# Pfic



## Lieber (Oct 9, 2020)

The PFIC rule is driving a lot of people crazy!! Some questions:
Is any investment to any foreign fund a PFIC?
What about investment into a retirement fund abroad?
Is there anything besides buying singular stocks or bonds that is allowed outside of the US?
Is it not possible to interpret PFIC as not applying to non residents? The purpose I believe was to focus on residents , as proof of that residents that are not US citizens are subject to that rule.
Is it possible to hire a lawyer in Washington to deal with this topic, I think it will be possible to fund the efforts via crowd funding.


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## Bevdeforges (Nov 16, 2007)

You may want to take a look at the websites for AARO https://aaro.org/ and the ACA https://www.americansabroad.org/

Both of these American expat groups have done significant work on taxation of US citizens living abroad - studies, white papers and even lobbying efforts in Washington. From their various reports and projects, it seems like the subject of US citizens abroad is of little or no interest in the halls of Congress (probably especially at the moment since they don't seem to be able to do anything on any topic).


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## 255 (Sep 8, 2018)

Lieber -- As you have surely determined; the PFIC rules are draconian. I assume you are asking from a U.S. perspective -- otherwise I have no knowledge. Passive Foreign Investment Companies' (PFICs) also often intersect with Controlled Foreign Corporation (CFC) rules. In answer to your questions, in turn:

"Is any investment to any foreign fund a PFIC?" Pretty much. A PFIC is a foreign entity that has more than 75% of it's income from "passive income" (dividends, interest, rent, royalties and capital gains,) or 50% of company assets are investments that produce passive income. Pretty much the definition of a "fund," whether foreign or domestic. I suspect a good securities lawyer might be able to form an "exception," but I suppose most foreign funds are not targeting U.S. investors.

"What about investment into a retirement fund abroad?" If you are talking about a "foreign" retirement fund -- you'll have the same issues -- after all it is still a fund. b There may be some "tax treaty" exceptions (depending on the country,) but I am not knowledgeable -- sorry. Of course you still have the possibility to invest in a U.S. retirement wrapper for "earned" income (that you haven't excluded by utilizing the FEIE.)

"Is there anything besides buying singular stocks or bonds that is allowed outside of the US?" Sure! Businesses, real estate, precious metals, etc. Actually, you can invest in a PFIC, but the taxes are horrendous. You can also invest in U.S. domestic funds, without issue (except perhaps by your country of residency, if not covered by a tax treaty.)

"Is it not possible to interpret PFIC as not applying to non residents? The purpose I believe was to focus on residents , as proof of that residents that are not US citizens are subject to that rule." If you are a U.S. person, U.S. PFIC rules apply whether you live in the U.S. or not. U.S. persons are obligated to pay U.S. taxes whether you are resident in the U.S. or offshore. The U.S. is one of two counties in the world that have a citizenship based tax system (which includes U.S. permanent residents) not a resident based tax system. 

"Is it possible to hire a lawyer in Washington to deal with this topic, I think it will be possible to fund the efforts via crowd funding." Of course you can hire a lawyer -- you just have to be able to pay him, crowd funding, or otherwise. Of course a lawyer can only advise on laws that are currently on the books, they can't magically change the law.

I suppose if you are bound and determined to invest in a PFIC and mitigate the U.S. tax burden -- you might consider opening a self-directed IRA that owns a foreign LLC (or equivalent) that could purchase the PFIC you're interested in. The taxes would flow to the IRA and nothing is paid by you (you'll only pay tax on withdrawals, and not even then, if it's a Roth.) U.S. hedge funds form foreign entities all the time to attract foreign clients and to act as blocker companies to mitigate Unrelated Business Income Tax (UBIT.)

Cheers, 255


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## Jca1 (Aug 7, 2019)

The main thing I would mention is CFR § 1.1298-1(c)(4), which exempts you from filing PFIC paperwork for an account if it is recognized as a foreign pension account under a US tax treaty and if the treaty also says the money earned in the account is only taxable when it is distributed to you.



> (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.


