production of, passive income. The quintessential PFIC is a foreign mutual fund.
To provide some background on the new regulations, on March 18, 2010, President Obama signed the Hiring Incentives to Restore Employment Act of 2010 (the Act). The Act amended the Internal Revenue Code by adding a new Code §1298(f).
Code §1298(f) requires U.S. persons who are shareholders of a PFIC to file an annual report with the I.R.S. Prior to the enactment of Code §1298(f), PFIC shareholders were required to file Form 8621 only in certain circumstances (e.g., upon disposition of stock of a PFIC, or with respect to a qualified electing fund under Code § 1293), but not annually.
Although Code §1298(f) was effective upon signing, the I.R.S. released Notice 2010-34 which provided that shareholders of a PFIC that were not otherwise required to file Form 8621 annually prior to the enactment of Code §1298(f) would not be required to file an annual report as a result of the addition of Code §1298(f) for taxable years beginning before March 18, 2010.
Pending the release of a revised Form 8621, Notice 2011-55 further suspended the Code §1298(f) reporting requirement for taxable years beginning on or after March 18, 2010 for PFIC shareholders that were not otherwise required to file Form 8621 as provided in the then-current instructions to Form 8621. PFIC shareholders with Form 8621 reporting obligations as provided in the then-current instructions to Form 8621 had to continue to file the Form 8621 with an income tax or information return filed prior to the release of a revised Form 8621.
Notice 2011-55 also provided that upon the commencement of Code §1298(f) annual reporting, taxpayers would need to file a Form 8621 for the years in which the reporting requirement was suspended (generally 2010, 2011, and 2012). However, the regulations released last week clarify that taxpayers will not need to file Form 8621 under Code §1298(f) with respect to taxable years ending before December 31, 2013. If required under Code §1298(f), calendar year taxpayers will need to file Form 8621 starting with the 2013 tax year.
The regulations create two de minimis rules where no Form 8621 is required to be filed. The de minimis rules apply only if the shareholder: (i) has not made a Qualifying Electing Fund ("QEF") election, (ii) has not received an excess distribution during the year, and (iii) does not recognize gain treated as an excess distribution during the year. The first de minimis rule applies if the aggregate value of all of the PFIC stock owned by the shareholder (directly or indirectly) does not exceed $25,000 ($50,000 for joint filers). The second de minimis rule applies if the PFIC stock is owned indirectly by the shareholder through another PFIC and is valued at $5,000 or less.
There are additional exceptions to the filing requirement. We have created a comprehensive flowchart of the new Code §1298(f) regulations that determines when Form 8621 must be filed. The chart is available for free at our sister website, www.Tax-Charts.com, along with many other charts dealing with international tax issues.