A passive foreign investment company (PFIC) is any foreign corporation if:
(1) at least 75% of its gross income for its tax year is passive, or
(2) at least 50% of the assets it held during the year produce passive income or are held for the production of passive income.
The passive assets test is generally applied based on the fair market value (FMV) of the corporation's assets, but assets are valued based on their adjusted basis, where the corporation isn't publicly traded and either is a CFC or elects to use the adjusted basis instead of FMV.
How a U.S. person who is a passive foreign investment company shareholder is assessed a PFIC tax depends on whether they have made a qualifying electing fund (QEF) election, a mark-to-market election), or no election.
Electing qualified electing fund (QEF) treatment for passive foreign investment company (PFIC) stock—Form 8621.
A passive foreign investment company is treated as a QEF with respect to a particular shareholder, if the shareholder so elects and the PFIC complies with the requirements for determining its ordinary earnings and net capital gain and otherwise carrying out the purposes of the election.
A U.S. investor in a PFIC makes the QEF election, by attaching a completed Form 8621 to his or her timely-filed income tax return (original or amended, by the due date (as extended) for the original return) for that year, reflecting the information provided by the PFIC in its annual information statement.
If the election is made, the electing shareholder is not subject to the deferred tax and interest charge. Instead, the electing shareholder must currently include in income his or her share of the PFIC's earnings and profits (with appropriate basis adjustments for amounts not distributed and previously taxed distributions). The fund's ordinary income and net capital gains are passed through to the shareholder as ordinary income and long-term capital gain.
If a passive foreign investment company is also a controlled foreign corporation (CFC), amounts includible in gross income under the CFC rules are not included under the QEF rules.
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