An exception to PFICs in Foreign Pension Plan Accounts

Certain US persons may become subject to the passive foreign investment company (PFIC) regime if they own an interest in a foreign corporation that invests primarily in passive investments (or become US persons while owning such interests). Typically, foreign mutual funds are deemed PFICs, which lead to onerous tax reporting. The Treasury and IRS recently released regulations that provide guidance on determining the ownership of a PFIC and on certain reporting obligations of PFIC shareholders.  

One helpful aspect of the newly finalized PFIC regulations is that the exceptions to PFIC reporting under Section 1298(f) have been clarified and expanded. Specifically, no Form 8621 must be filed for PFIC interests that are owned through a foreign trust that is a foreign pension fund operated principally to provide pension or retirement benefits where an income tax treaty essentially provides that the earnings from the pension fund are not taxable until distribution.

Exception for PFIC Stock Held Through Certain Foreign Pension Funds That Are Covered by a U.S. Income Tax Treaty

The final regulations revise the treaty-based exception for PFIC stock held by a United States person through certain foreign pension funds under § 1.1298–1T(b)(3)(ii) to eliminate the requirement that the foreign pension fund be treated as a foreign trust under section 7701(a)(31)(B). The final rule, which is renumbered § 1.1298–1(c)(4), clarifies that a foreign pension fund (or equivalent) covered by this exception may be any type of arrangement, including but not limited to, one of the arrangements listed in § 1.1298–1(c)(4). The final rule also applies in the case of an income tax treaty that provides the relevant benefit by election (or other procedure), such as under paragraph 7 of Article 18 of the U.S.-Canada income tax treaty, to the extent that the election is in effect (or other procedure properly satisfied).

The relevant regulation is pasted below:

(4) Exception for PFIC stock held through certain foreign pension funds. A shareholder who is a member or beneficiary of, or participant in, a plan, trust, scheme, or other arrangement that is treated as a foreign pension fund (or equivalent) under an income tax treaty to which the United States is a party and that owns, directly or indirectly, an interest in a PFIC is not required under section 1298(f) and these regulations to file Form 8621 (or successor form) with respect to the PFIC interest if, pursuant to the applicable income tax treaty, the income earned by the foreign pension fund may be taxed as the income of the shareholder only when and to the extent the income is paid to, or for the benefit of, the shareholder.

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