PFIC Testing: Performing the Gross Income and Asset Tests, Avoiding the PFIC Taint, Illustrative Examples

Foreign corporations that satisfy one of two tests are classified as PFICs under IRC Section 1297. The determination is critical since PFIC shareholders may be subject to additional reporting requirements, taxed at ordinary income rates on amounts that would otherwise be qualified dividends and long-term capital gain distributions, and assessed an interest charge on amounts deferred under IRC Section 1291 (unless a qualified electing fund (QEF) or mark-to-market election is made).

Foreign corporations that meet either a gross income or asset test are classified as PFICs. If 75 percent or more of gross income for the tax year is passive, the corporation meets the gross income test. Passive income generally includes dividends, interest, gains on sales of property, currency gains, rents, royalties, and other revenue. The corporation satisfies the asset test if the average percentage of assets producing passive income during the year is 50 percent or more. The gross income and asset tests raise numerous issues. Even if a foreign corporation qualifies as an active trade or business, it could still be classified as a PFIC. Additionally, once a company is classified as a PFIC, it remains a PFIC even when thresholds are not met in subsequent tax years unless an appropriate election is made.

Determining what constitutes passive income for potential PFICs and performing the gross income and asset tests is complicated. International tax advisers must understand the rules and assist MNEs in avoiding the PFIC taint.

Listen as our panel of international tax reporting experts discusses performing the income and asset tests for PFIC classification and offers advice to avoid this status.

1. PFIC testing: introduction
2. Income test
3. Asset test
4. Final and Proposed regulations
5. Exceptions and look-through rules
6. Elections
7. Best practices

The panel will cover these and other critical issues:

• Common scenarios with examples of applying the gross income tests
• Defining assets that produce passive income for purposes of the asset test
• Recommendations for avoiding the PFIC taint or adverse PFIC consequences
• Exceptions and elections available to circumvent PFIC classification or adverse PFIC rules

Learning Objectives

After completing this course, you will be able to:

• Determine whether a foreign corporation meets the gross income PFIC test
• Decide when a foreign corporation satisfies the asset test
• Ascertain ways to avoid or manage the PFIC taint
• Identify revenue considered passive income under PFIC guidelines

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of international taxation including residency determination, foreign entity classifications, application of treaty benefits, as well as GILTI, Subpart F, and the related Section 250 deductions.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).