On Dec. 27, 2016, the IRS and Treasury published final regulations (T.D. 9806
) that provide guidance on determining ownership of a passive foreign investment company (PFIC) and on certain annual reporting requirements for U.S. shareholders of PFICs. The final regulations finalize proposed regulations promulgated in 1992, and finalize and withdraw temporary regulations published on Dec. 31, 2013, which were scheduled to sunset on Dec. 30, 2016.
The final regulations adopt, with certain changes, the language of the proposed regulations. The proposed regulations included rules for determining when a U.S. person is treated as indirectly owning stock of a PFIC. One new addition to the final regulations is a “nonduplication rule” included to address concerns that the same shares of a PFIC could be attributed to multiple U.S. persons. The nonduplication rule generally provides that a U.S. person is not treated as indirectly owning PFIC shares that are owned directly (or considered owned indirectly) by another U.S. person.
Notably, the final regulations incorporate the rules announced in Notices 2014-28 and 2014-51. Notice 2014-28 provides that a U.S. person is not treated as a shareholder of a PFIC to the extent the person owns PFIC stock through a tax-exempt organization or account. The preamble to the final regulations explains that applying the PFIC rules to a U.S. person that owns stock of a PFIC through an individual retirement account (IRA), for example, would frustrate the tax deferral purpose of the IRA rules. Notice 2014-51 provides guidance that U.S. persons that own stock in a PFIC that is marked to market under a non-Section 1296 regime are generally not subject to PFIC information reporting.
The final regulations also add or clarify exceptions to the general rule that U.S. shareholders of PFICs file Form 8621, “Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.” The final regulations:
- Add an exception for domestic partnerships with respect to an interest in a PFIC for a taxable year when none of the partnership’s direct or indirect partners are subject to the PFIC rules (a domestic partnership that holds stock in a Section 1291 fund is required to file Form 8621 if it has partners that are exempt from filing an annual information report but would be subject to tax with respect to distributions from, or dispositions of, the PFIC)
- Revise an exception for PFIC stock owned by a U.S. person through a foreign trust that is treated as a foreign pension fund by a U.S. tax treaty
- Add an exception for dual resident taxpayers who are taxed as nonresident aliens
- Add an exception for certain shareholders with respect to PFICs that were owned for a short period of time during which no PFIC taxation was imposed on the shareholders
- Add an exception for bona fide residents of Guam, the Northern Mariana Islands and the U.S. Virgin Islands, who are not required to file a U.S. income tax return
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