Small PFIC Exception to Filing Form 8621

The Form 8621 filing requirements for shareholders of a passive foreign investment company (PFIC) are in effect for the current tax season. The annual filing requirement is imposed on U.S. persons who are PFIC shareholders who do not currently file Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund. Thus, almost all PFIC shareholders are required to complete and file Form 8621 with the IRS.

A foreign mutual fund is typically going to be considered a PFIC. The reason why is because most mutual funds themselves are incorporated as its own separate entity. Therefore, it meets the definition of a foreign company and since the purpose of the company is to generate passive income, it is safe to say that 75% of the income or 50% of the assets is considered passive.

Once a U.S. person is identified as a PFIC shareholder, that shareholder is required to file Form 8621. The PFIC shareholder must attach Form 8621 to its federal income tax return (or information return) each tax year, unless an exception discussed below applies. A PFIC shareholder must file Form 8621 for each PFIC the shareholder owns. Joint return filers may file one Form 8621 for a PFIC that they own jointly or individually.

Exceptions to the annual filing requirement

Form 8621 is a very complex form and few people know about the “small” PFIC filing exception. If a PFIC shareholder falls under the following exception, that PFIC shareholder is exempt from the Form 8621 filing requirement.

$25,000 and $5,000 stock value exceptions: This exception applies only to PFIC shareholders who are subject to tax under the Section 1291 tax and interest charge scheme. If a PFIC shareholder does not receive a payment from the PFIC or does not receive gains from the sale of the PFIC stock, and either:

1. The combined value of all PFIC stock at the end of the PFIC shareholder’s tax year does not exceed $25,000 ($50,000 for joint filers); or
2. The PFIC shareholder owns the PFIC (e.g., PFIC1) through another PFIC (e.g., PFIC2) and the value of the PFIC shareholder’s proportionate interest in PFIC2 through PFIC1 does not exceed $5,000, then the PFIC shareholder is not required to file Form 8621 in that tax year.

This exception is found in Treas Reg. §1.1298-1(c). The Form 8621 instructions provide that the Taxpayer does not need to complete “Part I,” but we believe (and most tax practitioners) that Form 8621 is not required.

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