US Expatriate Taxes, PFICs and QEFs, Oh My!

US Expatriate Taxes, PFICs and QEFs

Most Americans living abroad are aware that filing US expatriate taxes can be tricky, especially when it comes to determining which forms they’re required to include with their US Tax Return. There are some forms that are used for very specific situations, such as if you’re a shareholder in a Passive Foreign Investment Company (PFIC) or a Qualified Electing Fund (QEF). You may be required to file Form 8621, depending on your tax situation, so read on to get the details!

What Should I Know About Form 8621?

Form 8621 is actually a tax disclosure form, and may be required with your US expatriate taxes if you are a shareholder of a company or fund that can be defined as a PFIC or QEF. The PFIC or QEF must be a foreign corporation, meaning the entity was formed in a country other than the US or its territories.

A PFIC is considered a foreign corporation if it meets either an income or an asset test.

  1. 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.
  2. 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 must file Form 8621 with your US expatriate taxes each year that you:

  • Have a 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

Direct vs. Indirect Ownership

So, what’s the differentiator between direct and indirect ownership? If you own stock in a PFIC, you’re considered a direct owner. It’s possible that your mutual funds or custodial accounts could include shares in a PFIC, which makes you a direct owner and thus, requires filing Form 8621 with your US expatriate taxes.

Indirect ownership is a bit different. The IRS states that you are an indirect shareholder of a PFIC if you are a:

  • Direct or indirect owner of a pass-through entity (partnership, S-corporation, trust or estate) that is a direct or indirect shareholder of a PFIC
  • Shareholder of a PFIC that is a shareholder of another PFIC
  • A 50% or more shareholder of a foreign corporation that is not a PFIC, and that directly or indirectly owns stock of a PFIC

Note that if your ownership in a PFIC that is also a Controlled Foreign Corporation (CFC), an exception to the rules may apply and you may not be required to file Form 8621. 

What Should I Know About Qualified Electing Funds?

It’s fairly common for investors with shares in PFICs to elect to pay tax under the Qualified Electing Fund rules, which allows investors to pay tax on their share of PFIC income each year. Alternatively, they could pay tax at the highest income tax marginal rates in the year(s) the PFIC distributes profits or when investor dispose of their interests.

If you’ve made a QEF election, you’ll be required to file Form 8621 annually. You must file a separate form for each PFIC stock you own, and provide the following information:

  • 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
  • Number of shares in each class owned at the end of the year

You’ll attach Form 8621 to your US expatriate taxes unless you aren’t required to file US taxes – in which case, you’ll simply mail the form to the IRS.

It’s important to note that there may be other forms you need to fill out, depending on the type of foreign companies in which you have ownership interest. It’s a good idea to consult with an expat tax professional in order to be sure you’re fully compliant by filing the correct forms. Learn more about expat tax requirements by downloading a US expat tax guide for your specific tax situation.

Need Help Determining Your Tax Filing Liability?

Greenback can help. Our dedicated CPAs and IRS Enrolled Agents can assist you with your US expatriate taxes, every step of the way. Contact us today!