Final and Proposed Regulations on PFICs

The PFIC rules under §1297 are in place to discourage US shareholders from deferring US tax on the passive income of a foreign corporation. The PFIC rules are aimed at US taxpayers trying to shelter foreign passive investments from US tax through the corporate tax deferral rules.

US shareholders of a PFIC are required to file a Form 8621, ‘Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund’ and are subject to high tax rates and burdensome rules. Most foreign mutual funds are considered PFICs.

A PFIC is a foreign corporation that meets one of two tests. The ‘asset test’ test is where at least 50 percent of the foreign corporation’s assets on average produce passive income or are held for the production of passive income. The ‘income test’ is where at least 75 percent of the gross income of the corporation for the tax year is passive income.

Final regulations released on the determination of a PFIC and shareholders of PFICs (T.D. 9936) (12/8/2020)

The final regulations address the determination of whether a foreign corporation is treated as a PFIC and the application and scope of certain rules that determine whether a United States person that indirectly holds stock in a PFIC is treated as a shareholder of the PFIC.

Proposed Regulations (NPRM REG-111950-20)(12/8/2020)

The proposed regulation provide guidance on the treatment of income and assets of a foreign corporation for purposes of the PFIC rules and on the exception from passive income under the ‘PFIC insurance exception’ under section 1297(b)(2)(B).

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