• PFIC Break for Some
    No Need to File Annual Form 8621

    By Virginia La Torre Jeker J.D.


    Heartfelt thanks to Richard S. LeVine, J.D., LL.M. who emailed me to point out that the Internal Revenue Service (IRS) had just recently issued final “Passive Foreign Investment Company” (PFIC) regulations. Richard believed that certain aspects of the new regulations would make for an interesting post on my blog, “Let’s Talk About US Tax”.

    Richard is Of Counsel to Withersworldwide. Richard, always the consummate tax professional, has over the years provided valuable comments on many of my blog posts and made significant contributions to many tax discussions on Linked-In. Thank you Richard for this recent head’s up!

    Readers, please note, I welcome your suggestions for future blog post topics.

    IRS Plays Santa to Some — Says No Need to File

    Creeping up to the New Year, the IRS showed an uncharacteristic sign of holiday goodwill (and then, almost in the same breath reverted to its usual Grinchy self).

    On December 28, 2016 the IRS removed temporary Treasury Regulations and issued Final Treasury Regulations (full text here) that provide guidance on determining PFIC ownership and on certain annual reporting requirements for shareholders of PFICs to file Form 8621, "Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.’’

    I had blogged about the temporary PFIC regulations issued at the tail end of 2013 here. In part, both the temporary regulations and the final regulations implemented a provision of the Hiring Incentives to Restore Employment Act of 2010 (more commonly known as the HIRE Act) which had enacted an annual reporting requirement for shareholders of PFICs. This annual reporting requirement is mandated under Internal Revenue Code Section 1298(f) and is met by filing Form 8621 for each PFIC owned by a taxpayer. The annual reporting on Form 8621 is to be distinguished from the requirement to file the form when the investor receives an “excess distribution” from the PFIC, disposes of his PFIC shares resulting in an “excess distribution”, or makes a so-called QEF election.

    Two aspects of the final regulations will be discussed in this blog post.

    First, the good news! In response to a public comment made on the issue, the final regulations provide an exception to the annual reporting requirement to file Form 8621. The exception is for “dual resident taxpayers” who are treated as residents of another country (the “treaty country”) pursuant to an income tax treaty signed between the United States and the relevant treaty partner.

    Who is a Dual Resident Taxpayer?

    In general, a "dual resident taxpayer" is an individual who is considered a resident of the United States under the Internal Revenue Code (generally a Green Card holder, or an individual who meets the “substantial presence test”), and who is also considered a resident of a treaty country under the treaty country’s internal laws. Many US income tax treaties contain what is commonly called a “Treaty Tie-Breaker” provision. See for example, the US-Switzerland Income Tax Treaty at Article IV, 3. This provision enables a resolution to the conflicting claims of an individual’s residence by both countries. Under the tie-breaker rules a dual resident taxpayer is treated as a resident of only one country for income tax purposes. A dual resident taxpayer may claim the benefit of a tie-breaker rule by timely filing Form 8833, ‘‘Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b),’’ with an appropriate income tax return, such as Form 1040NR, ‘‘U.S. Nonresident Alien Income Tax Return.’’

    Why A PFIC Reporting Exception for Dual Resident Taxpayers Who “Tie-Break”?

    This is a most welcome exception and one that makes good sense.

    The PFIC rules apply only to ‘‘United States persons.’’ A dual resident taxpayer who properly claims the tie-breaker benefit is taxed as a so-called “nonresident alien” (NRA) for US income tax purposes. Under the US tax rules, NRAs are not treated as “United States persons” and as such, they are not subject to tax under the PFIC provisions. However, dual resident taxpayers who “tie-break” and are thus treated as residents of a treaty country for US income tax purposes are still treated as US residents for tax law purposes other than computing their income tax liability. (See Treasury Regulation § 301.7701(b)–7(a)(3)). Accordingly, absent this special carve-out in the final PFIC regulations, the dual resident taxpayer who is treated as a resident of a treaty country under a tie-breaker rule and who owns PFICs would still be subject to the Section 1298(f) annual PFIC reporting requirement on Form 8621 even though the individual would not be subject to tax under the PFIC provisions.

    The preamble to the final regulations notes that the requirement to file Form 8621 increases taxpayer awareness of, and compliance with, the PFIC rules. It also notes that because dual resident taxpayers are treated as NRAs for purposes of computing their US tax liability, such individuals are not subject to tax under the PFIC rules. Thus, annual PFIC reporting by these dual resident taxpayers is not essential to the enforcement of the PFIC provisions.

    Based on this rationale, the Treasury Department and the IRS determined that it is appropriate to provide an exception from the annual PFIC reporting rules for dual resident taxpayers who are treated as residents of a treaty country. The final regulations added § 1.1298–1(c)(5), which sets forth the exception. It should be noted that eligibility for the exception under the final regulations requires a timely filing of the relevant Form 1040NR, Form 8833, as well as the schedule required by § 1.6012–1(b)(2)(ii)(b) (if applicable).

    The Grinch

    The holiday cheer did not last very long.

    One commentator had requested that the so-called $25,000 and $5,000 exceptions to annual PFIC reporting thresholds be increased for US individuals living abroad. The apparent concern underlying the comment was the commenter’s view that such persons often are not aware of the PFIC provisions. (I can attest to this!).

    Briefly, an exception to annual filing of the Form 8621 is available if PFIC holdings do not exceed certain de minimis threshold amounts. (Remember, this assumes the shareholder is not otherwise required to file the Form 8621, for example, because the investor received an “excess distribution” or has made a so-called QEF election). If the threshold is not met on the last day of the shareholder’s taxable year, then reporting is not required for that particular tax year. Generally, reporting is not required if on that last day, the value of all PFIC stock owned directly or indirectly by the shareholder is $25,000 or less; or, if the shareholder holds his PFIC stock only indirectly and the value of the stock indirectly owned is $5,000 or less.

    The Treasury Department and the IRS rejected the commentator’s request to increase the dollar thresholds for PFIC investments of US persons living abroad. It was determined that “adopting an exception to the reporting requirements on this basis would adversely affect compliance with, and enforcement of, the PFIC provisions, because such individuals remain subject to tax under [the PFIC regime] regardless of the value of their PFIC stock, and a benefit of requiring reporting with respect to a [PFIC] in a year in which a shareholder is not subject to tax under [the PFIC rules] is to enhance the shareholder’s awareness of the PFIC requirements with respect to the [PFIC investment].”

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  • The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.

Virginia La Torre Jeker J.D.

Virginia La Torre Jeker J.D., is based in Dubai. Virginia has been a member of the New York Bar since 1984 and is also admitted to practice before the United States Tax Court. She has over 30 years of experience specializing in the international aspects of US tax, including FATCA. She has been quoted in the New York Times and Newsweek, and is regularly quoted in many local news articles and publications."

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