As an American living and working abroad, chances are you’ve experienced the complexity of understanding your foreign finances and US expat tax return. There are certain things you’ve likely come to expect in those regards, such as needing to file extra forms, keeping accurate travel records and more. Something you may be less familiar with, though, is the need to file certain disclosure forms with your US Tax Return if you happen to be a shareholder in a foreign corporation.
1. What Is Form 8621?
One of the primary disclosure forms you might find you need to file with your US expat tax return is Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund. This form may be necessary if you happen to be a shareholder of a company or fund that is considered to be Passive Foreign Investment Company (PFIC) or Qualified Electing Fund (QEF). You can read more specific information about PFICs in this article.
2. How Do I Know if the Corporation is a PFIC?
A foreign corporation is considered to be a PFIC if it meets either an asset or an income test.
- Asset Test: At least 50% of the average percentage of its assets produce or are held to produce passive income.
- Income Test: At least 75% of the corporation’s annual gross income is investment-type income like interest, dividends, capital gains, royalties, etc.
If the PFIC or QEF in question is considered to be a foreign corporation – meaning it was formed in a country other than the US or its territories – you should review the following filing qualifications closely.
3. Do I Need to File Form 8621?
If you’re a direct or indirect shareholder of a PFIC, you must file Form 8621 with your US expat tax return 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 that’s reportable on Form 8621.
4. What’s the Difference Between Direct and Indirect Ownership?
As noted above, you may need to file Form 8621 whether you’re a direct or indirect shareholder. If you own stock in a PFIC, you’re considered to be a direct owner. You should carefully inspect your investments, as some mutual funds or custodial accounts include shares in a PFIC – making you a direct owner and meaning you’d need to file Form 8621.
Indirect ownership is not as clear-cut, however. According to the IRS, you’re considered to be an indirect shareholder of a PFIC if you’re one or more of the following:
- A direct or indirect owner of a pass-through entity that’s a direct or indirect shareholder of a PFIC. This would be something like a partnership, S-corporation, trust or estate.
- A shareholder of a PFIC that’s a shareholder of another PFIC.
- A 50% or more shareholder of a foreign corporation that’s not a PFIC, but directly or indirectly owns stock of a PFIC.
Note that if your ownership is in a PFIC that’s also a Controlled Foreign Corporation (learn more about this type of corporation), an exception to these rules may apply, meaning you may not need to file Form 8621 after all. Because of the complexity of reporting PFICs, it’s always a good idea to consult with a tax professional, who can provide expat tax advice to help you better understand your filing requirements. You can also download our tax guide for Americans working overseas for helpful expat tax tips.
Have More Questions About PFICs and Your US Expat Tax Return?
Our team of expat-expert CPAs and IRS Enrolled Agents can help you determine your expatriate tax filing obligations, including the more complex nature of reporting foreign investments. Contact us today for the expat tax advice you need this tax season.