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March 23, 2017 - Haoshen Zhong

Your Stock Options in a PFIC

Getting a stock option from a PFIC

Here is a question from an email:

I am employee of a PFIC. My employer issued some stock options to me as part of my compensation. Do I have a PFIC problem?

This post describes why you cannot avoid passive foreign investment company (PFIC) taxes by holding onto an option or selling the option directly. But you may want to hold onto the option to reduce annual reporting requirements.

The option is an issue because of attribution rules

A passive foreign investment company (PFIC) is a special subcategory of foreign corporations. US shareholders of a PFIC are subject to punitive tax rules, so US persons want to avoid owning shares of a PFIC.... continue reading

March 9, 2017 - Haoshen Zhong

When You Have to File Both Form 5471 and Form 8621

Filing Form 5471 and Form 8621 for the same foreign corporation

This is a question that we get a lot:

If I own shares in a foreign corporation, and I file Form 5471, then I do not have to file Form 8621, right?

The answer to this question is “incorrect”. There are situations under which you have to file both Form 5471 and Form 8621 to report the same corporation. Here are a few common situations we have seen arise in the course of our work.

Background to Form 8621 and Form 5471

Form 8621 is a form that US persons use to report investments in passive foreign investment companies (PFICs).... continue reading

February 23, 2017 - Haoshen Zhong

Lookthrough Rules When Your Foreign Corporation Owns PFICs

What happens when a US citizen owns shares of a foreign corporation, and the foreign corporation owns shares in PFICs–for example, foreign mutual funds or money market funds? Does the US citizen need to look through the top level foreign corporation to the PFICs?

When a shareholder looks through a corporation to an underlying PFIC, he must pretend that he owned the underlying PFIC shares directly.

Does the US citizen look through the top level foreign corporation? The answer depends on the percentage of the shares in the top level corporation the US citizen and whether the top level corporation is itself a PFIC.... continue reading

February 9, 2017 - Haoshen Zhong

Deferring tax on PFIC income using your foreign operating company

Today’s post is a war story about a pair of US citizen former clients whose PFIC issues we helped clean up. The question, paraphrased, is more or less like this:

We are equal shareholders of a successful Portuguese company (LDA). Our company accrued a lot of profits. We really do not want to let the profits sit idle. Can we safely invest them in exchange traded funds?

This post will discuss how to use a mix of the mark-to-market regime for foreign investment companies (PFICs) and the de minimis exception to foreign base company income for controlled foreign corporation (CFCs) to defer US tax on the profits from the exchange traded funds.... continue reading

January 26, 2017 - Haoshen Zhong

Reducing PFIC Tax by Annualizing the First Year Distributions

This is a question we got in an email:

My client bought shares in a foreign mutual fund a few years ago. I see from the client’s statements that the average distribution for the last few years has been about the same, but I do not have statements for the entire first year. Can I annualize the first year distribution?

This post will discuss how to annualize the first year distribution to reduce the tax on distributions from a passive foreign investment company.

PFIC defined

A passive foreign investment company (PFIC) is a foreign corporation that meets either one of the following two tests (IRC §1297(a)):

  1. Income test: At least 75% of the corporation’s gross income is passive income.
... continue reading