form 8621 pfic reporting: passive foreign investment...
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Form 8621 PFIC Reporting: Passive Foreign
Investment Company Rules After Tax ReformTHURSDAY, SEPTEMBER 19, 2019, 1:00-2:50 pm Eastern
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September 19, 2019
Form 8621 PFIC Reporting: Passive Foreign Investment Company Rules After Tax Reform
John Bowlby, J.D., Senior Associate
Mazars USA
Seevun Kozar, International Tax Manager
KPMG
Barbara E. Rasch, Director
KPMG
Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
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PFICs: Tiered
Structures, PFIC
Ownership, Overlap
Rules, and the
Proposed Regulations
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OVERVIEW OF THIS MODULE
• Introduction
• PFIC ownership in general
• Overlap rules
• Common structures
• Overview of the proposed regulations
• Pass-through and look-through
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INTRODUCTION
• We’ve covered general rules for determining whether a foreign corporation (FC) is a PFIC
• What happens when a PFIC is also a CFC?
• Analysis under indirect ownership:
Structures are made up of foreign and domestic corporations, partnerships, disregarded entities (DRE), trusts, and sometimes special entities like REITs, RICs, insurance companies, and CFCs.
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RELEVANT ISSUES
• Who owns what entities?
• How much of each entity do they own?
• Which owner can make an election with respect to which entity?
• Who includes income from which entity?
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4 STATES OF THE WORLD
• A FC can only fall into one of four situations:– It’s a PFIC, and a CFC
– It’s a PFIC, but not a CFC
– It’s a CFC, but not a PFIC
– It’s neither a PFIC, nor a CFC
• As a general rule, we only care about the PFIC rules in the 2nd state.
• This is because the CFC rules generally control the 1st state.
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THE TAKEAWAY,UP FRONT
• When you are dealing with PFICs, take a minute to think about CFCs, and at least make a preliminary determination
• Why this matters: PFIC rules can produce better tax outcomes than CFC rules, especially where a QEF election is available, because the QEF election has the benefit of treating some income as capital gain. So, by erroneously making the QEF election on an entity that is a CFC, you risk underreporting income.
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CFC/PFIC OVERLAP RULE
• PFICs and CFCs must both be foreign corporations
• A PFIC is a CFC if more than 50% of the FC’s stock is owned by US persons each owning at least 10%.
• In this situation, section 1297(d) says we ignore the PFIC rules and apply subpart F.
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CFC OVERLAP, CONTINUED
• What happens when a PFIC is only a CFC for part of the PFIC owner’s holding period?
• Generally, the PFIC holding period runs for the period during which the FC is not a CFC.
• However, if the PFIC is not a CFC at the beginning of the holding period, then a CFC during the middle years of the holding period, then not a CFC at the end of the holding period, the PFIC holding period runs the entire holding period.
• This produces some issues when calculating E&P and applying section 1291.
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THE FIX WITH AN ELECTION
• The extended holding period that includes the CFC period can be elected out of.
• Under sections 1298(b)(1) and 1291(d)(2), a purging election can be made at the start of the CFC period
• This election is similar to, and functions like, the purging election made to remove the PFIC taint upon making a QEF election on what would otherwise be an unpedigreed QEF.
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LIMITED APPLICATION
• The CFC/PFIC overlap rule has been rendered less relevant under TCJA and the regulations and proposed regulations issued pursuant to TCJA
• Partners owning less than 10% of domestic partnerships that own PFICs may end up taxed under PFIC rules based on subpart F regulations.
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LOOK-THROUGH RULES
• 25% owned subsidiaries
• > 50% owned related person
• Potential overlap
• Look through rules apply to determine the status of assets and income as passive or non-passive
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25% SUBSIDIARY
FC
FC
FC
FC
25% 24%
25% of lower tier FC assets and income are included in upper tierasset and income test calculations
Value of lower tier stock is includedas passive asset, and dividends from lower tier FC are included as passive income in upper tier asset and incometest calculations
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ATTRIBUTION
• Section 1298 creates proportional attribution to a shareholder from a corporation the shareholder controls
• Section 1298 creates proportional attribution to partners from a partnership (old rule)
• Attribution creates ownership of stock that must be tested for PFIC status and income that must potentially be picked up.
