Form 8621 – An Introduction
A U.S. taxpayer who owns an interest in a foreign company, which is classified as a Passive Foreign Investment Company (“PFIC”), is required to attach Form 8621 each year to his or her U.S. tax return.
Technically, a PFIC is a foreign corporation that has one of the following attributes: (i) At least 75% of its income is considered “passive” (e.g., interest, dividends, royalties), or (ii) At least 50% of its assets are passive-income producing assets. In practice, a number of foreign investment products are classified as PFICs for U.S. federal tax purposes.
Most foreign mutual funds, for instance, fall within the definition of a PFIC. This can be the case even if such funds are held through a tax-deferred savings account (e.g., U.K. individual savings accounts (“ISAs”), New Zealand Kiwi Saver accounts, and Canadian tax-free savings accounts (“TFSAs”)) or a non-qualified pension and retirement account.
PFIC investment income is generally subject to highly punitive U.S. federal tax rates. A non-deductible penalty interest charge can also compound regularly while holding an interest in a PFIC. Several elections are available to mitigate the more onerous aspects of PFIC taxation (e.g., a so-called “QEF election” or “mark-to-market” election).
I.R.C. Section 1298(f) provides the basic reporting requirement that all shareholders of a PFIC must file the Form 8621 each year.
Who must file Form 8621?
Generally, a U.S. person that is a direct or indirect shareholder of a PFIC must file Form 8621 for each tax year under the following five circumstances – if the U.S. person:
1. Receives certain direct or indirect distributions from a PFIC;
2. Recognizes gain on a direct or indirect disposition (e.g., a sale) of PFIC stock;
3. Is reporting information with respect to a QEF or section 1296 mark-to-market election;
4. Is making an election reportable in Part II of the form; or
5. Is otherwise required to file an annual report pursuant to section 1298(f).
There are certain exceptions to the PFIC reporting requirement. A U.S. shareholder of a PFIC is not required to file the Form 8621 under the following circumstances:
1. The U.S. shareholder of the PFIC is not subject to tax on so-called “excess distributions” and gains on the disposition of PFIC stock during the year; and
2. Either: (a) the aggregate value of PFIC stock owned by the U.S. shareholder at the end of the tax year is not greater than $25,000 ($50,000 for taxpayers who are married filing jointly); or (b) the U.S. shareholder owns the PFIC stock through another PFIC and the value of the shareholder’s share of the upper-tier PFIC’s interest in the lower-tier PFIC is not greater than $5,000.
A separate Form 8621 must generally be filed for each PFIC in which stock is held directly or indirectly. Duplicative reporting may be avoided under certain circumstances.
What type of information is requested on the Form 8621?
The types of information requested include the following:
- Description of the PFIC shares (amount, value, etc.)
- Elections made with respect to the PFIC shares
- Income from a QEF, if applicable
- Gain (or loss) from a mark-to-market election, if applicable
- Distributions from or dispositions of a non-electing PFIC, if applicable
What is the due date for Form 8621?
Form 8621 must be attached to the shareholder’s tax return and filed by the due date, including extensions, of the return.
What are the penalties for not filing Form 8621?
Unlike other information returns, Form 8621 does not carry a penalty for not filing the form. However, failing to file the form does leave open the statute of limitations on all tax matters for that tax year indefinitely.