What are some other unfortunate and costly facts you must know about IRS PFIC rules and your investments? There has been a growing issue with Passive Foreign Investment Company or PFIC designations by the IRS. US taxpayers are consistently surprised to learn that their investment qualifies under IRS PFIC rules. They are even more dismayed by the exorbitant tax rate associated with these investments (39.5% or the highest personal tax bracket).
“Once a PFIC, Always a PFIC.”
There has been a rush to form offshore corporations and invest in foreign trusts in order to “shield” income from US tax authorities. This strategy is not only a potential bust, it is opening the doors to a whole new level of penalization. Once a US taxpayer learns their investment or company has been designated as a PFIC their natural question is “how do we change the nature of the company or its ownership to get out of the costly IRS PFIC rules? The answer is “it doesn’t matter. Once a PFIC, always a PFIC.” Once a non-US corporation has been classified as a PFIC for the tax year in which the taxpayer acquires an interest in that corporation, the taxpayer must always treat it as a PFIC – even if that foreign corporation no longer satisfies the gross income or asset tests under IRS PFIC rules.
“Inheritance or Immigration – Surprising PFIC Rules”
You may acquire a direct or indirect interest in a PFIC through inheritance, or if you already own shares in a non-US company when you immigrate to the US. You may trigger consequences simply by using those assets as collateral for a loan. It is also important to understand costly IRS PFIC rules supersede other tax-free regulations regarding transactions. You may be surprised to learn that simply inheriting an asset, owning it prior to coming to the US or using that asset in a transaction may increase your US tax burden.
The experienced international tax and IRS attorneys at Allen Barron offer a unique blend of inter-disciplinary expertise to our international investment and business clients. We can provide guidance from many perspectives and help you to gain a better understanding of complex offshore tax laws and how to best leverage your financial position while avoiding IRS PFIC rules. We invite you to contact us or call today to learn more and a free consultation at 866-631-3470.