Updated Guidance On PFIC and Form 5471 Reporting
In 2010 Congress enacted section 1298(f) with the seemingly simple requirement that each US person who is a shareholder of a passive foreign investment company ("PFIC") file an annual report. This filing requirement was effective as of March 18, 2010. However, in 2011, due to the uncertainty of exactly who needed to file an annual report, the IRS suspended the section 1298(f) reporting requirement until it published a revised reporting form, but stated that once the revised form was published, US shareholders would have to file retroactively to 2010. Three years after enactment we finally receive our first guidance regarding exactly who is subject to the section 1298(f) reporting requirements.
On December 31, 2013, the IRS cleared the slate and withdrew the definitions of the terms pedigreed QEF, section 1291 fund, shareholder and indirect shareholder from the 1992 proposed Treasury Regulation section 1.1291-1. In addition, the IRS withdrew the annual reporting requirements from the same proposed regulation. Accompanying these withdrawals was the publication of new final, temporary and proposed regulations (the "Regulations").
The Regulations eliminate the requirement to retroactively report back to 2010. The Regulations also provide guidance on the annual filing requirements for shareholders of PFICs, revised definitions, and guidance on determining the ownership of a PFIC. In addition to addressing PFICs, the Regulations also clarify an exception to the requirement for some shareholders of foreign corporations to file Form 5471 Information Return of U.S. Persons With Respect To Certain Foreign Corporations and update the rules related to Form 5471 to take into account previous statutory changes.
The Regulations partially obsoleted Notice 2011-55 with respect to section 1298(f) and Form 8621 Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund. No longer will a person with a reporting obligation under 1298(f) from 2010 through the date of publication of the revised Form 8621 be required to file retroactively.
Filing Requirements and Exceptions
The Regulations are meant to eliminate unnecessary and duplicative reporting. The general rule is that the US shareholders who are at the
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lowest tier in a chain of ownership of a PFIC are required to report their ownership on Form 8621, allowing upper-tier owners to avoid reporting in most cases. However, the upper-tier US indirect shareholders are also required to file a Form 8621 if the indirect shareholder is (i) treated as receiving an excess distribution with respect to the PFIC; (ii) treated as recognizing gain that is treated as an excess distribution as a result of a disposition of the PFIC; (iii) required to include an amount in income under the qualified electing fund (“QEF”) inclusion with respect to the PFIC; (iv) required to include an amount in income under the mark-to-market (“MTM”) inclusion with respect to the PFIC; or (v) required to report the status of a section 1294 election with respect to the PFIC.
For purposes of (iii) and (iv) above, there is an exception to filing when another shareholder through which the indirect shareholder owns an interest in the PFIC timely files Form 8621. However, this exception does not apply in the case of a PFIC owned by a partnership or S corporation that does not make a QEF election with respect to the PFIC.
An exception to filing is also made for beneficiaries of a foreign estate or trust that owns stock in a PFIC and has not made a QEF or MTM election, if the beneficiary is not treated as receiving an excess distribution or as recognizing gain that is treated as an excess distribution with respect to the stock.
The Regulations also contain a de minimis exception. A shareholder is not required to file a Form 8621 if: (i) the aggregate value of the shareholder's PFIC stock is $25,000 ($50,000 for joint filers) or less, or the value of the shareholder's indirect PFIC stock is $5,000 or less (determined as of the last day of the shareholder's taxable year); (ii) the shareholder is not treated as receiving an excess distribution or recognizing gain treated as an excess distribution; and (iii) a QEF election has not been made.
The terms pedigreed QEF and section 1291 fund were originally defined in the 1992 proposed PFIC regulations. The Regulations changed these definitions to be consistent with later-enacted statues. The revised definitions are as follows:
A PFIC is a pedigreed QEF with respect to a shareholder if the PFIC has been a Qualified Electing Fund ("QEF") with respect to the shareholder for all taxable years during which the corporation was a PFIC that are included wholly or partly in the shareholder's holding period of the PFIC stock.
