Passive Foreign Investment Companies (PFICs) are still alive and kicking! The new law made only one structural change to the PFIC regime: limiting the PFIC insurance exception. Other peripheral references include:

• PFIC-purging distributions are not eligible for the new 100% Dividends Received Deduction (DRD)
• The transition tax and 100% of DRD does not apply to PFICs that are not Controlled Foreign Corporations (CFCs)

Therefore, the complex and administratively burdensome PFIC regime remains intact, the intent being to place U.S. persons investing offshore on the same playing field as those investing onshore. To accomplish this, deemed deferral is punished. Accordingly, in the midst of tax season, we have accumulated our top 20 tidbits of PFIC items to be aware of.

#20: Mark-to-market treatment is available for non-publicly traded securities in the Offshore Voluntary Disclosure Program (OVDP) context.

#19: Form 8621 is not required for persons claiming residency treaty-based positions.

#18: PFIC rules do not apply to tax-exempt investors.

#17: Proposed regulations would treat residency terminations as a disposition. As they have never been finalized, conformity must be addressed.

#16: While there is no specific penalty for failure to file Form 8621, the statute of limitations for the entire return is kept open. Delinquent International Information Return Submission Procedures are available for delinquent Forms 8621. 

#15: When there is an overlap, the CFC rules trump PFIC rules regarding a U.S. shareholder (at least 10% ownership).

#14: No threshold of ownership is required. Any percentage of ownership triggers PFIC application.

#13: The PFIC regime refers to passive income and assets generating passive income.

#12: Passive income includes interest, dividends, non-active rents and royalties, and gains from the sale of securities, among other things. It also includes personal service income.

#11: One of either two tests invokes PFIC application: at least 75% of gross income is from passive sources or at least 50% of total assets are passive.

#10: Pursuant to an IRS notice, cash is treated as a passive asset.

#9: The dreaded excess distribution regime taxes gain or distribution as ordinary income at the highest rate of tax, spreads the income over the holding period, does not allow DOL, and imposes an interest charge on deemed deferral.

#8: Unless specifically enumerated as a modification, prior years’ income could escape state income taxation.

#7:  Death is not considered a non-recognition event.

#6: Once a PFIC, always a PFIC.

#5: Purging elections, such a deemed sale or a deemed dividend election, can cure past evils.

#4: QEF elections provide an out by introducing a hybrid pass-through regime:

• Income inclusion limited to E&P
• No losses allowed
• Net capital gains are allowed preferential treatment
• All other income is taxed as ordinary income, including qualified dividends
• Income inclusion increases tax basis
• PFIC statement must be received

#3:  One can elect to defer tax under the QEF regime as correlating with actual distributions.

#2: QEF regime permits deductibility of investment expenses for individual shareholders, which are otherwise eliminated under the new law.

#1: Form 8621 is essentially required in all situations and a separate form is technically required for each PFIC.

The author accepts full responsibility for the ordering of the Top 20 list, but it does highlight the complexity and administrative burdens of the PFIC regime. Missed elections or failure to properly heed all of the rules could prove quite costly. Therefore, as tax professionals, we must now—as we needed to previously—fully understand all of the intricacies of the PFIC regime.

Paul H. Dailey, CPA, MBA, is a partner at Citrin Cooperman and brings more than 35 years of experience to his engagements as an authority on international tax matters for corporate and individual clients. Paul specializes in tax planning, structuring, consulting, and compliance issues for large foreign-owned corporations. He has significant and extensive experience in structuring inbound entrance into the U.S. tax regime as well as outbound IP migration. Prior to joining Citrin Cooperman, Paul served as a tax principal  at a Big Six accounting firm. Paul is a member of the NYSSCPA, AICPA, and  the International Franchise Association. Within the NYSSCPA, he served as co-chair of FAE’s Small Business Taxation Conference and has chaired the International Taxation Committee.