PFIC is not a disease but, thanks to the IRS, if you’ve got one, you want to find a cure ASAP.
If you own shares in a foreign-based mutual fund, you have a PFIC (Passive Foreign Investment Company). If you don’t do something about it, you are subject to the onerous PFIC taxation regime imposed by the IRS. You pay tax at the highest ordinary income tax rate plus an interest charge whenever you take a distribution or the fund has a capital gain. This means that your capital gains get taxed at 39.6%+ rather than 15%. Ouch!
Example: The fund reinvests all income in 20×5, 20×6 and 20×7. You pay no tax. In 20×8 you take a 10,000 distribution. You pay 3,960 tax plus interest on the tax you did not pay in the prior three years.
What can you do?
There are two possible elections that can be made:
Make the QEF election and you treat your PFIC as a regular mutual fund. You pay ordinary or capital gains tax on your share of the funds income annually.. OR
Make the Mark to Market election and you pay tax on the annual increase in FMV.
In either case, if you didn’t make the election in the first year you owned the fund, you have to pay the steep PFIC tax on all prior income and increases in FMV. For assistance with these difficult tax issues, please contact us.