Table of Contents
- Address and Identifying Number
- Part I. Elections
- Part II. Income From a QEF
- Part III. Gain or (Loss) From Mark-to-Market Election
- Part IV. Distributions From and Dispositions of Stock of a Section 1291 Fund
- Part V. Status of Prior Year Section 1294 Elections and Termination of Section 1294 Elections
Important:
All line references to Form 1120 and Form 1040 are to the 2007 forms. Other entities should use the comparable line on their tax return.
Generally, a U.S. person that owns stock in a PFIC, directly or indirectly, may make Election A to treat the PFIC as a QEF.
Note.
A separate election must be made for each PFIC that the shareholder wants to treat as a QEF.
For more information on who may make the election, see Regulations section 1.1295-1(d).
Generally, a shareholder must make the election to be treated as a QEF by the due date, including extensions, for filing the shareholder's income tax return for the first taxable year to which the election will apply (the “election due date”). See Retroactive election below for exceptions. The foreign corporation will be treated as a QEF with respect to the shareholder for the taxable year in which the election is made and for each subsequent tax year of the foreign corporation ending with or within a taxable year of the shareholder for which the election is effective. For more information on making a retroactive election, see Regulations section 1.1295-3.
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The shareholder has preserved its right to make a retroactive election under the protective statement regime (described below) or
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The shareholder obtains the permission of the IRS to make a retroactive election under the consent regime (described below).
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Reasonably believed, as of the due date for making the QEF election, that the foreign corporation was not a PFIC for its taxable year that ended during that year (retroactive election year);
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Filed a Protective Statement (see below) with respect to the foreign corporation, applicable to the retroactive election year, in which the shareholder describes the basis for its reasonable belief;
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Extended, in the Protective Statement, the periods of limitations on the assessment of taxes under the PFIC rules for all taxable years to which the protective statement applies; and
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Complied with the other terms and conditions of the protective statements.
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The shareholder reasonably relied on tax advice of a competent and qualified tax professional;
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The interest of the U.S. government will not be prejudiced if the consent is granted;
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The shareholder requests consent before the PFIC status issue is raised on audit; and
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The shareholder satisfies the procedural requirements under Regulations section 1.1295-3(f)(4).
For rules relating to the invalidation, termination, or revocation of a section 1295 election, see Regulations section 1295-1(i). Also see Regulations section 1.1295-1(c)(2) for rules relating to the years to which a section 1295 election applies.
For the tax year in which the section 1295 election is made, the shareholder must do the following.
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Check box A in Part I of Form 8621.
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Complete the applicable lines of Part II. Include the information provided in the PFIC Annual Information Statement, the Annual Intermediary Statement, or a combined statement (see below) received from the PFIC.
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Attach Form 8621 to a timely filed tax return.
For each subsequent tax year in which the election applies and the corporation is treated as a QEF, the shareholder must:
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Complete the applicable lines of Part II and
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Attach Form 8621 to a timely filed tax return.
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The shareholder's pro rata share of the PFIC's ordinary earnings and net capital gain for that taxable year or
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Sufficient information to enable the shareholder to calculate its pro rata share of the PFIC's ordinary earnings and net capital gain for that taxable year. For other information required to be included in the PFIC Annual Information Statement see Regulations section 1.1295-1(g).
This election may be made by a U.S. person that elects to treat a PFIC as a QEF for a foreign corporation's tax year following its first tax year as a PFIC included in the shareholder's holding period (an unpedigreed QEF). A shareholder making this election is deemed to have sold the PFIC stock as of the first day of the PFIC's first tax year as a QEF (the qualification date) for its fair market value.
For purposes of this election, the following apply.
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The gain from the deemed sale is taxed as an excess distribution received on the qualification date.
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The basis of the stock is increased by the gain recognized. The manner in which the basis adjustment is made depends on whether the shareholder is a direct or indirect shareholder. See Regulations section 1291-10(f).
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The new holding period of the stock begins on the qualification date.
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The election may be made for stock on which the shareholder will realize a loss, but that loss cannot be recognized. In addition, there is no basis adjustment for a loss.
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After the deemed sale, the PFIC becomes a pedigreed QEF with respect to the shareholder.