There are still significant problems with foreign retirement accounts for the following reasons:

1) They'll need to be reported on the FBAR and, depending on the size of the account, form 8938

2) You'll have to figure out whether the type of account you have qualifies as a retirement account under the treaty, if one even exists. The treaties often have lists of qualifying types of accounts or names of local pension laws, but often the treaties were written 20+ years ago and pension law has been reorganized since, usually in the direction of encouraging individual self-directed accounts.

3) You'll have to figure out whether the treaty only taxes the pension income when it is distributed to you (usually some language like "income earned by the pension scheme may be taxed as income of that individual only when ... it is paid to ... that
individual from the pension scheme").

4) You'll have to figure out whether you are required to report the account as a foreign trust on forms 3520 and 3520-A (filing these forms for treaty-recognized retirement accounts usually greatly increases the risk of penalties rather than reduces it in my opinion, but opinions vary). 

5) The contributions to the account may be taxable by the US, and worse, as unearned income, so that the Foreign Earned Income Exclusion doesn't apply to them. Many treaties allow the contributions to be excluded from US income tax, but the treaties are often unclear about which types of accounts this applies to and what the limits are, and many accountants and lawyers focused on international taxation seem shockingly unaware of these provisions.

6) Every accountant or lawyer you talk to will give you different answers about the above, some blatantly incorrect or dangerous


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## Nononymous (Jul 12, 2011)

Best not to report the things, honestly.

Failing that, report only what is consistent with FATCA data that the IRS might one day be able to look at.


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## Moulard (Feb 3, 2017)

Jca1 said:


> The main thing I would mention is CFR § 1.1298-1(c)(4), which exempts you from filing PFIC paperwork for an account if it is recognized as a foreign pension account under a US tax treaty and if the treaty also says the money earned in the account is only taxable when it is distributed to you.


Your link was to the wrong regulation. 

The link was to 26 CFR § 301.6114-1 which confusingly also involves treaty based reporting exceptions. The regulation you linked to covers when a taxpayer must declare a treaty based position by filing Form 8833 and when that reporting requirement is waived. It too has a paragraph (c)(4) that deals with pensions both public and private, but this regulation is not relevant in this instance - although it does become relevant on distribution out of a foreign pension fund.

The final rule §1.1298-1(c)(4) reads...



> (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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## Jca1 (Aug 7, 2019)

Moulard said:


> Your link was to the wrong regulation.
> 
> The link was to 26 CFR § 301.6114-1 which confusingly also involves treaty based reporting exceptions. The regulation you linked to covers when a taxpayer must declare a treaty based position by filing Form 8833 and when that reporting requirement is waived. It too has a paragraph (c)(4) that deals with pensions both public and private, but this regulation is not relevant in this instance - although it does become relevant on distribution out of a foreign pension fund.
> 
> The final rule §1.1298-1(c)(4) reads...


Yes, it seems I pasted the wrong link; I had both regulations open at the same time for different reasons. I thought I had fixed that in edits, but apparently not. Thanks for catching that.


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## Lieber (Oct 9, 2020)

Thank you all for your responses! I thought it would be possible to seperate between PFIC and the rest of the CBT topic but I understand that does not work. Have there been any examples of the IRS actually enforcing PFIC?


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## Jca1 (Aug 7, 2019)

Lieber said:


> Thank you all for your responses! I thought it would be possible to seperate between PFIC and the rest of the CBT topic but I understand that does not work. Have there been any examples of the IRS actually enforcing PFIC?


Anecdotally, I know of someone who joined the Offshore Voluntary Disclosure Program (OVDP) some years ago and the IRS examiner asked him to fill out a mountain of PFIC paperwork for his UK investments held in an ISA. I don't have any statistics, but it's unlikely to come up unless you get examined, which is rare unless you have an interesting level of income or assets or are taking questionable credits or deductions. Also, there doesn't appear to be a penalty for not filling out form 8621 (PFIC informational return), though it's possible a penalty could be assessed based on tax due or the accounts not being disclosed on the FBAR or form 8938.


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