IRS Issues PFIC Reporting Rules

On December 31, the IRS published Temporary and Proposed Regulations regarding the reporting by U.S. taxpayers of interests in Passive Foreign Investment Companies ("PFICs"). U.S. investors in PFICs are subject to special tax rules designed to eliminate the deferral of tax liability on passive investments that might otherwise be available from such investments made through foreign investment companies. In 2010, Congress adopted Section 1298(f) of the Internal Revenue Code, which required most U.S. investors to file an annual report on Form 8621 with their U.S. income tax return describing their ownership interest in a PFIC regardless of whether such interest generated any taxable income to the investor in such year. Reporting under that section was then suspended under Notice 2011-55 until regulations were issued. However, taxpayers were instructed to attach Form 8621 for the suspended years to tax returns filed after the regulations were issued.

The Temporary Regulations provide that there is no obligation to file a Form 8621 under Section 1298(f) for any taxable year ending before the date on which these Temporary Regulations are published in the Federal Register, thereby eliminating the obligation to file Form 8621 for suspended years. The Temporary Regulations also provide for de minimis exceptions from filing Form 8621 and some exceptions to eliminate duplicative reporting, as well as modifying the regulatory definition of "shareholder" and "indirect shareholder" for purposes of the PFIC rules. The Temporary Regulations also provide that, if a foreign or domestic estate or non-grantor trust directly or indirectly owns PFIC stock, each beneficiary of the estate or trust is considered to own a "proportionate amount" of such stock.

However, the Regulations left open how such proportionate interests should be determined. Until further guidance is provided, the Regulations provide that beneficiaries of such estates or trusts should use a "reasonable method" to determine their ownership interests in PFIC stock held by the estate or non-grantor trust. Further, until further guidance is provided, beneficiaries of estates and non-grantor trusts are exempt from Section 1298(f) reporting requirements for taxable years in which the beneficiary is not treated as receiving an excess distribution (within the meaning of the PFIC rules), or recognizing gain that is considered an excess distribution, with respect to PFIC stock that the beneficiary is considered to own through the estate or trust.

See: Proposed Regulations; Temporary Regulations.See generally: Cabinet FATCA Materials.For more information, please contact Daniel Mulcahy or Mark Howe.