Form 8621, titled as Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, is filed by U.S. individuals who hold shares of a passive foreign investment company or qualified electing fund.
A foreign corporation is a “passive foreign investment company” (or PFIC) if 75% or more of the corporation’s gross income for it’s tax year is passive income as defined in tax code section 1297(b), or if at least 50% of the average value of the corporations’ assets for its tax year is attributable to assets used in the production of passive income or held for the production of passive income
The 8621 form is called a “Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund” and is used in situations in which a person needs to report a PFIC (Passive Foreign Investment Company).
All capital gains from the sale of PFIC shares are treated as ordinary income for federal income tax purposes and thus are not taxed at preferential long-term capital gain rates.
Income from investments are passive, but not that from the company’s (of fund’s) regular business operations.
PFIC Statements contain reporting information that can enable investors classified as “U.S. Persons” to make the Qualified Electing Fund (“QEF”) election for U.S. tax reporting services
Qualified Electing Fund election is an optional method of taxation available for certain PFICs. This election most closely mirrors the US taxation of US mutual funds and allows for capital gains treatment of some of the income as long as any prior gain has been dealt with.
An unreversed inclusion generally is a previously included gain. More specfically, an unreversed inclusion means with respect to any Market-to-market (MTM) stock the excess of the amount of mark to market gain included in gross income with respect to the stock in prior years (including any amount subject to section 1291 during the first year of the election) over the amount allowed as a deduction to the U.S. person with respect to such stock for prior taxable years.
Sometimes legal counsel is not necessary to correct Form 8621 errors. In some cases, legal counsel is strongly recommended. Unsure? Contact us.