Passive Foreign Investment Company (PFIC) Rules
1. Passive Foreign Investment Company (PFIC) rules apply to gain of Overseas Mutual Funds
2. A US citizen and / or US resident is required to pay tax on passive investments as income at normal rates.
3. Income from passive investments will include capital gains; dividend; interest etc.
4. U.S. person that is a direct or indirect shareholder of a Foreign Investment Company must file Information Return for Passive Foreign Investment in Form 8621 to IRS with their Federal Income Tax return.
5. Failure may attract penalties & also be subject to criminal prosecution.
6. IRS weblink : https://www.irs.gov/pub/irs-pdf/i8621.pdf
I. Passive Foreign Investment Company (PFIC) Rules under Mark-to-Market under Section 1296 :-
.01 PFIC rules have an option of computation and payment of tax on notional income i.e. Net Asset Value (NAV) as at the end of the year.
.02 Under PFIC rule, in Mark to Market election method, the yearly gains i.e. even unrealized gains are taxed as Ordinary Income.
.03 If NAV is less than the cost at the end of the year, the difference being loss is allowed as a deduction only to the extent it was recognised as income in prior years.
II. Passive Foreign Investment Company (PFIC) Rules under Excess Distribution Method under Section 1291:-
.01 For first year of holding period, total distribution received during the current tax year is taxed as Ordinary Dividends
.02 For subsequent years, if total distribution received during the current tax year is greater than 125% of previous 3/2/1 year of total distribution, it will amount to excess distribution & it will be taxed as excess distribution on disposition of stock.
.03 Excess distribution on disposition of stock is allocated on Pro-rata basis in the period from the date of Purchase till the date of sale.
.04 Amount of Gain of current tax year is taxed as ordinary income
.05 Amount of loss on disposition of stock is shown as ordinary loss
.06 Deferred Tax on excess distribution is calculated at highest marginal tax rate for each tax year in the holding period other than the current year
.07 Deferred Interest is calculated on the amount of deferred tax from the due date of tax return of year of Purchase till the due date of tax return of year of sale.
Our Professional Services :
We offer professional services regarding Passive Foreign Investment Company (PFIC) Rules by preparing Form 8621 and also compute gains/loss required to be reported in Fed Tax return.