A PFIC is a section 1291 fund with respect to a shareholder unless the PFIC is a pedigreed QEF with respect to the shareholder or a section 1296 election (MTM election) is in effect with respect to the shareholder.
The terms shareholder and indirect shareholder have multiple definitions in the existing regulations. For purposes of the taxation of shareholders of section 1291 funds, the Regulations generally adopted the definition of shareholder provided in the 1992 proposed regulations but revised certain aspects of the definition of indirect shareholder. The definitions are:
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Shareholder means any US person that owns stock of a PFIC directly or indirectly.
Indirect shareholder is a US person that indirectly owns stock in a PFIC. A person indirectly owns stock when such person is treated as owning stock of a corporation owned by another person, including a US person, under this paragraph.
Regarding the definition of a shareholder, the Regulations provide that a domestic partnership or S corporation is treated as a shareholder of a PFIC only for purposes of information reporting. In other words, they lose their look-through status only when it comes to information reporting. Also, a domestic grantor trust is treated as a shareholder of a PFIC for purposes of the information reporting in the context of only (i) domestic liquidating trusts and (ii) fixed investment trusts.
In conjunction with the definition of an indirect shareholder, the Regulations provide guidance for attributing ownership of PFIC stock through corporations, partnerships, S corporations, estates and trusts.
If the indirect ownership is through a non-PFIC foreign corporation, a person that owns 50 percent or more in value of the stock of the non-PFIC foreign corporation is treated as owning a proportionate amount (by value) of any stock owned by the non-PFIC foreign corporation. If the indirect ownership is through a PFIC, a person that owns any portion of the PFIC is treated as owning a proportionate amount (by value) of any stock owned by the PFIC. Section 1297(d) does not apply when determining whether the corporation through which the stock is owned is a PFIC.
Stock owned by a partnership is treated as owned by the partners proportionately in accordance with their ownership interests in the partnership.
Stock owned by an S corporation is treated as owned by the shareholders of the S corporation proportionately in accordance with the shareholders’ respective ownership interests in the S corporation.
Estates and Nongrantor Trusts
Stock owned by an estate or nongrantor trust is treated as owned proportionately by each beneficiary of the estate or trust. The IRS has indicated that further guidance on nongrantor trusts is forthcoming.
Stock owned by the grantor trust is treated as owned by any person that is treated under the grantor trust rules (Code sections 671-679) as the owner of such stock.
Pursuant to Code sections 6038 and 6046, certain US persons are required to file an information return on Form 5471 Information Return of U.S. Persons with Respect to Certain Foreign Corporations with respect to their ownership in certain foreign corporations or because
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they are officers or directors of certain foreign corporations. The current regulations provide an exception to the requirement to file Form 5471 under sections 6038 and 6046 that is applicable to certain US persons owning an interest in a foreign corporation under the constructive ownership rules. Specifically, a US person otherwise required to file Form 5471 does not have to file if: (i) the US person does not directly own an interest in the foreign corporation; (ii) the US person would otherwise be required to furnish the information solely by reason of attribution of stock ownership from a US person; and (iii) the person from whom the stock ownership is attributed furnishes all of the information required to be reported by the person to whom the stock ownership is attributed. However, these shareholders had to file a statement with their returns indicating that the requirement to provide information has been satisfied and identifying the return with which the information was filed and the place of filing. The Regulations remove this requirement to file a statement.
The remainder of the changes with respect to the Form 5471 filing obligations were done solely to incorporate previous statutory changes. Specifically, these changes incorporate the additional filing requirement imposed on US persons treated as section 953(c) shareholders and incorporate the 1997 change to the stock ownership threshold at which reporting is required from 5 percent to 10 percent.
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Written by: Rodney Read
Pursuant to requirements relating to practice before the Internal Revenue Service, any tax advice in this communication (including any attachments) is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing, or recommending to another person any tax-related matter.
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