This election must be made by the due date, including extensions, of the shareholder's original tax return (or by filing an amended return within 3 years of the due date) for the tax year that includes the qualification date. However, see Form 8621-A if the 3-year period has expired.
To make this election:
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Check box B in Part I,
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Enter the gain or loss on line 10f of Part IV, and
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If a gain is entered, complete line 11 to report the tax and interest due on the excess distribution.
For more information regarding making Election B, see Regulations section 1.1291-10.
This election may be made by a U.S. person that elects to treat a PFIC that is also a CFC as a QEF for the foreign corporation's tax year following its first tax year as a PFIC included in the shareholder's holding period (an unpedigreed QEF).
A shareholder making this election is treated as receiving a dividend of its pro rata share of the post-1986 earnings and profits (defined below) of the PFIC on the qualification date (defined under the instructions for Election B above). The deemed dividend is taxed as an excess distribution, allocated only to the days in the shareholder's holding period during which the foreign corporation qualified as a PFIC. For this purpose, the shareholder's holding period ends on the day before the qualification date.
For purposes of this election, the following apply.
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The term “post-1986 earnings and profits” means the undistributed earnings and profits of the PFIC (as of the day before the qualification date) accumulated in tax years beginning after 1986 during which the CFC was a PFIC and while the shareholder held the stock.
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The basis of the shareholder's stock is increased by the amount of the deemed dividend. The manner in which the basis adjustment is made depends on whether the shareholder is a direct or indirect shareholder. See Regulations section 1.1291-9(f).
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The shareholder's holding period (solely for purposes of applying the PFIC rules after the deemed dividend election) begins on the qualification date.
This election must be made by the due date (including extensions), of the shareholder's original tax return (or by filing an amended return within 3 years of the due date) for the tax year that includes the qualification date. However, see Form 8621-A if the 3-year period has expired.
To make this election:
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Check box C in Part I,
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Enter the dividend on line 10e of Part IV as an excess distribution, and
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Complete line 11 to figure the tax and interest due on the excess distribution.
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The name, address, and identifying number of the U.S. person and the amount that was included in income;
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The tax year in which the amount was previously included in income;
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The provision of law under which the amount was previously included in income;
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A description of the transaction in which the shareholder acquired the stock of the PFIC from the other U.S. person; and
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The provision of law under which the shareholder's holding period includes the holding period of the other U.S. person.
For more information on making Election C, see Regulations section 1.1291-9.
A shareholder of a QEF may make Election D to extend the time for payment of the tax on its share of the undistributed earnings of the fund for the current tax year. If a U.S. partnership is a shareholder of a QEF, the election is made at the partner level.
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If this election is made, interest will be imposed on the amount of the deferred tax.
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The election cannot be made for any earnings on shares disposed of during the tax year or for a tax year that any portion of the shareholder's pro rata share of the fund's earnings is included in income under section 551 (relating to foreign personal holding companies) or section 951 (relating to CFCs).
Generally, this election must be made by the due date, including extensions, of the shareholder's tax return for the tax year for which the shareholder reports the income related to the deferred tax.
For more information on making Election D, see Temporary Regulations section 1.1294-1T.
This election may be made by:
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A U.S. person that is a shareholder of a foreign corporation that no longer qualifies as a PFIC under either the income or asset test of section 1297(a) or
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A U.S. shareholder (as defined in section 951(b)) that owns stock in a foreign corporation that is a CFC and is not treated as a PFIC with respect to the U.S. shareholder under section 1297(d).
Such persons may elect to treat the stock of the foreign corporation as sold on the last day of the last tax year of the foreign corporation in which it was treated as a PFIC (termination date) for its fair market value on that date.
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The gain from the deemed sale is taxed as an excess distribution.
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Any shareholder who owns stock in a CFC during its last taxable year as a PFIC, may, alternatively, apply the deemed dividend election rules under Election C. The deemed dividend is taxed as an excess distribution.
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The basis in the stock is increased by the amount of the excess distribution taxed to the shareholder making
Election E. -
The new holding period of the stock begins on the date after the deemed sale.
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Election E may be made for stock on which there would be a loss, but the loss is not recognized.
