Filing Form 8626 for a Passive Foreign Investment Company

U.S. persons who are shareholders of a Passive Foreign Investment Company (PFIC) use IRS Form 8621 to report their interests and handle the associated tax implications. A PFIC is a foreign corporation that primarily generates passive income or holds assets that produce it, such as foreign mutual funds or exchange-traded funds (ETFs). The regulations surrounding PFICs are designed to prevent U.S. taxpayers from deferring tax on foreign investment income, and Form 8621 is the mechanism for reporting this activity.

Determining Your Filing Requirement

A U.S. person who is a direct or indirect shareholder of a PFIC is required to file Form 8621 under specific circumstances. You must file if you receive direct or indirect distributions from a PFIC, recognize a gain from the sale of PFIC stock, or need to report information for a Qualified Electing Fund (QEF) or Mark-to-Market (MTM) election. This filing obligation exists even if the income is not immediately taxed in the U.S.

There are exceptions to the filing requirement. The most common is a de minimis exception for shareholders with small holdings, where you are not required to file if the total value of all your PFIC stock is $25,000 or less ($50,000 for joint filers). This exception only applies if you did not receive an excess distribution and do not have a QEF or MTM election in effect. Another exception, the “CFC overlap rule,” applies if the foreign company is both a PFIC and a Controlled Foreign Corporation (CFC). If you are a U.S. shareholder subject to the CFC reporting rules for that stock, which involves filing Form 5471, the company is not treated as a PFIC for you and Form 8621 is not required.

Information and Elections Needed for Form 8621

To complete Form 8621, you must gather specific information about your investment. You will need the PFIC’s name, address, and a description of each class of shares you own. You must also have records of the number of shares held, their value at different points in the year, and the dates of any purchases or sales.

A “PFIC Annual Information Statement” is a document provided by the PFIC that is necessary to treat the investment as a Qualified Electing Fund (QEF). This statement breaks down your pro-rata share of the fund’s ordinary earnings and net capital gains. Without it, you cannot use the QEF tax rules or make a QEF election.

You must choose one of three taxation methods, as your choice dictates which parts of Form 8621 to complete. The default method involves “excess distributions,” which has high tax rates and an interest charge on deferred tax. The second option is the QEF election, which allows you to pay tax annually on your share of the fund’s income. The third option, a Mark-to-Market (MTM) election, is available only for marketable PFIC stock and requires you to recognize any appreciation in the stock’s value as ordinary income each year.

Completing Form 8621 Part by Part

You must file a separate Form 8621 for each PFIC investment you hold. Each part of the form corresponds to a specific purpose, and you will only complete the sections relevant to your tax election and situation.

The form is organized into the following parts based on your tax election:

• Part I: A summary of your annual information, where you enter the PFIC’s name and other identifying details.
• Part II: Used to formally make or report your tax elections, such as making a QEF or MTM election for the first time.
• Part III: Used to report your share of ordinary earnings and capital gains from the PFIC Annual Information Statement under a QEF election.
• Part IV: Used to calculate gains or losses under a Mark-to-Market (MTM) election.
• Part V: Used to calculate the tax and interest charge on distributions or sales under the default excess distribution rules.
• Part VI: A specific annual statement for Regulated Investment Companies that have made an MTM election.

Filing the Completed Form

Form 8621 must be attached to your annual income tax return for the year in which the reported activity occurred. This could be an individual return (Form 1040), a corporate return (Form 1120), or another return depending on your filing status.

The due date for Form 8621 is the same as the due date for your main tax return, including any extensions. For most individual taxpayers, this is the April 15 deadline. Filing the form electronically with your tax return is the most common method. Failure to file the form on time can result in penalties and may leave the statute of limitations open indefinitely for the tax year in question.