PFIC Pension Fund Exception Under US Tax Treaty

 Pension Exception to PFIC Reporting by US Tax Treaty 

One of the most misunderstood aspects of international forms reporting involves the annual disclosure requirements for PFIC (Passive Foreign Investment Companies). In general, PFICs are reported on Internal Revenue Service Form 8621. Unlike the FBAR and Form 8938, the requirements for reporting PFIC can get infinitely complicated – especially in any year that the US Person Taxpayer may have generated excess distributions. Adding to the complexity is the fact that when a Taxpayer has ownership of various investment funds, such as foreign Mutual Funds, ETFs and SICAVs – these are also considered PFIC and therefore may require significant reporting of information that the Taxpayer may not be able to obtain. Luckily, for some Taxpayers who have their foreign investment funds in a Pension and it is with a Treaty County where there is a Treaty dealing with PFIC – the Taxpayer may escape Form 8621 reporting. Let’s take a brief look at the limitation on PFIC pension fund exception Under US Tax Treaty.

Section 1.1298-1 Section 1298(f)(c)(4) PFC Exception

• • • Exception for PFIC stock held through certain foreign pension funds.

      • A shareholder who is a member or beneficiary of, or participant in, a plan, trust, scheme, or other arrangement that is treated as a foreign pension fund (or equivalent) under an income tax treaty to which the United States is a party and that owns, directly or indirectly, an interest in a PFIC is not required under section 1298(f) and these regulations to file Form 8621 (or successor form) with respect to the PFIC interest if, pursuant to the applicable income tax treaty, the income earned by the foreign pension fund may be taxed as the income of the shareholder only when and to the extent the income is paid to, or for the benefit of, the shareholder.

Key PFIC Pension Exception Requirements

In order to qualify for this exception, it is important to note the following:

• • • The foreign investment is considered a PFIC;

    • The wrapper or investment pension type qualifies as a foreign pension (or equivalent);

    • There is an income tax treaty in place which identifies the PFIC/Treaty exception; and

    • The income may only be taxes when paid to, or for the benefit of, the shareholder

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