As a direct PFIC shareholder, do I need to file Form 8621?

Apr 17, 2020

US expats can have a direct or indirect shareholder of a passive foreign investment company (PFIC).

If you’re a U. S citizen living and working abroad and have invested in a passive foreign investment company, then you likely have a lot of questions pertaining to Form 8621. Do you need to file Form 8621? What are the Form 8621 filing requirements? And what is the penalty for not filing it?

For those of you are new to filing Form 8621, understanding its eligibility criteria and other technicalities can be intimidating. But it doesn’t have to be. 1040 Abroad helps answer some frequently asked questions below by deep-diving into the Form 8621 filing requirements and whether you need to file it in the first place. Let’s get started!

As a US expat, if you own direct or indirect shares of a passive foreign investment company, then the IRS found the way to congratulate you on that by adding one additional form you need to file. Together with your tax return, you need to file Form 8621.

This applies for each separate PFIC you are a shareholder if you:

  • receive direct or indirect distributions from a PFIC.
  • recognize a gain on a direct or indirect disposition of PFIC stock.
  • report information with respect to a QEF or section 1296 mark-to-market election.
  • make an election reportable in Part II of the form.
  • file an annual report pursuant to section 1298(f).

Who must file Form 8621?

If you have opened a foreign mutual fund investment account and have received income from those funds in the past year, then you must file Form 8621. In other words, every shareholder who is taking the benefits of income from a passive foreign investment company (PFICs) is required to file Form 8621.

If you’ve received a disposition of the shares of a PFIC by gift. Tax-free exchanges or redemptions. Yet, in case you have investments in a foreign partnership, but the partnership does not own any shares, then you are not required to file a Form 8621.

Most foreign mutual funds are considered a PFIC. Moreover it’s not just mutual funds that are regarded as PFICs. The term also applies to any pooled investment that is registered outside of the United States. Pooled investments include ETFs, multiple types of funds, investment trusts, and more.

What Information Is Required?

With regards to the filing requirements of Form 8621, The main concern while filing is that you must choose to pay taxes currently on the shareholder’s pro-rata share of the income of the PFIC. There are two methods of electing to pay current taxes on the income of a PFIC. And a default method of taxation if no election is made.

Default method involves a complicated allocation of an “excess distribution”. Applied to the prior tax years in which the taxpayer was a shareholder. Another method is the Qualified Electing Fund (QEF) which requires extensive information from the PFIC. 

In order to use the QEF election, the U.S. shareholders must own enough of the stock to force the fund managers to provide the required information for the shareholders to compute their share of the income of the PFIC each year.

Why do I need to file Form 8621

Where there are no distributions to the shareholders, there are no explicit penalties for a failure to file the form.

Generally, it is to the advantage of a U.S. taxpayer to file this form and to make an election to pay taxes on the current income of the PFIC. If an election is not made to pay taxes on the current income of the PFIC, then any future distributions may be subject to the punitive tax on excess distributions.

In addition, the QEF election may permit the taxpayer to retain the benefits of the lower tax rate on long term capital gains realized by the PFIC.

There are no consequences for failure to file Form 8621. However, failure may impose the statute of limitations indefinitely for that tax year. As the US grantor who invests in any foreign mutual funds (PFICs), you will have to file a Form 8621.

Exemption From Filing

You are not required to file Form 8621 when you are :

  • not subject to tax under section 1291. On an excess distribution received from the PFIC during the shareholder’s tax year.
  • haven’t made a QEF election with respect to the PFIC. And either:
    #1 the aggregate value of all PFIC stock at the end of its tax year does not exceed $25,000. $50,000 if you and your wife file together.
    #2 the shareholder owns the PFIC stock through another PFIC. The value of the shareholder’s proportionate share of the upper-tier PFIC’s interest in the lower-tier PFIC does not exceed $5,000. 

What Are the Penalties for Not Filing Form 8621?

The penalties for not filing Form 8621 are not precisely known as they aren’t quite straightforward. However, it’s important to note that even if there may be no Form 8621 penalty or punishment for not filing it, there’s a possibility that defaulting individuals may face audits in the future. Therefore, it’d be best to avoid unnecessary consequences or hassles by filing Form 8621 if you’re required to.

We hope we answered all your questions pertaining to Form 8621 filing requirements. Need help filing Form 8621 or with other aspects of your taxes? Let us file your expatriate taxes!

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