US citizens applying for Portugal GV must be aware of FATCA and PFIC. Investment funds and banks need to consider FATCA regulations.
PFIC Company
Passive Foreign Investment Company (PFIC) refers to certain foreign corporations that meet specific criteria related to their income and assets. Generally foreign fund investments, such as mutual funds, bond funds, equity funds, and private equity funds, are examples of PFICs. PFICs (Passive Foreign Investment Companies) are taxed by the IRS. A foreign investment fund is considered a PFIC if either income test or asset test is met:
- Income test—75% or more of the corporation’s gross income is passive income
- Asset test—50% or more of the corporation’s average assets produce or could produce passive income.
IRS Reporting
The IRS requires US citizens who have direct or indirect interests in PFICs to report such as part of their annual US income tax filing, failing to do so results in penalties or fees.
The US has three potential tax treatments for PFICs.
- Excess Distribution (ED) (Default)
- Qualified Electing Fund (QEF)
- Mark-to-Market (MTM)
US citizens must affirmatively choose to be taxed through the more favorable Qualifying Elective Fund (QEF) Regime, or be subjected to the less favorable (and seemingly punitive) default Excess Distribution Regime (ED). The difference between the ED and QEF regimes when it comes to taxes levied on PFIC income. A QEF election must be affirmatively made in the first year. If not timely made, the default ED regime will apply.
Form 8621 is a tax form file annually used by U.S. taxpayers to meet reporting requirements for PFIC
Be sure to wisely discuss with your fund manager who understands the US tax system and how PFIC taxes work,
