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ARTICLE · 26 AUGUST 2014

Exemption From PFIC Regime For Indirect Ownership Expanded

Patterson Belknap Webb & Tyler LLP
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The consequences of the excess distribution regime can be onerous if a PFIC is sold at a significant gain, because Sec. 1291(a)(2) treats the entire gain as an excess distribution.

United StatesTax
Dahlia Doumar
Dahlia Doumar
Carl Merino
Carl Merino

On April 14, Treasury and the IRS announced they will amend the regulations under Sec. 1291 to provide that a U.S. person who indirectly owns stock of a passive foreign investment company (PFIC) through a tax-exempt organization or account will not be treated as a U.S. shareholder of the PFIC (Notice 2014-28).

In general, a foreign corporation is a PFIC if at least 75% of its gross income is passive or at least 50% of its assets produce passive income or are held for the production of passive income (Sec. 1297(a)). Sec. 1291 imposes interest charges on U.S. shareholders with respect to "excess distributions" from PFICs (which are taxed as ordinary income) unless certain elections are made to include income currently or mark to market (if applicable). The consequences of the excess distribution regime can be onerous if a PFIC is sold at a significant gain, because Sec. 1291(a)(2) treats the entire gain as an excess distribution.

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