What is the benefit of a QEF election?
The QEF or Qualified Electing Fund election under §1295 is optional method of taxation available for certain PFICs. This election most closely mirrors the US taxation of US mutual funds and allows for capital gains treatment of some of the income as long as any prior §1291 gain has been dealt with.
Who makes QEF election?
Any U.S. shareholder of a passive foreign investment company (PFIC) can elect to treat the PFIC as a qualified electing fund (QEF) and be taxed currently on a share of the QEF’s income (IRC § 1293 ).
What is a Section 1295 election?
1295. Qualified Electing Fund. Such an election, once made with respect to any company, shall apply to all subsequent taxable years of the taxpayer with respect to such company unless revoked by the taxpayer with the consent of the Secretary. …
Is rental income PFIC?
Issues: Rental income by default is treated as passive unless the “active rents” test is met.
Do you have to file 8621 every year?
If you are a direct or indirect shareholder of a PFIC, you are required to file IRS Form 8621 for each year that you: Recognize gain on a direct or indirect disposition of PFIC stock, or. Receive certain direct or indirect distributions from a PFIC, or. Make an election reportable on Form 8621.
What does QEF stand for?
“Q.E.F.,” sometimes written “QEF,” is an abbreviation for the Latin phrase “quod erat faciendum” (“that which was to be done”). It is a translation of the Greek words used by Euclid to indicate the end of the justification of a construction, while “Q.E.D.” was the corresponding end of proof of a theorem (cf.
Do I have to file 8621 every year?
The annual filing requirement Then, the PFIC shareholder must attach Form 8621 to its federal income tax return (or information return) each tax year, unless one of the exceptions discussed below applies. A PFIC shareholder must file Form 8621 for each PFIC the shareholder owns.
Is QEF an annual election?
A QEF Election in a Year After the Year of Purchase Under the QEF tax regime, a U.S. taxpayer’s investment in a PFIC is generally subject to the same tax rules and rates as a domestic investment—except that dividends are not considered qualified dividends.
What is a Section 1291 Fund?
Section 1291 Fund A PFIC is a section 1291 fund if: The shareholder did not elect to treat the PFIC as a QEF or make a mark-to-market election with respect to the PFIC, or. The PFIC is an unpedigreed QEF (as defined in Regulations section 1.1291-9(j)(2)(iii)).
What are Unreversed inclusions?
(d) Unreversed inclusionsFor purposes of this section, the term “unreversed inclusions” means, with respect to any stock in a passive foreign investment company, the excess (if any) of— the amount included in gross income of the taxpayer under subsection (a)(1) with respect to such stock for prior taxable years, over.
How do I stop being a PFIC?
In order to avoid this treatment, here are some solutions:
- Keep the cash in a non-interest bearing account. Not having passive income will automatically disqualify the company from the income test.
- Acquire business assets.
- Contribute cash on an as-needed basis.
- Make a check-the-box election.
How do you determine if a company is a PFIC?
Under the income test, a foreign corporation is a PFIC if 75% or more of its gross income is passive income. Under the asset test, a foreign corporation is a PFIC if 50% or more of the average value of its assets consists of assets that would produce passive income.
How does a qualifying electing fund ( QEF ) work?
What Is A QEF Election? A QEF (Qualifying Electing Fund) election allows a PFIC to be treated essentially the same as a partnership in that income is taxed at the ordinary income tax rate and capital gains are treated as capital gains.
What is the tax treatment of a QEF?
A QEF, or Qualified Electing Fund, is a PFIC for which you have made a special election. The tax treatment of a QEF is better than the other two ways of taxing PFICs:
When is the best time to elect a QEF?
Because of restrictions on the use of the mark-to-market method, the QEF election is the more favorable approach for the majority of U.S. taxpayers—preferably elected in the year the investment is made or as soon as possible thereafter to begin the running of the holding period for a subsequent sale.
Can a QEF be sold as a capital gain?
Making the election will allow gains on disposition of pedigreed QEFs to be taxed as capital gains when they are sold.