These new instructions (2013 instructions) [PDF 211 KB] add to previous requirements describing when U.S. persons owning stock of a passive foreign investment company PFIC must file Form 8621. The newly added filing requirements are under the authority granted in section 1298(f) and contained in recently published in temporary regulations (T.D. 9650) (published in the Federal Register on December 31, 2013). These new filing rules affect U.S. persons who must file U.S. returns for calendar year 2013 and other taxable years ending on or after December 31, 2013.
Form 8621 [PDF 132 KB] is used by a U.S. person who is a direct or indirect shareholder of a PFIC or qualified electing fund (QEF).
As part of the Hiring Incentives to Restore Employment Act of 2010, Congress added section 1298(f) to the Code, requiring each shareholder of a PFIC to file an annual report “containing such information as the Secretary may require.” The IRS issued two notices delaying the effective date until new Form 8621 instructions could be issued. On December 31, 2013, the IRS issued temporary regulations prescribing new reporting requirements under section 1298(f) (read TaxNewsFlash-United States(December 30, 2013)). The 2013 instructions incorporate the additional filing requirements under the new regulations.
The new filing requirements in the section 1298(f) regulations and the 2013 instructions apply to tax years ending on or after December 31, 2013. Thus, a calendar year taxpayer is required to comply beginning with its 2013 calendar year return.
PFIC shareholders required to file Form 8621 under the previous version of the form must continue to file. Under the heading “Who Must File,” the 2013 revision of the instructions for Form 8621 adds two new circumstances to the three circumstances listed in the prior (2012) revision of the instructions that will require a U.S. person to file Form 8621. The 2012 revision to the instructions requires that Form 8621 be filed for each tax year in which a U.S. person:
- Receives certain direct or indirect distributions from a PFIC
- Recognizes gain on a direct or indirect disposition of PFIC stock
- Is making an election reportable in revised Part II of Form 8612
The 2013 revision to the instructions to Form 8621 adds a requirement to file Form 8621 if a U.S. person:
- Is reporting information with respect to a QEF or mark-to-market election, or
- Is required to file an annual report pursuant to section 1298(f)
A timely filed “purging election” continues to be made on Form 8621. Form 8621-A is used to make a late purging election under section 1298(b)(1).
As in the prior version, a separate Form 8621 must be filed for each PFIC in which stock is held directly or indirectly pursuant to the chain-of-ownership requirements.
Highlights of the 2013 revision
Part I, Summary of Annual Information, of the revised instructions reflects the annual filing requirement of section 1298(f). In addition to U.S. persons previously required to file Form 8621, the new instructions, together with Reg. section 1.1298-1T, address filing requirements for the following shareholders:
- A U.S. person who is the first U.S. person in a chain of ownership with respect to a PFIC. For this purpose, a U.S. person subject to the filing requirements includes a partnership or S Corporation.
- An indirect U.S. shareholder of a PFIC that is required to include an amount in income with respect to the PFIC.
- A U.S. grantor of a domestic grantor trust. However, if the trust is a domestic liquidating trust or widely held fixed investment trust, the trust, rather than the shareholder, is required to file Form 8621. In addition, if the trust is a foreign grantor trust that is a pension fund, filing may not be required.
- A U.S. beneficiary of a foreign non-grantor trust or foreign estate is not required to file unless it is required to include income from the estate or trust for the tax year.
- A shareholder of a PFIC that is an exempt organization is not required to file unless it would be taxable on income derived from the PFIC that is unrelated business taxable income. The 2013 revision of the instructions to Form 8621 does not change the filing obligations of exempt organizations, and continues to state that exempt organizations are exempt from section 1291 unless a dividend to the exempt organization from the PFIC would be subject to tax under subchapter F.
A de minimis rule exempts shareholders from filing Part I of Form 8621 if the total value of all PFIC stock that the shareholder directly or indirectly owns during the year is $25,000 or less (the threshold is $50,000 if married filing jointly) on the last day of the shareholder’s tax year. In addition, an indirect shareholder of a section 1291 fund is not required to file if the value of its interest in the fund is $5,000 or less on the last day of the shareholder’s tax year.
Note that the requirement to file Form 8621, or the applicability of an exception from the requirement to file Form 8621, may affect a U.S. person’s requirement to file Form 8938, Statement of Specified Foreign Financial Assets, for that taxable year.
The revised instructions reference Reg. section 1.1298-1T(d) and (h) for more information.
- Beginning in 2013, certain U.S. persons filing Form 8621 may be subject to net investment income tax. (Read TaxNewsFlash-United States (January 24, 2014) for more information concerning net investment income tax and related Form 8960.)
- The instructions for lines 16e, 16f, 23, and 24 have been modified. The revised instructions state that changes may affect where the amounts from these lines are now reported on an income tax return.
For more information, contact a tax professional with KPMG's Washington National Tax practice:
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