Recognizes gain on a direct or indirect disposition of PFIC stock,

Receives certain direct or indirect distributions from a PFIC, or

Is making an QEF election as described below.

The undistributed earnings of a PFIC whose shares are not marketable are subject to U.S. tax under one of two methods, each of which is directed at eliminating tax deferral benefits.

Under the first method, the investor in a PFIC can elect to be treated as a Qualified Electing Fund (QEF) which is only available if the PFIC provides the investor with the necessary information.  A U.S. investor in a PFIC who elects in a timely manner to treat the PFIC as a QEF will generally be subject to current U.S. federal income tax for any taxable year in which the fund qualifies as a QEF on the U.S. investor’s pro rata share of PFIC’s (i) “net capital gain” and (ii) “ordinary earnings” (the excess of earnings and profits over net capital gain), which will be taxed as ordinary income to the electing U.S. investor regardless of whether such amounts are actually distributed.  

NOTE: A QEF election will only be effective if the PFIC provides certain information to the U.S. Holders.

Under the second method, a U.S. investor who fails to make a QEF election is taxed under special excess distribution provisions.

Here, a U.S. investor is permitted to defer tax on the PFIC's undistributed income until the U.S. investor either disposes of the stock or the PFIC makes an excess distribution.

When the U.S. investor disposes of the PFIC stock, the gain on the disposition will be taxed under the excess distribution rules. If, on the other hand, the U.S. investor receives an excess distribution, the entire excess distribution will be taxable, without regard to either the PFIC's earnings and profits or the amount of the U.S. investor’s investment in the PFIC.

If, on the other hand, a U.S. investor receives an excess distribution, the entire excess distribution will be taxable to the U.S. investor without regard to either the PFIC's earnings and profits or the amount of the shareholder's investment in the PFIC.

NOTE:  If the PFIC has a deficit in earnings and profits for the year, there will be no income inclusion for the U.S. investor and no loss will flow through to the U.S. investor.

Jeff Lonsdale
Logical Formulas
4516 Lovers Lane #122
Dallas, TX 75225
(214) 769-3322

Jeff@logicalformulas.com