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Removing PFIC Taint on Foreign Investments Through Subsequent Year QEF Elections

New Final PFIC Regulations and Navigating PFIC Rules of IRC Sections 1291-1298

Recording of a 90-minute premium CLE/CPE video webinar with Q&A

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Conducted on Wednesday, June 30, 2021

Recorded event now available

or call 1-800-926-7926

This CLE/CPE course will provide tax attorneys and counsel with a practical guide to removing the "taint" of foreign investments treated as passive foreign investment companies (PFICs). The panel will discuss new final and proposed PFIC regulations, the complex qualified electing fund (QEF) election rules, detailing the advantages, disadvantages, and calculations involved in making a QEF election, and the planning opportunities for electing out of PFIC treatment.

Description

The PFIC regime imposes a set of U.S. tax rules among the most onerous in all of the Internal Revenue Code. The PFIC rules expose U.S. taxpayers owning stock in passive foreign investment companies to an ordinary income and accrued interest regime that is complicated and expensive. Unlike controlled foreign corporation rules, there are no ownership thresholds for PFIC status.

Because the PFIC regime is intended to prevent U.S. persons from deferring U.S. taxation on passive investments held through foreign companies, taxpayers may avoid the ordinary income and interest treatment by electing to be taxed currently on income from their PFIC holdings.

In December 2020, the IRS released final regulations that include significant changes to the PFIC rules. The final regulations include clarification on indirect ownership, eliminate reliance on Section 954(h) active financing rules, and eliminate certain rents and royalties from the PFIC income and asset tests, along with other key provisions.

The primary mechanism for opting out of the PFIC regime is the election to treat the PFIC as a QEF. This election allows U.S. taxpayers to preserve capital gain treatment for their PFIC gains and to avoid interest accrual by paying tax currently on their pro-rata share of income and gain from the QEF.

The QEF election avoids the ordinary income and interest scheme altogether if made when the foreign investment is acquired. Taxpayers wishing to make a QEF election in years after the year they first acquired the stock must make an additional "purging election" to remove the "PFIC taint" from the stock.

This additional election--which involves gain recognition--is reported on Form 8621. Alternatively, taxpayers holding PFIC stock may be able to make a mark-to-market election for their PFIC stock, reporting proceeds from deemed sales annually as ordinary income, but only if the PFIC stock is publicly traded.

Listen as our experienced panel goes beyond the basics of Form 8621 to provide a thorough discussion of QEF elections and other means of avoiding the PFIC regime.

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Outline

  1. Recent final PFIC regulations
  2. Code provisions governing PFIC treatment, purging, and deemed distribution rules
    1. Section 1291 default treatment
    2. Section 1295 QEF provisions
    3. Section 1296 mark-to-market option
    4. Section 1298 special rules
  3. Ownership rules
    1. When PFIC shares are owned by a pass-through entity
    2. When PFIC shares are owned by a trust or estate
    3. Rules when a foreign corporation or entity is classified as both a PFIC and a controlled foreign corporation
  4. Purging elections to remove PFIC "taint"
  5. Making election in the year of purchase
  6. Making election in a subsequent year after initial purchase
  7. Mark-to-market elections
  8. Entity classification elections

Benefits

The panel will review these and other important issues:

  • Final PFIC regulations
  • Identifying assets that qualify as PFIC holdings
  • Differentiating tax results between PFIC, mark-to-market, and QEF scenarios
  • Assessing the tax impact of a QEF election in a year subsequent to the acquisition of the PFIC stock

Faculty

Hatch, Kris
Kris Hatch
Attorney
Fenwick & West

Mr. Hatch concentrates his practice on a broad variety of domestic and international tax matters.

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Knobler, Michael
Michael Knobler
Attorney
Fenwick & West

Mr. Knobler focuses his practice on U.S. international and domestic tax planning, mergers and acquisitions, and...  |  Read More

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