For more information on making this election, see Temporary Regulations sections 1.1297-3T(a) and (b).
This election is made either:
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With the original return for the tax year of the shareholder that includes the last day of the last year of the foreign corporation during which it qualified as a PFIC or
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By filing an amended return for the tax year that includes the date of the deemed sale.
Election F may be made by:
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A U.S. person who owns (or is treated as owning) “marketable stock” (defined on page 2) in a PFIC at the close of such person's tax year or
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A RIC that meets the requirements of section 1296(e)(2).
For more information, see section 1296 and Regulations section 1.1296-1. See sections 1296(f) and (g) and Regulations sections 1.1296-1(e) and (h)(1)(ii) for information regarding stock owned through certain foreign entities.
This election must be made on or before the due date (including extensions) of the U.S. person's income tax return for the tax year in which the stock is marked to market. A section 1296 election by a CFC is made by its controlling shareholders. For more information, see Regulations section 1.1296-1(h)(1)(ii). Once made, the election applies to all subsequent tax years unless the election is revoked or terminated pursuant to Regulations section 1.1296-1(h)(3).
To make the election:
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Check box F in Part I,
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Complete Part III to report the gain or loss, and
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Complete Part IV if the tax and interest rules of section 1291 (explained in the Part IV instructions, which begin on page 6) apply.
For any tax year in which the foreign corporation is not treated as a QEF because it is not a PFIC under section 1297(a), the shareholder is not required to complete Part II. However, the section 1295 election is not terminated. If the foreign corporation is treated as a PFIC in any subsequent tax year, the original election continues to apply and the shareholder must include in Part II its pro rata share of ordinary earnings and net capital gain and also must comply with the section 1295 annual reporting requirements.
If you receive a distribution from the QEF during the current tax year, the distribution is first treated as a distribution out of the earnings and profits of the QEF accumulated during the year. If the total amount distributed (line 3b) exceeds the amount included in income (line 3a), the excess is treated as distributed out of the most recently accumulated earnings and profits and is taxable to you unless you satisfactorily demonstrate that the excess was previously included in the income of another U.S. person. To satisfactorily demonstrate this, the QEF shareholder must attach a statement to Form 8621 that includes the information listed under Attachments on page 4.
If the fair market value of the PFIC stock as of the close of the tax year is more than the U.S. person's adjusted basis in the stock, the excess is a gain and is treated as ordinary income.
If the adjusted basis of the stock is more than the fair market value, the excess is allowed as a deduction, but only to the extent of the lesser of:
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The amount of the excess (line 7) or
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The excess of the amounts that were included in income under the mark-to-market rules for prior tax years over the amounts allowed as a deduction under the mark-to-market rules for prior tax years (line 8). See section 1296(d) and Regulations sections 1.1296-1(c)(3) and (4).
This amount is treated as an ordinary loss.
See Section 1291 Fund on page 2 for the definition of section 1291 fund. See page 2 for a brief summary of the tax consequences for shareholders of a section 1291 fund.
Complete a separate Part IV for each excess distribution. That is, if you receive a distribution from a section 1291 fund with respect to shares for which you have different holding periods, complete lines 10a through 10e separately for each block of shares that has the same holding period (“applicable stock”). If you dispose of stock in a section 1291 fund for which you have different holding periods, complete line 10f for each block of shares that has the same holding period.
Enter your total distributions from the section 1291 fund with respect to the applicable stock for the periods indicated.
Note.
A distribution to a corporation claiming the foreign tax credit for deemed paid foreign taxes includes foreign taxes deemed paid. See Form 1118, Foreign Tax Credits-Corporations, Schedule C, Part I, column 10, and Parts II and III, column 8, for the gross-up amount.
Divide the amount on line 10b by 3. If the number of tax years in your holding period preceding the current tax year is less than 3, divide the amount on line 10b by that number.'>
Determine the taxation of the excess distribution on a separate sheet and attach it to Form 8621. Divide the amount on line 10e or 10f, whichever applies, by the number of days in your holding period. The holding period of the stock is treated as ending on the date of the distribution or disposition.
