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Introduction
On December 31, 2013, the IRS and the Treasury Department issued temporary and proposed regulations implementing the reporting obligations imposed on U.S. shareholders of passive foreign invest- ment companies ("PFICs") by the 2010 enactment of section 1298(f) as part of the HIRE Act.1 The regulations are generally targeted at achieving a limited goal-providing guidance on who must file an annual PFIC information report under the expanded reporting requirement. These rules will generally impact individuals more than U.S. companies. However, because the HIRE Act also modi- fied the statute of limitations rules under section 6501(c)(8), which keeps the statute open if a taxpayer fails to file the PFIC annual report, compliance with these rules is critical for all taxpayers.
Background
The PFIC rules were enacted in 1986 and generally limit the abil- ity of U.S. taxpayers to defer the taxation of portfolio investment income by earning this income through a minority investment in a foreign corporation. Accordingly, a U.S. taxpayer that owns any interest in a PFIC, no matter how small, is subject to one of the fol- lowing three taxation regimes designed to eliminate any deferral.
Section 1291. The default regime under section 1291 imposes an interest charge on any "excess distributions" (regardless of wheth- er the PFIC has actual earnings and profits) from the PFIC.2 The interest charge only applies when the shareholder receives actual distributions or sells shares in the PFIC and is meant to eliminate the benefit of deferring taxation of the investment income.
QEF Election. Alternatively, taxpayers can make a "qualified electing fund" election or "QEF" election, which effectively treats the PFIC as a passthrough entity for U.S. tax purposes.3 In this case, the PFIC must supply to the shareholder annual information about its income and gains, which the U.S. shareholder includes on a current basis similar to a subpart F inclusion (except that the PFIC inclusion is with respect to all of the PFIC's income and not just certain types of income).
Mark-to-Market Election. U.S. shareholders also can elect to mark to market their PFIC stock each year if the PFIC stock is "mar- ketable" (e.g., publicly traded) stock.4
The determination of whether a foreign corporation is a PFIC is analyzed only at the level of the PFIC...