The Complications of a Passive Foreign Investment Company, or PFIC
The recent implications of FATCA and the unique position taken by the United States to tax its citizens, residents and U.S. taxpayers on their global interests, assets and income have placed many offshore investors in a challenging position. U.S. taxpayers (including permanent U.S. residents) face taxation from the United States as well as the nation of their residence. Generally speaking, there are provisions in U.S. tax code to protect U.S. taxpayers from double taxation. However, the management and sophisticated transactional, business, accounting and tax planning expertise required to maximize profitability while ensuring compliance with the IRS and other sovereign agencies can be challenging to find.
Is Your Investment in a Foreign Corporation Classified as a Passive Foreign Investment Company, or PFIC?
U.S. taxpayers who invest in offshore investment accounts and those who take a position in foreign corporations face the genuine risk of an investment being characterized as a Passive Foreign Investment Company, or PFIC. The PFIC is a passive investment vehicle, and there are two primary tests to determine if a foreign corporation is actually a PFIC: the income test and the asset test. If 75% or more of the foreign corporation’s income consists of passive income, it is classified as a PFIC. Passive income is usually defined to include rents, royalties, annuities, dividends, interest and specific types of gains from the sale of property. It is important to note that rents and royalties generated in active business or trade are not considered passive income.
Also, if a mutual fund or partnership based in a foreign country has one or more U.S. shareholder, the investment will almost always be classified as a PFIC.
The challenge and potential trap for U.S. offshore investors is that, generally speaking, U.S. persons owning stock in a PFIC—even a single share—may be taxed at the top U.S. marginal rates. This is in addition to an interest charge on many transactions and distributions associated with PFIC stock. This may apply to those who are indirect owners of a PFIC through their offshore investment accounts.
A U.S. taxpayer may avoid these complications with the guidance of the experienced tax attorneys at Allen Barron. We can help you to perform a comprehensive review of the investments in your portfolio to evaluate PFIC risks. PFIC direct or indirect shareholders receiving an excess distribution from a PFIC, disposing of its shares, or making an election to purge its stock (i.e., QEF election or mark-to-market election) are required to file Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund. PFIC reporting also creates duplicate reporting issues with other IRS forms. The failure to meet the filing requirements associated with offshore investment accounts and PFICs can result in significant penalties.
Contact Allen Barron for Tax, Legal and Accounting Advice Regarding Offshore Investment Accounts
If you have offshore investment account concerns or require assistance evaluating the tax ramifications of your offshore investments, we invite you to contact us for a free and substantial consultation at 866-631-3470. Take advantage of the extensive international tax, accounting, business and legal services provided by Allen Barron.