Table of contents:
PFIC stands for Passive Foreign Investment Company which is a passive income-generating entity. A foreign corporation qualifies as a PFIC if it meets either the income or asset test:
Income test: 75% or more of the corporation's gross income for the tax year is passive income.
Asset test: At least 50% of the average assets held by the corporation during the tax year are assets that generate passive income or are held for its production.
When using the asset test, a foreign corporation can use an adjusted basis if it is not publicly traded and meets certain criteria. Publicly traded corporations must use fair market value when applying the asset test to determine PFIC status.
Examples of foreign corporations that may qualify as Passive Foreign Investment Companies (PFICs) based on the income or asset test can vary across different countries. Common examples are real estate investment companies, holding companies, foreign mutual funds, investment trusts, and investment holding companies. In the United Kingdom, a UK Investment Trust could qualify as a PFIC. In Canada - a Canadian Income Trust.
Reporting PFICs if it is held within a pension plan
If a PFIC investment is held within a qualified pension plan, such as an Individual Retirement Account (IRA) or a 401(k) plan, the taxpayer is not required to separately report or record it for tax purposes. The tax treatment of PFIC investments within qualified pension plans is typically deferred until distributions are made from the plan.
How many PFIC forms (8621) need to be filled out
A separate Form 8621 must be filed for each PFIC in which stock is held directly or indirectly. After you submit your tax questionnaire, you will receive an Engagement Letter outlining the total filing cost based on our determination of how many forms need to be filed.
Note: Form 8621 incurs an additional cost. An additional fee will be charged for each additional form. This fee structure is under Sec 1296 or QEF election.
Filing requirements for non-U.S. mutual funds
Non-U.S. mutual funds carry additional filing requirements under the PFIC regime:
A mutual fund that is invested in European stocks but incorporated in the U.S. may be taxed at a long-term capital gains rate of 15%, but if the U.S. taxpayer buys an identical fund listed outside the U.S., they will find their investment may be taxed at up to 50%.
The De minimis exception
You are not required to report if, on the last day of the year, the aggregate value of all PFIC stocks owned directly or indirectly by the shareholder is $25,000 or less ($50,000 if married filing jointly). According to the IRS instructions for Form 8621:
In determining the value of these funds, the shareholder may rely on periodic account statements unless they have actual knowledge or access to information that such statements do not reflect a reasonable estimate of the PFIC's value.
Reporting such investments on the Tax Questionnaire
To report investment income:
Open your Tax Questionnaire.
Navigate to the Life & Income > Basic Information TQ section on the left side and click Yes next to the statement I have investments.
Navigate to Income > Investments and click Yes under the question Do you have investments in non-U.S. pooled investment funds? E.g. mutual funds, unit trusts, ETFs, REITs, etc. (Do NOT report funds held in retirement funds, insurance policies, or annuity products).
Upload annual statements for the last 3 years in which the fund was held (showing year-end balance).
Never filed Form 8621 but filed a tax return yearly
Unfortunately, as of November 2017, the Streamlined Program does not permit a person to make a late PFIC.
Canadian RRSP & TFSA accounts are reportable but not as PFIC
RRSPs and TFSAs are bank accounts over which you have signatory authority for U.S. tax purposes. Therefore, they are required to be reportable on FBAR and Form 8938.
❗ Important note: RRSPs are not reportable as PFIC.
The reporting regime for RRSP and RRIF was simplified by Notice 2003-75 for taxable years beginning after December 31, 2002. Income in the Canadian registered plans does not need to be recognized in the U.S. until distribution. The taxable portion is reported as ordinary income upon issuance. Form 8621 is not required. For more information please refer to Canadian income reporting.