Form 8621 - Shareholder of a Passive Foreign Investment Company
The most common scenario for U.S. expats is where they hold a fund (group of shares) outside the U.S., either in their investment accounts or frequently in a stocks and shares ISA.
If you do hold a fund, if it is a Passive Foreign Investment Company, then you may need to complete form 8621.
Passive Foreign Investment Company (PFIC)
A foreign corporation is a PFIC if it meets either the income or asset test below:
Income test - 75% or more of the corporation's gross income for its tax year is passive income
Asset Test - At least 50% of the average percentage of assets held by the foreign corporation during the tax year are assets that produce passive income or that are held for the production of passive income.
Tax Consequences For Claiming elections on form 8621
A - Qualifying Electing Fund (QEF) election
Each tax year, you include in gross income your share of the ordinary earnings of the QEF and as a long-term capital gain your share of the net capital gain of the QEF.
You can elect to extend the time to pay the tax on your share of the undistributed earnings of the QEF (Election B) until the QEF election is terminated.
After the first year, you can make a deemed sale election (Election D) or deemed dividend election (Election E).
B - Mark-To-Market Election If you elect for Mark-To-Market (section 1296), you can either:
Include in your income each year the amount equal to the excess, if any, of the fair market value of the PFIC stock as of the close of the tax year over your adjusted basis in the stock; or
Are allowed a deduction equal to the lesser of:
The excess, if any, of the adjusted basis of the PFIC stock over its fair market value as of the close of the tax year; or
The excess, if any, of the amount of mark-to-market gain included in your gross income for prior tax years over the amount you allowed as a deduction for a loss with respect to the stock for prior tax years.
C- Section 1291 Fund
If you don't make the election for QEF or Mark-To-Market, the PFIC will treated as a section 1291 fund.
Section 1291 funds are subject to special rules when they receive an excess distribution.
Excess distributions - the amount received from a section 1291 fund in the current tax year that is greater than 125% of the average distributions received during the 3 prior tax years.
When to File - PIFC Reporting
While you are living outside the United States as an expat, the filing deadline for the U.S. tax return is June 15 each year (extended to July 15 for 2020).
Form 8621 is filed with your main federal tax return with the IRS.
Next Steps
If you do need to file Form 8621, or you have any questions about which election to make and the reporting requirements, feel free to contact one of our U.S. expat accountants and tax preparers here.
