Are Foreign Investment Mirror Funds Reported as PFIC?
In many different countries across the globe, Taxpayers invest in financial products such as foreign life insurance or assurance policies, personal pensions, etc. While these types of foreign investments (especially life insurance and/or life assurance policies) may have a death benefit component to them — in general, they are designed to serve as wrappers around various types of investments. From a US tax and reporting standpoint, foreign life insurance policies are considered both taxable and reportable on various international information reporting forms, such as the FBAR, IRS Form 8938, Form 720, and possibly others. One of these potentially ‘other’ types of forms that may be required is Form 8621 for PFIC (Passive Foreign Investment Companies) although oftentimes it is not required. One common question we receive about funds held within foreign investment products is whether or not they are considered PFIC?
Mirror Funds vs Mutual Funds, ETF & SICAV
In general, foreign mutual funds are reportable on form 8621. In a situation in which a foreign investment product is involved and the taxpayer does not have an opportunity to select the funds and/or does not have any control over the acquisition or sale of the funds, it is a bit of a gray area — and oftentimes may not be required. It is important to note, that many foreign investment products do not invest in regular mutual funds, but rather mirror funds, which are not the same as established mutual funds, such as Vanguard or Fidelity.
Mirror Funds May Not be PFIC
While the mirror fund is designed to mimic various other types of mutual funds and other types of ETFs and SICAVs — they are not per se the same as an established fund at an investment firm. Depending on the specific company and structure of the fund and whether the fund is incorporated will help determine whether or not it is technically considered a PFIC. The reason why this is so important is that there are serious tax consequences to classifying certain foreign investments as PFIC — and taxpayers typically do not want to take the leap and presume that the foreign investment is a PFIC when it is not — because this may result in more than double the amount of taxes due than would have ordinarily been due if the investment was not considered a PFIC.
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