Passive Foreign Investment Company (PFIC) Interest Calculations
If you are dealing with a Passive Foreign Investment Company (IRC §1291), you may need to make numerous interest computations using IRC §6621 rates. (Please note that the below discussion is a simplification of a difficult subject!)
A PFIC is a foreign corporation if (A) at least 75% of its gross income for its tax year is passive, or (B) at least 50% of the assets it held during the year produced passive income or are held for the production passive income.
The tax treatment for a US shareholder in a PFIC is a function of whether that shareholder has (1) not made an election, (2) made a qualifying electing fund (QEF) election, or made a mark-to-market election.
A non-electing PFIC shareholder can defer the US tax until he disposes of the PFIC stock or receives an "excess distribution." When one of those events occurs, that shareholder must pay US tax, plus interest related to the value of the tax deferral. The tax is computed at ordinary tax rates. This would be reported on Form 8621.
A shareholder of a Qualified Electing Fund (QEF) annually pays tax on his or her share of PFIC income. The income may be split between ordinary and capital gain components. By making this election, interest will not be added.
A shareholder that uses the mark-to-market election takes a gain or loss each year based on the increase or decrease of that shareholder's interest in the PFIC.
The IRS/State Interest & Penalty Calculator can be used to easily compute interest pertaining to PFIC issues. As a service, we can make the interest computations for you [(800)-326-6686].
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