A US holder with shares in a Passive Foreign Investment Company (PFIC) will likely realize that there can be negative tax implications for being a holder of a PFIC. Luckily, these consequences can be avoided in two ways: by either making a Qualified Electing Fund (QEF) election or by making a mark-to-market election. This article will provide a general understanding of how to make a Qualified Electing Fund (QEF) election as well as some of the effects that these elections can have.

PFIC – Qualified Electing Fund (QEF) Election

Who can make a QEF election?

First, it is important to understand who is eligible to make a QEF election. Direct or indirect shareholders of a PFIC can elect to make a PFIC a QEF. Each shareholder that wants to have a PFIC treated as a QEF has to make an individual election. There are some exceptions to who can make a QEF election, so contact us today for a consultation if you want to find out if you are eligible or if you would like any additional information.

How does a shareholder make a QEF election?

A QEF election has to be made on or before the income tax due date for the year in which the holder wants to make the election. One step a holder wishing to make this election must follow is to properly fill out Form 8621, which is an information return form for holders of a PFIC or QEF.

What are the effects of making a QEF election?

Making a QEF election will allow the holder’s gross income to be taxed as capital gain instead of being taxed as ordinary income. The tax rate for capital gains is generally lower than ordinary income tax rates. If a holder of a PFIC does not make a QEF election, then the holder will have to pay ordinary income tax rates. This is why it is important to find out if the holder is eligible for a QEF election.

Takeaways

Being a holder of a PFIC can have its negative consequences. To ensure the holder is not impacted by these consequences, the holder should look into eligibility for either a QEF election or a mark-to-market election.

There is a lot of complicated information to process if you are a shareholder of a PFIC. Contact us today for a consultation if you would like to know if you are eligible to make QEF election or a mark-to-market election, or if you want any additional information.