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CORPORATE ATTRIBUTION
SH
FC
SH
FC
51% 49%
The upper tier FC is considered to own 51% of the lower tier’s assets and income.
The upper tier FC is NOT considered to own any of the lower tier’s assets and income.
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PARTNERSHIP ATTRIBUTION
Partner
Partnership
Partner
Partnership
51% 49%
The partner is considered to own 51% of the partnership’s assets and income.
The partner is considered to own 49% of the partnership’s assets and income. (Old rule)
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MORE ATTRIBUTION
• Attribution from non-PFIC FCs
• Attribution from domestic corporations
• Attribution from chains of PFICs
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ATTRIBUTION FROM NON-PFIC FC
FCNon-PFIC
USP
PFIC
USP
FC Non-PFIC
PFIC
51% 49%
USP is Owner of this PFIC USP is NOT Owner of this PFIC45
ATTRIBUTION FROM DOMESTIC CORP
DC
USP
PFIC
USP
DC
PFIC
51% 49%
USP is Owner of this PFIC USP is NOT Owner of this PFIC46
ATTRIBUTION FROM PFICS
USP
PFIC 1
PFIC 2
PFIC 3
9%
8%
7%
USP owns: 9% of PFIC 1, 0.72% of PFIC 2, and 0.0504% of PFIC 3.
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SPECIAL DISPOSITION RULES
• PFIC stock for PFIC stock exchange
• Nonrecognition transfers
• Distributions in reorganization
• Distributions from partnerships
• Contributions to partnerships, S-Corps, grantor trusts
• Transfers within consolidated groups
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Guidance Under
the Proposed Regulations
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OVERVIEW OF NEW REGULATIONS
• Guidance on rules on direct and indirect ownership
• Guidance on determining PFIC status
• Partnership attribution rules
• 25% owned foreign subsidiary rule
• PFIC Insurance exception
• Prop regs solve some problems
• Also leave some questions
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NON-CORPORATE ATTRIBUTION
• Old rule for partnership was proportional ownership, regardless of ownership percentage
• Proposed regulations require 50% or more ownership for proportional ownership to apply
• Proposed regulations apply to partnership, S-Corp, estate, and nongrantor trust
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DIVIDENDS INCLUDED FOR INCOME TEST
• Consolidation rules remove related party dividends
• PFIC rules provide no such mechanism
• Proposed regulations confirm this treatment
• However, dividends are eliminated between look through subsidiaries and tested FC
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“LOOK-THROUGH SUBSIDIARY”
• Tested FC is considered to receive its proportionate share of income from subsidiary if FC owns an average of 25% of the sub for the year
• Tested FC is considered to own its proportionate share of assets form subsidiary if it owns 25% of subsidiary on measurement date.
• If gross income can be proven on measurement dates, FC is considered to receive proportionate share of income on those dates
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“LOOK-THROUGH PARTNERSHIP
• New rule for partnerships mirrors subsidiary look through rule for corporations (25%)
• Applies exceptions to passive income to the income of the lower tier partnership
• For partnership owned less than 25%, distributive share is passive income
• Similar reasoning underlies application of asset test
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STAPLED ENTITIES
• Entities linked by restrictions on alienability create a single economic unit under the tax code
• Proposed regulations adopt this treatment and treated stapled entities as a single entity for purposes of asset and income tests.
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GROUP ACTIVITY AGGREGATION
• Parent wholly owns holding company and management company
• Holding company owns real estate
• Management company earns fees to manage property
• Activities can be aggregated for purposes of asset and income test
• Benefit relies on look through subsidiary or partnership designation
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INSURANCE-RELATED PROVISIONS
• Definitions
• Elections
• Exceptions
• Discussion Item
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