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PFIC Questions
Old 06-24-2014, 05:14 PM   #1
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PFIC Questions

If a US investor buys in his US account, a UK or Hong Kong or Japan domiciled REIT, is that REIT a PFIC in his hands?

How about a holding company, such as Swedish company Investor AB.? Or Dutch Heineken Holding?

When I look at the description, it almost seems that all of these might be PFIC, but I never see this mentioned on websites that feature investments in these foreign firms.

I think there are people here who are experienced in this, and I would really appreciate some help. Some of these securities seem much better priced than similar US businesses, but as I understand PFIC rules they would basically make a big headache for the US investor. US tax preparers seem mostly clueless on this.

Ha
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Old 06-24-2014, 05:57 PM   #2
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I know that I have been warned that PFIC's are a nightmare to report to the IRS, and deal with. I think a big problem is that they do not report into the US financial authorities who then cannot verify if all gains made within the funds are reported and distributed (so that they can be taxed).

I have looked into the prospectus of Wellesley and it clearly states that all or substantially all of the gains are reported and distributed each year.

The UK equivalent of the IRS (HMRC) has a huge spreadsheet of "HMRC Reporting" funds where foreign companies report into HMRC, and all of Vanguard's ETF's are listed there. This means that when we re-locate back to the UK all of our foreign funds (VG ETF's) are recognized by the UK and not treated as PFIC's and should save me some reporting headaches, plus dividends and capital gain distributions will be treated as such and get very favorable UK tax treatment.

I don't know if the IRS has any similar arrangement with foreign funds.

Sorry I don't know more details.
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Old 06-24-2014, 06:09 PM   #3
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Thanks Alan, this is helpful. I am not really interested in mutual funds per se, but several countries like Sweden and France use holding companies, likely as a way to avoid challenges to family control. Sometimes, these things are downright cheap. When I look at the definitions, it is not clear to me if mostly dividends from wholly owned subsidiaries in these firms make it a PFIC.

Might be best for me to just forget about it.

I didn't realize that UK had this PFIC concept.

Ha
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PFIC Questions
Old 06-24-2014, 06:18 PM   #4
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PFIC Questions

Quote:
Originally Posted by haha View Post
Thanks Alan, this is helpful. I am not really interested in mutual funds per se, but several countries like Sweden and France use holding companies, likely as a way to avoid challenges to family control. Sometimes, these things are downright cheap. When I look at the definitions, it is not clear to me if mostly dividends from wholly owned subsidiaries in these firms make it a PFIC.

Might be best for me to just forget about it.

I didn't realize that UK had this PFIC concept.

Ha

Yes, the UK has the same PFIC concept. PFIC's I believe can be a way that money is hidden from a country's taxing authorities, hence the complexity in buying into them and then reporting them at tax time.
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Old 06-24-2014, 06:47 PM   #5
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The PFIC rules were enacted in 1986 when America was at a disadvantage to the rest of the world. The idea was to prevent deferral using foreign funds and companies and they are actually called the anti-deferral rules.
So they made the rules to catch foreign mutual funds and companies knowing that mutual funds are their own small companies.
It's possible to have pass through entities but my searching on this suggests the companies have to be incorporated in the US.
I have looked at UK OEIC and ICVC and see these are companies for example.
Now note that it's not legal for a 'US Person' to buy American securities from a foreign firm. You must purchase them from an American firm. This is why foreign mutual funds will say no US citizens.

If you buy a PFIC you can have it taxed in three ways. Mark to market, QEF and sec 1291. Few funds give details enough for QEF election (you elect the first year you hold them). Mark to market is horrible as well.

Now I have done a large number of sec 1291 calcs. They aren't very hard to do but it takes ages to understand the rules. If your subject to AMT some of the sec 1291 income is tax free. To understand this you need to know the PFIC income buckets:
1) Capital losses - You sold something you purchased at a loss
2) Ordinary income - Dividends that aren't excess or dividends attributed to the current year or pre-pfic years
3) sec 1291 tax. For income attributed to days in PFIC years this is the income taxed at the highest marginal rate anyone could pay that year (not you but anyone)
4) sec 1291 interest - interest on the sec 1291 tax compounded daily for the tax time of the pfix year to tax time for the current year.

Now sec 1291 tax is horrible but it only increases tax but not income. So if you subject to AMT it will increase your federal taxes but not AMT. So it's tax free until you wipe out AMT. This saved me a bunch one year while struggling with this stuff.
Best to run away from this stuff unless you are very brave. I had to file over 400 form 8621 for an 9 year period in OVDP. One 8621 per tax lot / sale / dividend.
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Old 06-24-2014, 07:00 PM   #6
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Best to run away from this stuff unless you are very brave. I had to file over 400 form 8621 for an 9 year period in OVDP. One 8621 per tax lot / sale / dividend.


Thanks Neill, I'll be sure to steer well clear!!
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Old 06-24-2014, 07:32 PM   #7
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As a US citizen or tax payer I would avoid foreign REITs, trusts and holding companies unless you have a specific reason for buying them and know exactly how they will be taxed in the US. You will almost certainly run into PFIC, FBAR and FATCA issues.
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Old 06-24-2014, 09:42 PM   #8
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Now note that it's not legal for a 'US Person' to buy American securities from a foreign firm. You must purchase them from an American firm. This is why foreign mutual funds will say no US citizens.
I think we need to be careful about the difference between a US resident and a US citizen here. A US citizen resident outside the US can buy mutual funds and stocks from local investment firms. Whether those firms and brokers will deal with a US citizen will depend on their desire or need to comply with FATCA regulations. The situation is interesting for US/UK dual citizens living in the UK and taxed on an arising basis. US tax and PFIC rules make buying UK mutual funds a bad idea and anyway, UK firms might refuse to open an account for a US citizen because of FATCA. The solution is to buy US Vanguard ETFs as they are recognized as reporting funds by HMRC so you still get your UK capital gains allowance. There are no rules to stop a UK resident from buying funds from a US broker and Vanguard is still ok with servicing the existing accounts of foreign residents. However, many US firms are starting to require a US address to allow continued trading.
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