2022 Proposed PFIC Regulations Focus on Aggregate Treatment of Partnerships
January 25, 2022

Proposed changes to PFIC treatment related to partnerships

In 2019, the Treasury Department and the Internal Revenue Service 2019 released proposed regulations regarding the aggregate treatment of U.S. partnerships for purposes of the Controlled Foreign Corporation Subpart F rules and requested comments concerning the Passive Foreign Investment Corporation (“PFIC”) rules for U.S. partners of U.S. partnerships. In response to the comments received, the Treasury Department and the Internal Revenue Service (“Treasury and IRS”) released proposed PFIC regulations regarding U.S. partnerships and S-corporation on January 25, 2022 (“the Proposed Regulations”). This tax alert principally focuses on the proposed PFIC rules as it relates to U.S. partnerships.


Let’s start with a brief discussion of the aggregate versus entity treatments for partnerships. In the entity approach, the partnership is treated as owning the assets of the partnership and is treated as separate and distinct from its partners. Conversely, in the aggregate approach, the partners of a partnership are treated as owning the assets of the partnership. This is relevant because the Treasury and IRS intend to use the aggregate approach with respect to the PFIC rules related to U.S. partners of U.S. partnerships per the Proposed Regulations.


The PFIC rules generally negate any U.S. tax benefits of deferral of income related to investments in non-U.S. corporations. These rules are important for U.S. partners to consider as the partner could be subject to interest charges and other special U.S. tax treatments related to their direct or indirect interest in a PFIC.


Similar to recent decisions by the Treasury Department and IRS regarding Controlled Foreign Corporation (“CFC”) rules, the Treasury Department and IRS concluded that domestic partnerships and S-Corporations should be treated as aggregates of their partners and shareholders for purposes of the Qualified Electing Fund (“QEF”) and Mark-to-Market (“MTM”) rules. This is significant as the intention of the Proposed Regulations is to not treat U.S. partnerships and S-corporations are shareholders for purposes of making a QEF or MTM election. Accordingly, U.S. partnerships and S-Corporations should not recognize QEF inclusions or MTM amounts, make PFIC purging elections, or file Form 8621. The Treasury and IRS noted that the new reporting on a partner’s Schedules K-2 and K-3 from a partnership is expected to enable the partner to make a QEF election.


The Proposed Regulations provide transition rules for QEF elections made by U.S. partnerships and S-Corporations. These transition rules will be effective for tax years of a PFIC ending on or before the date of publication of these rules as final regulations.


There are special rules concerning the transfer of QEF stock to U.S. partnerships and flow-through entities amongst other miscellaneous PFIC rule changes.


Do you have questions regarding PFIC tax reporting, PFIC determinations, or outbound tax planning? Contact International Capital Associates, LLC to discuss.

U.S.-Russia Tax Treaty Suspension

June 18, 2024
The U.S. Department of the Treasury announced on June 17, 2024, that the United States has formally notified the Russian Federation about the suspension of certain articles and provisions of the Convention between the United States of America and the Russian Federation for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital, signed at Washington, June 17, 1992. This suspension will take effect on August 16, 2024, and will continue until otherwise decided by the two governments. This decision is in response to the Russian Federation's notification on August 8, 2023, expressing its desire to suspend specific articles and provisions of the Convention and the Protocol. The announcement can be seen at United States’ Notification of Suspension, By Mutual Agreement, of the 1992 Tax Convention with Russia | U.S. Department of the Treasury . Taxpayers who rely on the U.S.-Russia income tax treaty should plan for this suspension. Please contact International Capital Associates, LLC if you need help planning for the treaty suspension or if you need other U.S. tax services .

U.S. Internal Revenue Service Releases Updated Form W-8EXP With Updates for Qualified Foreign Pension Funds

December 11, 2023
In November 2023, the U.S. Internal Revenue Service released an updated Form W-8EXP. The Form W-8EXP is a U.S. withholding tax certificate for foreign governments or other foreign organizations. Confusingly, the words “qualified foreign pension fund” do not appear on the Form W-8EXP. However, the updates to the Form W-8EXP are intended to allow a non-U.S. pension fund (or qualifying entity) to certify its Qualified Foreign Pension Fund status. A non-U.S. pension fund may certify that it is a “Withholding Qualified Holder Under Section 1445” provided it meets the requirements of Section 897(l) and Treas. Reg. 1.897(l)-1 as a Qualified Foreign Pension Fund. A “Qualified Holder” includes certain wholly-owned entities that meet the requirements of Treas. Reg. 1.897(l)-1(d)(2) or (3). A “Withholding Qualified Holder” also consists of a non-U.S. partnership wholly owned by Qualified Holders. Unfortunately, Form W-8EXP still does not contain sections to allow the taxpayer to claim the benefits of a U.S. income tax treaty. Non-U.S. pension funds and governments will still need to complete Form W-8BEN-E to claim U.S. income tax treaty benefits with a U.S. withholding agent, such as reduced dividend and interest withholding rates. The release of the updated Form W-8EXP does not invalidate any prior Qualified Foreign Pension Funds certifications. In the future, U.S. withholding agents may request a valid Form W-8EXP instead of other Qualified Foreign Pension Fund certifications. A Withholding Qualified Holder should ensure that the Form W-8EXP is complete and valid to make a Qualified Foreign Pension Fund certification using the Form W-8EXP. Please contact International Capital Associates, LLC if you need help determining if the entity is considered a Withholding Qualified Holder, if you need assistance completing Form W-8EXP , or if you need other U.S. tax services .