The IRS issued proposed PFIC regulations on January 25, 2022 to clarify issues related to PFIC shares held by U.S. partnership and S-Corporation taxpayers.
Historically, U.S. passthroughs were responsible for:
- Reporting ownership of a PFIC;
- Making elections pertaining to the PFIC; and
- Allocating income inclusions required by the PFIC regime.
These obligations hinged on the fact that these entities were included in the definition of a “PFIC shareholder”. Under the Proposed PFIC Regs, such entities would be excluded from such definition. Accordingly, the PFIC related U.S. tax obligations would be shifted to lie with ultimate U.S. persons with an interest in such U.S. passthroughs. This aggregate treatment would extend further under the Proposed PFIC Regs to the application of the CFC/PFIC overlap rules and elections to purge the PFIC taint.
By extending aggregate treatment to these various aspects of holding PFIC shares through a flow-through entity, the Proposed PFIC Regs raise administrability concerns – most clearly, how PFIC shareholders will be able to access relevant information to comply with their newfound responsibilities.
On the same day, January 25, the IRS issued final foreign stock ownership regulations (the “Final 958 Regs”) to treat domestic partnerships as aggregates for subpart F inclusion purposes.
What Does This Mean for You?
The Proposed PFIC Regulations and Final 958 Regulations fundamentally change the way domestic partnerships are treated for PFIC and subpart F purposes. As domestic partnerships navigate the myriad of aggregate vs. entity theory application to various types of non-U.S. income, it will become more important to analyze foreign shareholdings held by domestic partnerships and the income these shareholdings produce. It will also become increasingly important for U.S. persons receiving Forms K-3 from domestic partnerships to scrutinize the information furnished to determine whether relevant tax elections have been made on their behalf.
Author: Manpreet Sangha | [email protected]
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If you think you may be impacted by these IRS issued regulations, please contact Withum’s International Services Team today.
