Passive foreign investment company reporting: avoiding pitfalls

International tax compliance has become so complicated it sometimes seems like a constant crossword puzzle of acronyms and obligations. If you live abroad, have foreign accounts, or meet other criteria, the intricacies of FATCA, FBAR, FinCen, Form 8938 are in play, carrying the potential to trip you up.

In this post, we will use a Q & A format to inform you about a reporting requirement that is not as well known as some of the others but is equally dreaded: Form 8621 for passive foreign investment companies.

What is a foreign passive investment company (PFIC)?

The term is defined in 26 US Code Section 1297. A PFIC is a non-US company that meets one of two qualifications for having “passive” income, either in terms of income or assets.

Passive income is income is a term of art in tax law. It generally refers to income that comes from an enterprise or activity in which the taxpayer is not materially involved, such as certain types of rental property or limited partnerships.

What do the reporting rules for PFICs generally require?

Owning foreign securities directly does not, of itself, trigger a PFIC reporting obligation. After all, there are already FBAR and Form 8938 rules for that.

Foreign mutual funds, however, are another story. The PFIC reporting rules were developed because the U.S. government took a dim view of money kept in foreign mutual funds and not taxed until the money was taken out, rather than as they grew year by year.

To reduce numerous complexities to a single statement, this means that annual reporting of PFIC income is generally required if the total amount in the account is more than a threshold of $25,000. The form to be used is Form 8621 and t

Are there any exceptions to this?

Yes, there is an exception for pension accounts.

In an upcoming post, we will provide further discussion of how to avoid running afoul of the PIC rules.

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