As an American living abroad, you may be familiar with the most common forms for expats. For example, Form 2555 (Foreign Earned Income Exclusion) and Form 1116 (Foreign Tax Credit) are both fairly easy to understand. But if you’re an expat with shareholder investments, you may also have to complete disclosure forms that must be filed according to very specific tax rules.
If this is you, it’s important for you to understand all your required US tax disclosure forms. Form 8621 is one of these tax forms. This form’s official title gives you information about who files it: “Form 8621 Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.” If you are a shareholder of a company or fund that fits the definition of a Passive Foreign Investment Company (“PFIC”) or Qualified Electing Fund (“QEF”), then you may need to add Form 8621 to your to-do list.
So, Who Needs to File IRS Form 8621?
For starters, the PFIC or QEF in question must be a foreign corporation. “Foreign” refers to entities that were formed in countries other than the US or its territories.
As we will discuss in more depth, a foreign corporation is a PFIC if it meets either an income test or an asset test. If at least 75% of the corporation’s annual gross income is investment-type income such as interest, dividends, capital gains, royalties and the like then it is a PFIC. A corporation meets the asset test if at least 50% of the average percentage of its assets produce or are held to produce passive income.
If you are a direct or indirect shareholder of a PFIC, you are required to file IRS Form 8621 for each year that you:
- Recognize gain on a direct or indirect disposition of PFIC stock, or
- Receive certain direct or indirect distributions from a PFIC, or
- Make an election reportable on Form 8621.
Form 8621 Examples and Exclusions
Notice that your ownership can be direct or indirect. If you own stock in a PFIC, you are a direct owner. Check your investments carefully because one of your mutual funds or custodial accounts could include shares in a PFIC, making you a direct owner, which could mandate Form 8621 filing requirements.
As a Form 8621 example, if your ownership is in a PFIC that is also a Controlled Foreign Corporation (CFC), this is an exception to the rules that may apply, and you may not have to file Form 8621.
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
Form 8621 Instructions: What Exactly Is Indirect Ownership?
Indirect ownership requires more explanation. The IRS Form 8621 instructions explain that you are an indirect shareholder of a PFIC if you are a:
- direct or indirect owner of a pass-through entity that is a direct or indirect shareholder of a PFIC [“pass-through” entity is a partnership, S corporation, trust or estate],
- shareholder of a PFIC that is a shareholder of another PFIC, or
- 50%-or-more shareholder of a foreign corporation that is not a PFIC and that directly or indirectly owns stock of a PFIC.
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.
Beyond Form 8621 Filing Requirments
In addition to the filing requirements for Form 8621, there may be still other forms you need to file. If you have an ownership interest in a foreign partnership or a foreign LLC you may want to check the rules of filing disclosure Form 8865 (for foreign partnerships) or Form 8858 (for foreign LLCs taxed as disregarded entities) to make sure you are meeting all your US tax filing requirements.
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