The U.S. IRS has released temporary, final and proposed regulations in relation to passive foreign investment companies (PFICs) confirming that U.S. citizens and residents who own shares in PFICs will be required to provide annual reporting on Form 8621 starting with their 2013 income tax returns, with no requirement for retroactive (prior to 2013) reporting.
On December 30, 2013, the U.S. Internal Revenue Service (IRS) released temporary, final and proposed regulations in relation to passive foreign investment companies (PFICs).1 The new regulations confirm that U.S. citizens and residents who own shares in PFICs will be required to provide annual reporting on Form 8621 for all PFICs starting with their 2013 income tax returns (subject to certain exceptions noted below). However, the regulations eliminate the requirement that taxpayers report PFIC holdings for 2011 and 2012 with their 2013 income tax returns.
The requirement to file Form 8621 represents a further development of the U.S. tax rules compelling disclosure of assets held outside the United States by U.S. citizens and residents. This additional requirement is likely to add to the complexity of preparing tax returns for affected individuals.
The HIRE Act of 2010 added section 1298(f) to the U.S. Internal Revenue Code (I.R.C.). This provision requires all U.S. persons who are shareholders of a PFIC to report their ownership of the PFIC on Form 8621 even when there is no other requirement to file Form 8621, such as receipt of an excess distribution or making the qualified electing fund (QEF) or mark-to-market (MTM) elections. Section 1298(f) was effective as of March 18, 2010. In Notice 2010-34, the IRS suspended the filing requirement for 2010 and in Notice 2011-55 the IRS further suspended this filing requirement until regulations and a revised Form 8621 were issued to reflect the reporting requirements of section 1298(f).
For prior coverage of Notice 2011-55 and related issues, see KPMG’s Flash International Executive Alert 2011-102 (June 22, 2011).
On December 30, 2013, the IRS released temporary, final and proposed regulations under section 1298(f). These regulations were published in the Federal Register on December 31, 2013, and are therefore effective as of that date.
The regulations provide that all PFIC shareholders must file Form 8621 with their 2013 income tax returns and for all subsequent years. However, the reporting requirement for 2011 and 2012 PFIC holdings, which was previously suspended, now does not apply. Thus, no retroactive reporting for years prior to 2013 is required.
In addition, the regulations provide certain exceptions to the reporting requirement under I.R.C.section 1298(f). These are discussed below.
The regulations provide a de minimis exception to the Form 8621 filing requirement under I.R.C.section 1298(f) for certain PFIC shareholders. This exception applies if:
The filing requirement under I.R.C.section 1298(f) does not apply to a U.S. person who is treated as the owner of any portion of a foreign grantor trust that is a foreign pension fund operated principally to provide pension or retirement benefits if, pursuant to an income tax treaty, income earned by the pension fund is taxed as income of the U.S. person only when and to the extent it is paid to or for the benefit of that person.
Only relatively few income tax treaties to which the United States is a party provide this relief. These include the treaties with Belgium, Canada, Germany, Malta, the Netherlands, South Africa, and the United Kingdom.
A U.S. person who is considered to own an interest in a PFIC because he is a beneficiary of a foreign estate or non-grantor trust that owns stock in a PFIC, either directly or indirectly, and has not made a QEF or MTM election with respect to that PFIC, is not required to file Form 8621 under section 1298(f). This exception only applies if the beneficiary is not treated as having received an excess distribution from the PFIC or as recognizing gain that is treated as an excess distribution with respect to the PFIC.
A U.S. person who is required to include an amount in income only under the QEF or MTM rules with respect to PFIC stock held through another U.S. person is generally not required to file Form 8621 with respect to the PFIC stock if another shareholder through which the U.S. person holds the PFIC stock timely files a Form 8621 under section 1298(f) with respect to the PFIC.
I.R.C. section 6038D requires the annual reporting of certain specified foreign financial assets on Form 8938. Reporting of a PFIC on Form 8938 is not required if the PFIC is reported on a timely filed Form 8621. This coordination rule, designed to prevent duplicative reporting, will continue to apply under the newly issued regulations.
1 T.D. 9650, REG-140974-11, published in the Federal Register December 31, 2013.
The information contained in this newsletter was submitted by the KPMG International member firm in the United States.
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BYKPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHERPERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAYBE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING ORRECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.KPMG International Cooperative (“KPMG International”) is a Swiss entity.
Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.
Flash Alert is an Global Mobility Services publication of KPMG LLPs Washington National Tax practice. The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.