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Requirement to File Informational Return Form 8621 Even If Below Filing Thresholds

While submitting the shareholder’s tax return (or, if applicable, partnership or exempt organization return), fill the Form 8621 as per instructions mentioned in it, attach it with return and file both by the due date, including extensions, of the return at the Internal Revenue Service Center where the tax return is required to be filed. You need to file only Form 8621 directly with the Internal Revenue Service Center, Ogden, UT 84201-0201, if you are not required to file an income tax return or other return for the tax year.

PFIC Background

In general, a foreign corporation is a PFIC which fulfill one of two conditions:

  • Criteria for Income: If 75% or more company’s gross income for the tax year is passive income (as defined in section 1297(b)) including rents, royalties, interests, dividends, net gains from a certain property and currency transactions etc.
  • Criteria for Asset: At least 50% of the average annual value of its total assets consist of income producing assets (determined under section 1297(e)) For example cash, working capital and non-inventory investment in stock are generally considered to be passive income-producing assets.

Who Should File?

A U.S. citizen who is a direct or indirect shareholder of a PFIC must file Form 8621 for each tax year under the following five conditions, if the U.S. citizen:

  1. Receives any direct or indirect distributions from a PFIC,
  2. Receives gain on a direct or indirect sale of PFIC stock,
  3. Is providing information with respect to a QEF or section 1296 mark-to-market election,
  4. Is making an election reportable in Part II of the form, or
  5. Is required to file an annual report under section 1298(f).

For each PFIC in which stock is held directly or indirectly, a separate Form 8621 must be filed. In the case of a chain of ownership, under the five conditions stated above, unless otherwise provided, if a shareholder owns a chain of one or more PFIC through a PFIC, then he has to file a separate Form 8621 for each PFIC in the chain.

Filling of a consolidated Form 8621 is prohibited and if someone file a consolidated form 8621 for multiple PFICs then penalties may be imposed for those who continue to file in such a manner.

The information required by section 1298(f) regarding a PFIC and to report information for Parts III through VI and to make elections in Part II of the form, a single Form 8621 may be filed. For example, a U.S. person that has made a section 1296 mark-to-market election with respect to a PFIC will file a single Form 8621 and complete Part I and Part IV. Indirect shareholder.

Definition for Indirect Shareholder of a PFIC

 Generally, a U.S. citizen is an indirect shareholder of a PFIC if it is:

  • A person has 50% or more shares in a foreign corporation and that holds directly or indirectly stock of a PFIC.
  • A person is a shareholder of a PFIC who itself is a shareholder of another PFIC.
  • A person having 50% or more share in local company who owns section 1291 fund, or
  • A person owning a pass through entity directly or indirectly who itself has direct or indirect shares in PFIC. For more information whether a US citizen is a direct or indirect shareholder, please see Temporary Regulations section 1.1291-1T (b) (8) and Notice 2014-28.

Taxation of PFIC shareholders

PFIC shareholder can be taxed under one of three tax schemes

1. Sec 1291 Fund – the tax and interest scheme

Under this scheme, the shareholder is not only subject to a special tax but also an interest will be charge if shareholder receives any gain either from the sale of PFIC stock or payment from the PFIC as an excess distribution

2. Qualified Electing funds – the current taxation schemes

Under this scheme, shareholders must make a qualified electing fund election with the IRS. This scheme tax imposed on a PFIC income in the tax year in which that income was earned.

3. The Mark to Market Scheme

Under this scheme, PFIC shareholders whose stock is marketable on a reputable stock exchange. Similar to QEF, the mark to market tax scheme imposes tax on a PFIC shareholder on the PFIC income or loss annually.

 Exception to filing Form 8621

A US citizen shall not be treated as a shareholder of the PFIC if he owns stock of a PFIC through a tax-exempt organization or as described in the list below:

  • An organization or an account that is exempt from tax under section 501(a) because it is described in section 501(c), 501(d), or 401(a),
  • A state college or university described in section 511(a)(2)(B),
  • A plan described in section 403(b) or 457(b)
  • An individual retirement plan or annuity as defined in section 7701(a) (37), or
  • A qualified tuition program described in section 529 or 530. Interest holder of pass-through entities.

Other exception to the annual filing requirement

1. Exception of aggregate value

If the aggregate value of Shareholder’s PFIC stock is $25,000 or less or the value of shareholder’s indirect PFIC stock is $5,000 or less then this exception applies only to those PFIC shareholders who are subject to tax under the tax and interest charge scheme (Sec 1291 Fund).

  • The aggregate value of all PFIC stock at the end of the PFIC shareholder’s tax year does not exceed $25,000 ($50,000 for joint filers); or
  • The PFIC shareholder owns the PFIC (e.g., PFIC1) through another PFIC (e.g., PFIC2) and the value of the PFIC shareholder’s proportionate interest in PFIC2 through PFIC1 does not exceed $5,000, then the PFIC shareholder is not required to file Form 8621 in that tax year. 
2. Exception for dual resident taxpayers

For certain foreign nationals who maintain tax residency in treaty countries, there is now an exception to filing Form 8621 for dual resident taxpayers that determine any US income tax liability as a nonresident alien for the taxable year under treaty tie-breaker provisions. Under this exception, the taxpayer must file either Form 1040NR (US Nonresident Alien Income Tax Return) or Form 1040NR-EZ (US Income Tax Return for Certain Nonresident Aliens With No Dependents), including a treaty based return position disclosure in accordance with regulations. (Form 8833).

A similar exception is provided for a dual resident taxpayer that determines any US income tax liability as a nonresident alien for only a portion of the tax year under treaty tie-breaker provisions and files a so-called ‘dual-status’ income tax return. This exception requires Form 8621 to be filed (and PFIC tax consequences to apply) only for the portion of such taxable year that Form 1040NR does not apply.

3. Certain PFIC held for 30days or less

The regulations provide a new exception to filing Form 8621 if the taxpayer acquires a PFIC fund in the taxable year or the immediately preceding taxable year, and only holds that fund for 30 days or less. Specifically, this test focuses on the period beginning 29 days before the first day of the shareholder’s taxable year and ending 29 days after the close of the taxable year. During this period, no distributions were made to shareholders.

4. Exception for a bona fide resident of certain US territories

A shareholder of a PFIC will be exempted to file Form 8621 for a taxable year if the person is:  

  • a bona fide resident of Guam, the Northern Mariana Islands, or the United States Virgin Islands, and is not required to file an income tax return with the IRS for such taxable year.

In general, the following interest holders must file Form 8621, unless an exception applies:

  • A U.S. person that is an interest holder of a foreign pass-through entity that is a direct or indirect shareholder of a PFIC,
  • A U.S. person that is considered (under sections 671 through 679) the shareholder of PFIC stock held in trust, and
  • A U.S. partnership, S corporation, U.S. trust (other than a trust that is subject to sections 671 through 679 for the PFIC stock), or U.S. estate that is a direct or indirect shareholder of a PFIC.

Note. U.S. persons that are interest holders of pass-through entities described in 3 above must file Form 8621 if the pass-through entity fails to file such form or the U.S. person is required to recognize any income under section 1291.

Penalties:

IRC 1298(f) and the applicable regulations do not provide for a specific penalty in case of failure to file Form 8621

Failing to file Form 8621 would result in suspension of status of limitation for the US shareholder’s entire federal income tax return until the shareholder files Form 8621. The suspension will be limited to unreported PFIC interest and will not apply to other portions of the tax return if shareholder show a “reasonable cause” for the failure to file Form 8621.

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