Changes Needed to Passive Foreign Investment Company Shareholder Rules, AICPA Tells IRS and Treasury

June 24, 2014

The American Institute of CPAs (AICPA) recommended to the Department of the Treasury and the Internal Revenue Service (IRS) that they act to make regulatory and legislative changes to ease burdensome compliance requirements for certain shareholders of passive foreign investment companies (PFIC).

Originally enacted as part of the Tax Reform Act of 1986, the PFIC rules were intended to limit U.S. taxpayers from avoiding U.S. taxes by making investments through foreign corporations.  However, as world economic activity has increased since the law’s enactment, many more U.S. taxpayers have become subject to the PFIC rules, the AICPA explained.

“The PFIC rules are highly complex and in most cases apply equally to direct shareholders and minor, indirect shareholders,” the AICPA wrote in its May 12 letter.  “Therefore, an indirect shareholder with a small investment in a PFIC must prepare calculations and incur compliance costs that can, at times, far exceed the underlying tax potentially imposed by the PFIC rules.”

The AICPA stated its 10 recommendations are proposed “in an effort to minimize costs of compliance, as well as limit the impact of the PFIC rules to situations where the PFIC investor has a significant interest.”

The AICPA’s recommendations include asking Treasury to recommend to Congress that the start-up exception be expanded by eliminating the gross income requirement in the start-up year or that the definition of the start-up year be extended to a period of at least six months, which would allow time for the generation of gross income.  In addition, the AICPA recommended expanding the conditions allowing a retroactive pedigreed qualifying electing fund (QEF) election to include U.S. taxpayers who had not previously affirmatively selected a PFIC method and relaxing the requirements for QEF documentation.