IRS Issues Regulations Regarding Ownership and Information Reporting of Passive Foreign Investment Companies: Final and Temporary Regulations Provide Guidance Regarding Ownership of Passive Foreign Investment Companies and Implement the Annual Report Requirement for Shareholders of Passive Foreign Investment Companies

Sullivan & Cromwell LLP - January 7, 2014
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On December 30, 2013, the IRS and Treasury Department issued Temporary and Final Regulations providing guidance on the ownership of “passive foreign investment companies” and implementing an annual reporting requirement for shareholders of such companies. The regulations replace and expand certain provisions of regulations that had been proposed on April 1, 1992. The Temporary and Final Regulations are effective December 30, 2013.

Generally, adverse U.S. tax consequences apply to U.S. persons who directly or indirectly own shares of a “passive foreign investment company” (a “PFIC”), a foreign corporation that has passive income or passive assets in excess of certain thresholds.

The Temporary Regulations set forth rules for determining indirect ownership of PFICs, which are largely consistent with the rules contained in the proposed regulations, and clarify the rules for attributing PFIC stock held by trusts.

The Temporary Regulations also provide guidance with respect to the requirement that a PFIC shareholder file information returns regarding its investment in the PFIC, including IRS Form 8621 “Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.” Under the Temporary Regulations, Forms 8621 are not required to be filed for taxable years ending before December 30, 2013 to the extent that the requirement to file such forms was previously suspended under IRS Notice 2011-55.

In addition, the Temporary and Final Regulations reduce the filing requirements for certain “U.S. shareholders” who indirectly or constructively own shares of a “controlled foreign corporation” (“CFC”).