As any US expat knows, there are a large number of tax forms that may need to be filed as a result of living abroad. Some of these forms are common and fairly simple to understand. Others, like Form 8621 — which is used to disclose passive foreign investments — are more difficult to understand.
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.
Who Needs to File 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.
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 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.
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.
If your ownership is in a PFIC that is also a Controlled Foreign Corporation (CFC), this is an exception to the rules may apply and you may not have to file Form 8621.
What Exactly is Indirect Ownership?
Indirect ownership requires more explanation. The IRS instructions to Form 8621 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.
What About the Qualified Electing Fund Rules?
Many investors with shares in passive foreign investment companies make an election to pay tax under the Qualified Electing Fund rules. The QEF election allows investors to pay tax on their share of PFIC income each year. The alternative is to pay tax at the highest income tax marginal rates in the year(s) the PFIC distributes its profits or when the investor disposes of his interest.
If you made a QEF election you have to file Form 8621 each year. In addition to the QEF election other tax elections are available related to your QEF or your PFIC and these are also reported by filing Form 8621.
A separate Form 8621 has to be filed for each PFIC stock you own and the following information must be attached:
- 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,
- number of shares in each class owned at the end of the year.
Your 8621 should be attached to your US income tax return. If you are not required to file a US tax return then you file Form 8621 by mailing it to the IRS.
But Wait, There’s More…
In addition to 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.
Have More Questions About Form 8621?
If you have additional questions about Form 8621 or would like Greenback Expat Tax Services to prepare your expat tax return, please contact us.