Tax Analysts provides news, analysis, and commentary on tax-related topics, including anti-deferral regimes and Passive Foreign Investment Companies (PFICs).
Section 1297 defines a PFIC as a foreign corporation if 75 percent or more of the gross income of the corporation is passive (income test) or the average percentage of assets of the corporation producing passive income or held for the production of passive income is at least 50 percent (asset test). There are also look-through rules for determining whether a foreign corporation is a PFIC and a start-up exception to PFIC status. Passive income is income that would be foreign personal holding company income under section 954(c), with certain exceptions, and generally includes dividends, interest, royalties, rents and annuities.
The general rule for PFIC reporting status is: once a PFIC, always a PFIC. Coordination rules apply where CFC and PFIC rules overlap.
Shareholders of PFICs can defer taxation of undistributed income but are taxed on realization events, including excess distributions and dispositions, under the harsh section 1291 regime that includes special interest charges and denial of capital gain treatment.
However, U.S. shareholders of a PFIC are taxed currently on their pro rata share of a PFIC’s income if they have made a timely QEF (qualified electing fund) election effective from the beginning of the shareholder’s holding period or if they make a retroactive election and purge PFIC taint for prior years. If a shareholder makes a deemed sale election or deemed dividend election, the PFIC will be a pedigreed QEF.
Reporting obligations of PFIC shareholders involve Form 8621 and are addressed by section 1298(f) regulations (Treas. Reg. 1.1298-1T).
Tax Notes Federal and Tax Notes Today Federal subscribers have free access to James M. Peaslee and David Z. Nirenberg, Federal Income Taxation of Securitization Transactions and Related Topics (Fifth Edition). Chapter 13 discusses the treatment of U.S. shareholders of offshore issuers of collateralized loan obligations (CLOs) that are PFICs.