Are PFIC Distributions Eligible to be Qualified Dividend Income?

Are PFIC Foreign Dividends Considered Qualified Income?

A PFIC Is a Passive Foreign Investment Company and they come in all different shapes and sizes. Oftentimes, a U.S. Taxpayer will unintentionally acquire PFIC by way of investing in foreign mutual funds or ETFs. Otherwise, a taxpayer may become an owner of a PFIC when they have ownership over a foreign holding company that operates primarily to generate passive income and/or operates using passive assets. For those taxpayers who have been pulled into the PFIC matrix, they are aware that one of the worst parts about it is that income that may otherwise be taxed at a lower 15 or 20% tax rate gets taxed at a much higher tax rate including having to pay interest on the time the investment was being held in the PFIC. The question then becomes whether PFIC dividends can be considered qualified income. A good place to start for this analysis is Notice 2004-70. We have a separate article involving qualified dividends for CFCs — and while may sometimes be some overlap between PFIC and CFC, the focus of this article will be on PFIC.

PFIC Does Not Generally Qualify for Qualified Dividend Treatment

Unfortunately, passive foreign investment companies do not generally qualify to have their dividend income treated as qualified dividend income. That is because the Internal Revenue Code excludes PFIC from 1(h)(11)(C)(iii) treatment.

26 U.S.C. 1(h)(11)(C)(iii)

• • • (iii) Exclusion of dividends of certain foreign corporations

    • Such term shall not include—

      • (I) any foreign corporation which for the taxable year of the corporation in which the dividend was paid, or the preceding taxable year, is a passive foreign investment company (as defined in section 1297), and

      • (II) any corporation which first becomes a surrogate foreign corporation (as defined in section 7874(a)(2)(B)) after the date of the enactment of this subclause, other than a foreign corporation which is treated as a domestic corporation under section 7874(b).

Notice 2004-70 (Section 7. Passive Foreign Investment Companies)

• • • In General

      • Section 1(h)(11)(C)(iii) of the Code excludes PFICs from the definition of qualified foreign corporation. As a result, a dividend (including an excess distribution) from a foreign corporation that is a PFIC or that is not a PFIC in the current taxable year but was a PFIC in the preceding taxable year is not qualified dividend income.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.