Special rules apply to the holding period if:
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The deemed dividend election (Election C) is made (see the instructions for Election C beginning on page 4) or
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The mark-to-market election (Election F) is made or was made in a prior year (see section 1291(a)(3)(A)(ii)).
Determine the amount allocable to each tax year in your holding period by adding the amounts allocated to the days in each such tax year. Add the amounts allocated to the pre-PFIC and current tax years. Enter the sum on line 11b.
This amount is treated as ordinary income (e.g., individuals and corporations should enter this amount on the “other income” line of their tax return).
Determine the increase in tax for each tax year in your holding period (other than the current tax year and pre-PFIC years). An increase in tax is determined for each PFIC year by multiplying the part of the excess distribution allocated to each year (as determined on line 11a) by the highest rate of tax under section 1 or section 11, whichever applies, in effect for that tax year. Add the increases in tax computed for all years. Enter the aggregate increases in tax (before credits) on line 11c.
To figure the foreign tax credit, the shareholder of a section 1291 fund figures the total creditable foreign taxes attributable to the distribution. This amount includes the direct foreign taxes paid by the shareholder on the distribution (for example, withholding taxes) and, for 10% or greater corporate shareholders, any taxes deemed paid under section 902. Both the direct and indirect foreign taxes must be creditable under general foreign tax credit principles and the shareholder must choose to claim the foreign tax credit for the current tax year.
The excess distribution taxes (the creditable foreign taxes attributable to an excess distribution) are determined by apportioning the total creditable foreign taxes between the part of the distribution that is an excess distribution and the part that is not.
The excess distribution taxes are allocated in the same manner as the excess distribution is allocated. See Excess distributions on page 2. Those taxes allocated to pre-PFIC tax years and the current tax year are taken into account for the current tax year under the general rules of the foreign tax credit.
The excess distribution taxes allocated to a PFIC year only reduce the increase in tax figured for that tax year (but not below zero). No carryover of any unused excess distribution taxes is allowed.
When you dispose of PFIC stock, the above foreign tax credit rules apply only to the part of the gain that, without regard to section 1291, would be treated under section 1248 as a dividend.
This amount is the aggregate increase in tax and is included on your tax return as additional taxes.
For individuals, enter this amount on Form 1040 to the left of the line 44 entry space. Enter “Sec. 1291” next to the amount and include the amount as part of the total for line 44.
For corporations, enter this amount on Form 1120, Schedule J, to the left of the entry space for line 2. Enter “Sec. 1291” next to the amount and include it as part of the total for line 2. Other entities should use the comparable line on their income tax return.
Interest is charged on each net increase in tax for the period beginning on the due date (without regard to extensions) of your income tax return for the tax year to which an increase in tax is attributable and ending with the due date (without regard to extensions) of your income tax return for the tax year of the excess distribution.
For individuals, enter the interest at the bottom right margin of Form 1040, page 1 and label it as “Sec. 1291 interest.” Include this amount in your check or money order payable to the United States Treasury. If you would otherwise receive a refund, reduce the refund by the interest due.
For corporations, enter this interest at the bottom right margin of Form 1120, page 1, and label it as “Sec. 1291 interest.” Include this amount in your check or money order payable to the United States Treasury. If you would otherwise receive a refund, reduce the refund by the interest due.
Each person who has made a section 1294 election must (1) annually report the status of that election and (2) report the termination of any section 1294 election that occurred during the tax year. See Temporary Regulations section 1.1294-1T(h).
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An actual or deemed distribution of earnings to which the election is attributable (a loan, pledge, or guarantee by the QEF to or for the benefit of the taxpayer may cause a deemed distribution of the earnings);
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A disposition of stock in the QEF, including a pledge by the taxpayer of stock as security for a loan; or
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A change of status of the QEF (that is, a foreign corporation that is no longer a QEF or PFIC).
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A distribution of earnings will terminate an election to the extent the election is attributable to the earnings distributed.
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A loan, pledge, or guarantee by the QEF made directly or indirectly to the electing shareholder or related person will terminate an election to the extent of the undistributed earnings equal to the amount loaned, secured, or guaranteed.
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A disposition of stock will terminate all elections with respect to the undistributed earnings attributable to that stock.
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A change in status of the QEF will terminate all elections.
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