PFICs (Portfolio 6300)

Description

Tax Management Portfolio No. 6300, PFICs, discusses the passive foreign investment company (PFIC) provisions. These provisions attempt to deny the benefit of tax deferral to U.S. persons who invest in PFICs, i.e., foreign corporations that generate primarily passive income but whose investors are not subject to the anti-deferral rules for controlled foreign corporations (CFCs).

A foreign corporation is a PFIC if it satisfies either of two tests — an income test or an asset test. Under the income test, a foreign corporation is a PFIC if 75% or more of its gross income is passive income. Under the asset test, a foreign corporation is a PFIC if 50% or more of the average value of its assets consists of assets that would produce passive income. For purposes of both tests, certain look-through rules apply.

There are three possible taxation regimes under the PFIC provisions — the “default” regime and two elective regimes. Under the excess distribution regime, which is the default regime, an interest charge is imposed on the U.S. tax on excess distributions from a PFIC. Under the qualified electing fund (QEF) regime, a U.S. shareholder is taxed on its share of the QEF’s ordinary income and net capital gains annually. Under the mark-to-market election, which is available only where PFIC stock is marketable, the U.S. shareholder marks its stock to market on an annual basis.

If the U.S. shareholder fails to elect the QEF regime or the mark-to-market regime in the first year PFIC stock is held, but subsequently elects one of those regimes, both the interest charge regime and the elective regime may apply simultaneously unless the investor “purges the PFIC taint.” This may be accomplished by making a deemed sale election, or if the PFIC is a CFC, by making a deemed dividend election to treat all earnings and profits earned during the period of PFIC status (while the investor held the stock) as an excess distribution.

This Portfolio may be cited as Blanchard, 6300 T.M., PFICs.

Table of Contents

I. Introduction
II. Overview of the PFIC Rules
III. Determining PFIC Status — §1297
IV. Indirect Ownership and Attribution Rules — §1298(a)
V. Excess Distribution Regime — §1291
VI. Electing QEF Treatment — §1295
VII. Income Inclusions Under the QEF Regime — §1293
VIII. Election to Defer Payment of Tax on Undistributed QEF Inclusions — §1294
IX. Mark-to-Market Election to Include Gain or Loss from Publicly Traded PFIC Stock — §1296
X. Purging the PFIC Taint
XI. Information Reporting Requirements
XII. State and Local Considerations
XIII. Some Suggestions for Improving the PFIC Rules

Partners and Partnerships – International Tax Aspects (Portfolio 6680)
Tax Management Portfolio No. 6680, Partners and Partnerships – International Tax Aspects, examines the principal U.S. tax issues that arise when entities treated as partnerships for U.S. federal income tax purposes feature in international transactions.