PFIC

NON-U.S. MUTUAL FUNDS

Or PFIC

When investing in foreign funds or foreign companies that derive their income primarily from investments your investment may be considered subject to the PFIC rules. Investment most commonly subject to PFIC rules are investments in mutual funds through non-U.S. financial institutions. For some back ground on why these PFIC rules apply, you need to compare reporting from U.S. based financial institutions with for example the reporting from Dutch financial institution.

U.S. based financial institutions will provide annual statements indicating:

 

  • - the year-end value of your investment;
  • - your dividend earnings;
  • - your gain or loss upon of the funds;
  • - and your capital gain distributions: your share of the gains and losses accrued in the fund during the year when selling the underlying shares.

 

However, the Dutch (and other non-U.S. based) financial institutions typically only report the year-end value of the fund, the dividend earnings and sometimes the gain or loss upon sale. However, there is no reporting of capital gain distributions. Even if the financial institution is FATCA compliant, there is still no reporting of the capital gain distributions.

Nevertheless, as a U.S. taxpayer, you are still required to report these capital gains distributions in your U.S. Ffderal (and state) tax return even though the financial institutions do not provide that information. In absence of this information, the IRS has implemented reporting rules based on PFIC rules. There are several ways of reporting these gains how the two most commonly used are the excessive distribution method and the mark-to-market method.

When reporting the funds, you will need to file a separate Form 8621 for every fund. It is therefore common for taxpayers to have multiple Forms 8621 included with the tax return.

The excessive distribution method

The mark-to-market method

Form 8621 (PFIC)

 

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