Expats who are shareholders in foreign companies: take note! You may have extra filing requirements that garner heavy penalties if ignored. Find out if you must file Form 8621 along with your other American expatriate tax documents and other tips on how to avoid penalties below.
Passive Foreign Investment Companies (PFICs) in a Nutshell
PFICs first came into being in 1986 when new regulations were introduced to close a loophole which some taxpayers were using to shelter offshore investments. Foreign-based mutual funds and startups often qualify as PFICs, especially when they generate income from passive sources, such as capital gains and dividends.
PFIC guidelines are notoriously strict and complicated. This means that PFIC owners and shareholders must keep highly accurate records of all income and transactions.
Form 8621 is also known by a longer name: Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund. This form is required if you are a shareholder of a company or fund that can be defined as a PFIC or QEF, and that was formed outside of the US.
What Qualifies as a PFIC?
A PFIC is considered a foreign corporation if it meets the criteria of either the income or asset test:
- Income Test – If at least 75% of the corporation’s annual gross income is categorized as investment-type income (interest, dividends, capital gains, royalties, etc.), it is a PFIC.
- Asset Test – If at least 50% of the average percentage of its assets produce or are held to produce passive income.
Do you meet either of those criteria? If so, know that you’ll need to file Form 8621 annually for each year that:
- You had a gain on a direct or indirect disposition of PFIC stock, or
- You received certain direct or indirect distributions from a PFIC, or
- You made an election reportable on Form 8621
How Qualified Electing Funds (QEFs) May Affect Your American Expatriate Tax Rates
Expat investors with shares in PFICs often elect to pay under QEF rules. If you choose to go the QEF route, you’ll need to file a separate Form 8621 for each PFIC in which you have shares. And, you’ll want to gather the number of shares in each stock class owned at the beginning of the year, changes in number of shares in each class and dates of changes, and the number of shares in each class owned at the end of the year before you file. Don’t forget: depending on the type of company in which you have ownership, other forms (such as Form 8858 or Form 8865) might be required, too. Lastly, you should review the new requirements for the Tax Cuts and Jobs Act, as Section 965 affects many foreign investment taxes as well.
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