Form 8621: When a US Person has foreign accounts, assets, investments, or income — they may have annual IRS reporting requirements. Depending on the type of account — and the value — the reporting may be significant (and oftentimes overwhelming) to a taxpayer with no financial background who simply has some foreign investments in a country they used to reside in. One of the most difficult international reporting forms is IRS Form 8621 which is used to report Passive Foreign Investment Companies (PFIC). PFIC tax and reporting can be much more complicated than other individual tax rules.
Let’s jump into 20 important things to know about Form 8621:
What is Form 8621?
The Form 8621 is used by US Person taxpayers to report ownership in passive foreign investment companies. Unlike the FBAR for example, the Form 8621 is very complex — if for no other reason than just trying to decipher whether your foreign investment qualifies as a passive foreign investment company or not. The filing requirements will vary depending on whether there are excess distributions or not.
What is a PFIC?
A PFIC is a passive foreign investment company. Since you are dealing with the IRS, you have to remove the common sense portion of your brain that would presume this means that you have ownership or interest in an investment company — such as a holding company. Actually, if you own units in a foreign mutual fund or SICAV — chances are, you have an ownership or interest in a PFIC.
Who is Required to File 8621?
Essentially, taxpayers who have an interest in a PFIC and meet the threshold reporting requirements have to file Form 8621. Unlike other types of international information reporting forms, there is no set amount of interest ownership that is required (such as the Form 5471). Stated another way, even if you own a fractional portion of a unit which happened to be above the threshold filing requirement, then you would have to file the Form 8621.
How to File Form 8621 Extension?
Form 8621 is filed with your individual tax return. Therefore, if you file an extension for your tax return, then the filing of Form 8621 goes an extension as well.
What about Direct Shareholders?
Direct shareholders of passive foreign investment companies have to file a form 8621. If you own foreign mutual funds or other types of funds, or you have ownership of a holding company that meets the requirements of a PFIC — you have to file Form 8621.
What about Indirect Shareholders?
Essentially, an indirect shareholder would be someone who owns a company (usually more than 50%) and that company has ownership over a PFIC. It requires a more in-depth analysis of the ownership structure and the taxpayer relationship to the PFIC.
What are Examples of Indirect Shareholders?
There are many different types of indirect shareholders. For example, if a person has 60% ownership of a foreign corporation that directly owns PFIC stock, then the taxpayer would (probably) have to file a Form 8621.
What is the Asset Test?
The asset test means that in order to qualify as a PFIC:
- “At least 50% of the average percentage of assets (determined under section 1297(e)) held by the foreign corporation during the tax year are assets that produce passive income or that are held for the production of passive income.”
What is the Income Test?
The income test means that in order to qualify as a PFIC:
- “75% or more of the corporation’s gross income for its tax year is passive income (as defined in section 1297(b)).”
What about Form 8621 and Mutual Funds?
A foreign mutual fund is typically going to be considered a PFIC. The reason why is because most mutual funds themselves are incorporated as its own separate “investment container” with its own investment manager, etc. Therefore, it meets the definition of a foreign company and since the purpose of the company is to generate passive income, it is safe to say that 75% of the income or 50% of the assets is considered passive.
What about a SICAV?
A SICAV (société d’investissement à capital variable) is typically a Luxembourgish, French, or similar investment product that mimics a mutual fund. While it may not be exactly the same, it is very common for SICAVs to also qualify as a PFIC.
What about Mirror Funds?
A mirror fund is owned through an insurance company — and while it may not be considered a PFIC, it should not be presumed. Mirror funds are designed to “mirror” a mutual fund. For example, there may be a mirror fund at a foreign life insurance company that is designed to mirror VTSAX. If that mirror fund is not a separate company, then it may not qualify as a PFIC.
What about a Holding Company?
Holding companies that are designed to only hold investments will typically qualify as a PFIC. For example, taxpayers in Hong Kong who have BVIs to hold investments for tax purposes may have a PFIC issue if they are considered US persons.
If No Distributions, Do You Still File Form 8621?
Yes. A few years back, the IRS changed the rules. It used to be that you only filed the Form 8621 in any year there was an excess distribution. Now, the form is filed in any year that the person meets the threshold filing requirements for reporting Form 8621 — unless an exception or limitation applies.
What is a Form 8621 Excess Distribution?
This is the most complicated part of the PFIC regime and we have many resources available to assist you. Essentially, unless it is the first year of the holding (not the first distribution), when there is a distribution from a PFIC in a subsequent year after the first year — especially the initial distribution — the IRS deems this as an excess distribution because there has been no distributions in prior years and thus no taxes being paid. The IRS now wants to get all the money back that it should have been receiving during the accrued non-distributed growth phase prior to the dividend (or capital gain) being issued.
That is why the IRS punishes you heavily on excess distributions.
What is a Non-Excess Distribution?
A non-excess distribution does not get hit with the same incredibly unfair tax that an excess distribution gets stuck with. Oftentimes — and especially when the excess distribution is the result of dividends and it is not the first distribution — the full amount of the distribution in the current year is not going to be an excess distribution, presuming that there were distributions made in prior years to offset the equation.
What about the QEF Election?
The QEF election is a Qualified Electing Fund. It is a great way to reduce the excess distributions if the taxpayer can convince their foreign financial/investment institution to provide them with sufficient documentation to provide the IRS so the IRS is aware of how the fund works. Oftentimes, when a taxpayer requests this information, they are asked to leave the fund — so proceed with caution.
What about the MTM Election?
The mark-to-market election is another type of election a taxpayer can make. It doesn’t require the taxpayer to request the information from the foreign financial institution and likewise, it doesn’t provide the same benefit as a QEF election — although it is still better than an excess distribution calculation.
$25,000/$50,000 Exception to Form 8621
Presuming that there were no excess distributions, if the total annual aggregate value of the PFIC is less than $25,000 (MFS or Single) or $50,000 (MFJ) — taxpayer does not have to include the form with their tax return.
*The instructions provide that the Taxpayer does not need to complete “Part I,” but the general consensus amongst tax practitioners is that the form is not required when the elements above are met.
What about the $5000 Indirect Exception?
There is a much more limited exception for taxpayers with indirect ownership of PFIC stock worth $5,000 or less — and also eliminates the requirement to file a Form 8621.
Just the Tip of the Iceberg
We just brushed the surface of the complex Form 8621. This article will hopefully provide some answers and some additional food for thought. There are many nuances and issues associated with this form and we highly recommend that you seek out a Specialist to assist you. This is one of those instances where it is not the best idea to DIY.
Golding & Golding: About our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.