What is a distribution from a PFIC?

All income from the sale or disposition of a PFIC is an excess distribution. The amount by which annual income/distributions exceed 125% of the average non-excess distributions received in the prior 3 years- meaning the amount that was previously included as ordinary income not subject to the high rate of taxation.

How are PFIC excess distributions taxed?

Likewise, when a person has a PFIC, and they did not make an election, they are not taxed on the increase in value within the PFIC. Presuming that the distribution exceeds the average of 125% value of the three prior-year distributions, the IRS deems this distribution an excess distribution.

How is PFIC calculated?

Under the income test, a foreign corporation is a PFIC if 75% or more of its gross income is passive income. Under the asset test, a foreign corporation is a PFIC if 50% or more of the average value of its assets consists of assets that would produce passive income.

What is the PFIC threshold?

Threshold for Reporting PFIC The person who is single or married filing separate has to file form 8621 in any year that their total number of PFICs exceed $25,000.

What happens when you sell a PFIC?

All capital gains from the sale of PFIC shares are treated as ordinary income for federal income tax purposes and thus are not taxed at preferential long-term capital gain rates (Sec.

How do you tell if a stock is a PFIC?

You can generally tell if a foreign corporation or foreign investment fund is considered a passive foreign investment company (PFIC) if it meets one of the following two characteristics: 75% or more of its gross income for the taxable year is passive income, or.

What are excess distributions?

An excess qualifying distribution is the amount by which the total qualifying distributions treated as made out of undistributed income for any tax year beginning after 1969, or as made out of corpus for the tax year (other than distributions by donee organizations described in Certain contributions to exempt …

What qualifies as PFIC?

A foreign corporation is a deemed passive foreign investment company (PFIC) if 75% or more of its gross income is from non-business operational activities (the income test), or at least 50% of its average percentage of assets is held for the production of passive income (the asset test).

Who Must File PFIC?

More In Forms and Instructions A U.S. person that is a direct or indirect shareholder of a passive foreign investment company (PFIC) files Form 8621 if they: Receive certain direct or indirect distributions from a PFIC. Recognize a gain on a direct or indirect disposition of PFIC stock.

Do I need to report PFIC?

PFIC reporting is the requirement that US citizens or green card holders, who indirectly or directly own shares in a PFIC at any time during the year, must file Form 8621 with the IRS. As this is an additional and often complex form, you will need to pay your tax advisor additional fees to prepare these.

How is PFIC income taxed?

A shareholder of a PFIC is by default subject to the Sec. All capital gains from the sale of PFIC shares are treated as ordinary income for federal income tax purposes and thus are not taxed at preferential long-term capital gain rates (Sec. 1291(a)(1)(B)).

How is PFIC taxed?

Current taxation of income from qualified electing fund (IRC section 1293). This regime applies when a shareholder elects to treat his or her PFIC investment as an investment in a qualified electing fund (QEF). It requires that PFIC shareholders be taxed on undistributed PFIC income as it is earned.

Can a PFIC make a mark to market?

Remember – the rule is FIFO-first in first out- so you cannot offset the purchases and distributions in a year and just deal with whatever is left over. Only PFICs that are marketable securities are eligible to make a Mark to Market election.

How are PFIC shares treated as ordinary income?

Under mark-to-market treatment, the U.S. taxpayer owning the PFIC shares must recognize as ordinary income annual increases in the market value of their PFIC shares (Sec. 1296(a)(1)). Annual losses in the value of PFIC shares are treated as ordinary losses only to the extent of previously recognized gains.

When to use adjusted basis for PFIC status?

When determining PFIC status using the asset test, a foreign corporation may use adjusted basis if: The corporation is not publicly traded for the tax year and The corporation (a) is a controlled foreign corporation within the meaning of section 957 (CFC) or (b) makes an election to use adjusted basis.

What is the correct US tax reporting for a PFIC?

The most frequently asked question by funds and the US investors is what is the appropriate US tax reporting for the investment interest: PFIC (Passive Foreign Investment Company) reporting or Sch. K-1 filing.