PFIC holdings and trust reporting

The PFIC classification tests and related reporting rules apply to U.S. citizens with direct or indirect interests, including interests through trusts.

How a foreign corporation meets the PFIC tests

A foreign corporation is a PFIC if it meets either the income test or the asset test. The income test is met when at least 75 percent of gross income for the tax year is passive income. The asset test is met when the average percentage of the foreign corporation's assets during the tax year that produce passive income or are held for its production is at least 50 percent, as determined under section 1297(e).^[7]

The asset test uses an average for the tax year, so a single asset percentage does not determine classification by itself. The IRS instructions describe adjusted-basis rules for certain corporations that are not publicly traded, and require fair market value for publicly traded foreign corporations. When determining PFIC status, a foreign corporation is treated as directly holding its proportionate share of the assets and directly receiving its proportionate share of the income of any corporation in which it owns at least 25 percent of the stock by value.^[7]

When trust ownership is attributed

The IRS instructions treat a trust as a pass-through entity for identifying indirect PFIC shareholders. For a nongrantor trust that owns PFIC stock, beneficiaries are treated as owning proportionate amounts. For a grantor trust, a person treated as owner of a trust portion is treated as owning the interest held by that portion.^[7]^[8]

Indirect attribution also applies through ownership chains. The IRS describes a U.S. person as an indirect shareholder when the person owns a pass-through entity that itself holds PFIC shares, or meets the 50-percent ownership rule for a non-PFIC foreign corporation holding PFIC shares. The regulations also say the ownership determination depends on the facts and circumstances.^[7]^[8]

Form 8621 and elections

A U.S. person who is a direct or indirect PFIC shareholder generally files Form 8621 for each tax year in specified circumstances. These include receiving certain distributions, recognizing gain on a disposition, reporting a QEF or mark-to-market election, making a reportable election, or having an annual reporting obligation. A separate form generally applies to each PFIC in a chain of holdings.^[7]

The IRS instructions describe a QEF election and a section 1296 mark-to-market election. When the QEF election does not apply from the first year of the shareholder's holding period, an eligible shareholder may be able to make a deemed-sale or deemed-dividend election. A person holding shares of a former PFIC or a section 1297(e) PFIC generally remains subject to section 1291 unless a purging election is made. Timely purging elections use Form 8621; Form 8621-A is for a late purging election.^[6]^[7]

The filing location depends on whether the shareholder files another return. Form 8621 is attached to the shareholder's tax return, or to an applicable partnership or exempt-organization return. If no income tax or other return is required for the year, the instructions direct the form to the IRS service center listed there.^[7]

How PFIC rules overlap with CFC rules

The IRS describes a limited overlap rule for stock in a foreign corporation that is both a CFC and a PFIC. Under the CFC overlap rule, a foreign corporation generally is not treated as a PFIC with respect to a shareholder during the qualified portion of the holding period when the shareholder is a U.S. shareholder and the corporation is a CFC. The instructions state that this exception does not apply to option holders.^[7]

For interests held through domestic partnerships and S corporations, the overlap rule is evaluated at the partner or shareholder level under aggregate treatment. Some owners may remain under CFC rules while others may fall under PFIC rules, depending on their ownership interests. The IRS instructions also describe the overlap rule by reference to a U.S. shareholder's inclusion of Subpart F income.^[3]^[7]

Questions and answers

What are the two PFIC classification tests?

The income test applies when at least 75 percent of a foreign corporation's gross income is passive. The asset test applies when the average percentage of the foreign corporation's assets during the tax year that produce passive income or are held for its production is at least 50 percent, as determined under section 1297(e).^[7]

How can a U.S. citizen be treated as owning PFIC shares through a trust?

For a nongrantor trust, beneficiaries are treated as owning proportionate amounts of stock. For a grantor trust, the person treated as owner of a portion is treated as owning the stock interest held by that portion.^[8]

When does a U.S. person generally file Form 8621?

The IRS instructions list circumstances that include certain distributions, gain on disposition, reporting a QEF or mark-to-market election, making a reportable election, or an annual reporting requirement. Generally, a separate Form 8621 is filed for each PFIC in a chain.^[7]

What does the CFC/PFIC overlap rule do?

For qualifying stock in a corporation that is both a CFC and a PFIC, a U.S. shareholder who includes Subpart F income generally is not subject to PFIC provisions for the same stock during the qualified holding-period portion. The instructions state that the exception does not apply to option holders.^[7]

Related glossary terms

Specified foreign financial asset: The Form 8938 instructions use specified foreign financial asset for certain foreign accounts and investment holdings. The term identifies assets for reporting.
Foreign grantor trust: A foreign grantor trust is a foreign trust treated as owned by a grantor, often a U.S. person. Ownership brings Form 3520 and Form 3520-A reporting duties.
Foreign trust: For federal tax purposes, a trust is foreign if it fails either the court test or the control test. The tests concern U.S. court oversight and decision control.