What is PFIC tax?

What is PFIC tax?

The PFIC regime is a penalty provision that taxes gains and distributions at the highest tax rate plus an interest charge on the deferral period. An example would be if the taxpayer is invested in a fund and the fund owns a PFIC, the taxpayer would be subject to the PFIC rules.

What is a QEF election?

The QEF or Qualified Electing Fund election under §1295 is optional method of taxation available for certain PFICs. This election most closely mirrors the US taxation of US mutual funds and allows for capital gains treatment of some of the income as long as any prior §1291 gain has been dealt with.

What is CFC tax?

Controlled foreign corporation (CFC) rules are features of an income tax system designed to limit artificial deferral of tax by using offshore low taxed entities. Generally, certain classes of taxpayers must include in their income currently certain amounts earned by foreign entities they or related persons control.

What is considered PFIC?

A passive foreign investment company (PFIC) is a corporation, located abroad, which exhibits either one of two conditions, based on either income or assets: At least 75% of the corporation’s gross income is “passive”—that is, derived investments or other sources not related to regular business operations.

How do I report QEF income?

The gain is reported on Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, filed with the taxpayer’s federal income tax return.

Who makes QEF election?

Any U.S. shareholder of a passive foreign investment company (PFIC) can elect to treat the PFIC as a qualified electing fund (QEF) and be taxed currently on a share of the QEF’s income (IRC § 1293 ).

Who is eligible for QEF election?

Qualified Electing Fund planning A QEF election would require the US Person shareholder to pay US income tax each year on such portion (regardless of whether—as in the check-the-box context—the company actually makes any shareholder distributions during the year).

What is CFC in geography?

Chemicals called chlorofluorocarbons (CFCs) are a reason we have a thinning ozone layer. A chlorofluorocarbon (CFC) is a molecule that contains the elements carbon, chlorine, and fluorine. CFCs are everywhere, mostly in refrigerants and plastic products.

What are the CFC gases?

chlorofluorocarbon (CFC), any of several organic compounds composed of carbon, fluorine, and chlorine. When CFCs also contain hydrogen in place of one or more chlorines, they are called hydrochlorofluorocarbons, or HCFCs. CFCs are also called Freons, a trademark of the E.I.

How do I report PFIC income?

PFIC reporting is the requirement that US citizens or green card holders, who indirectly or directly own shares in a PFIC at any time during the year, must file Form 8621 with the IRS. As this is an additional and often complex form, you will need to pay your tax advisor additional fees to prepare these.

When can you make QEF election?

A QEF Election in a Year After the Year of Purchase 1291(d)(2)(A). Under very limited circumstances—and only when the taxpayer fails to file the election based on a reasonable belief that the investment was not a PFIC—the taxpayer may file a retroactive QEF election as described in Regs.

What is a 1291 fund?

A Section 1291 Fund is a PFIC (Passive Foreign Investment Company) and it receives different tax treatment than other foreign passive investments. As defined by the code: “(1) Distributions. If a United States person receives an excess distribution in respect of stock in a passive foreign investment company, then—

What is a qualified electing fund (QEF)?

(i) QEF.—A PFIC is a qualified electing fund (QEF) with respect to a shareholder that has elected under section 1295 to be taxed currently on its share of the PFIC’s earnings and profits pursuant to section 1293. Next an election to tax the PFIC as a QEF is made 5 by filing form 8621 and ticking the appropriate box in Part II.

How are qefs taxed in the US?

the mark to market (MTM) rules of I.R.C. § 1296. QEFs are taxed much like partnerships, meaning that income retains its character (capital gains are taxed as capital gains, for instance) and is passed through to the shareholder for current inclusion in income. This is much better than the MTM and excess distribution regimes.

How do I elect to tax a PFIC as a QEF?

Next an election to tax the PFIC as a QEF is made 5 by filing form 8621 and ticking the appropriate box in Part II. The election can generally only be made for a PFIC that provides the taxpayer with a PFIC Annual Information Statement or Annual Intermediary Statement 6 that provides the income amounts and amounts deemed to have been distributed.

How long have you owned your QEF for?

You have owned it for five years. There have been no dividends from the fund and you have not sold any of your shares. It is slowly growing in value. You have never made any elections with respect to the fund, so the default rules of I.R.C. § 1291 are in force. For 2014, you are given a QEF investor statement for the first time.