Taxpayers who are either direct or indirect shareholders of passive foreign investment companies (PFIC) must submit Form 8621 to the IRS. In general, taxpayers must file a separate Form 8621 for each PFIC in which they either directly or indirectly hold stock. 

What is a PFIC?

A PFIC is a foreign corporation where at least 75 percent of its gross income is from non-business operational activities. Alternatively, at least 50 percent of its average percentage of assets is held for producing passive income.

When Taxpayers Must Submit Form 8621

When a taxpayer is a direct or indirect shareholder of a PFIC, the IRS requires them to submit Form 8621 when:

·        The taxpayer receives direct or indirect distributions from the PFIC

·        The taxpayer recognizes a gain on either the direct or indirect disposition of PFIC stock

·        The taxpayer reports information related to Qualified Election Funds (QEF) or 26 US Code § 1296, Election of mark to market for marketable stock

·        The taxpayer makes an election reportable in Part II of Form 8621

·        They're required to file an annual report under 26 Code § 1298(f)

Failing to file or submitting the wrong form can result in fines and penalties. 

What is an Indirect Shareholder?

Form 8621 covers both direct and indirect shareholders. The question becomes who qualifies as an indirect shareholder under the IRS. The IRS defines an indirect shareholder as being a taxpayer who meets one of the following criteria:

Is a shareholder in at least 50 percent of a foreign corporation that isn't a PFIC but either directly or indirectly owns stock in a PFIC

Is a shareholder in at least 50 percent of a domestic corporation, and the domestic corporation owns part of a Section 1291 fund

Is either a direct or indirect owner of a pass-through entity, and the pass-through entity is either a direct or indirect shareholder in a PFIC

Failing to file the proper forms can result in a higher tax bill and penalties. If you need help with investments in PFICs, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.