Just want to share this with everyone here. One of the CPAs I talked to advised me that on top of FATCA, FBAR and 8621, I will also need to file tax form 926 ( A U.S person transfers > $100,000 cash to a foreign coorporation.) Then, I went back to the other one and asked if I needed to, the other CPA also confirmed it. Has anyone heard of the form 926?
Thank you @wkb for cluing me in to this disastrous gotcha! I had never heard of form 926 in all of these conversations about PFICs. I read up on this after you mentioned itāthrough a lot of extremely cryptic and baffling regulatory text full of circular definitions. As far as I can tell, this is a hard requirement for investing in a GV fund, there are severe penalties (10-40% of the total investment, or 100K$) for inadvertent noncompliance with the filing requirement, and I would never have had a clue about this requirement unless you had mentioned it. I have never seen it mentioned on any discussion or reference about PFICs. Ugghh!
@wkb Thanks for posting.
After looking at the form briefly, the good news is that for an individual contributing cash to the foreign fund, completing the form will be SUBSTANTIALLY easier than if the contribution was intangible property or property with built-in losses.
This scenario would probably apply to most or all of the people reading this.
The instructions refer to a āforeign corporationā. The regulations distinguish between a foreign partnership in one instance. I donāt deal a lot with IRS code but I am not 100% sure that this would include a collective such as some of the GV funds. Did your CPA address that at all?
Youāre welcome. Thanks to you, too. If you didnāt started this thread about PFIC, I would have no clue about form 8621.
The scary thing to me is that only one of the CPAs mentioned this. (did the other one know about this form and just didnāt give me all the details but will file it when the time comes? Iām not sure) I probably will talk to another CPA this year (I have some time because my investment will be on the 2021 return).
They didnāt really go into the details. I just met with them about a quote for tax return for after when we do the investment. I just told them the whole situation about the GV investment. ("we are thinking of investing in a PE fund with an investment company in Portugal, etc.) They gave me a quote along with the list of forms they will file on my behalf.
@wkb
It is possible that the CPA is not totally familiar with this situation. My CPA admitted to me that he has no experience with PFIC or foreign tax related issues, but offered to help anyway. Some of these regulations are so convoluted and layered that it would be hard to expect a CPA who has never trained or worked in this area to know all of these rules. As you said, that is scary but I donāt blame the CPA as much as the bureaucracy.
I donāt blame them at all either. I did come across a few CPAs that will not touch PFIC at all. The 2 I talked to are familiar with PFICs and have done it before. From what I gather while searching for a CPA, CPAs that work with expats will have experience with PFIC.
Just FYI
I would only choose a GV fund that will issue an annual statement.
Once I get the annual statement, I will elect QEF and then there is a company that will generate the Form 8621 for me based on the annual statement for about $200. Money well spent in my opinion.
Looking at the relevant sections of tax code, I actually donāt think itās applicable. The thrust of it is if youāre transferring cash or assets around in relation to corporate reorganizations, in such a way that might conceal a gain. Every referent of 6038B is to the code on corp reorgs or liquidations.
None of the funds are actually organized as corporations; theyāre structurally partnerships or unit trusts. Maybe some are, but I havenāt seen them.
Doesnāt feel right, to me. But Iām not a tax lawyer or CPA.
But kudos for saying something. thatās what this thread is for, broadly.
Here is another interesting quote; apparently a ritual is available to nullify the PFIC filing requirement if an investment ceases to qualify as a PFIC:
Shareholders in a former PFIC can make a āpurging electionā under Sec. 1298(b)(1), which will be treated for tax purposes as a deemed sale or deemed dividend. The result of the election is that the shareholderās stock will no longer be considered stock in a PFIC.
Ok, so this then may trigger the requirement to file Form 8865
A U.S. person files Form 8865 to report the information required under:
Section 6038 (reporting with respect to controlled foreign partnerships).
Section 6038B (reporting of transfers to foreign partnerships).
Section 6046A (reporting of acquisitions, dispositions, and changes in foreign partnership interests).
Foreign partnership.
A foreign partnership is a partnership that isnāt created or organized in the United States or under the law of the United States or of any state or the District of Columbia. If a domestic section 721(c) partnership is formed on or after January 18, 2017, and the gain deferral method is applied, then the section 721(c) partnership is treated as a foreign partnership for purposes of Form 8865 and these instructions. See Temporary Regulations section 1.721(c)-6T(b)(4).
I actually did some more research on this. The 8865 form seems most relevant to a GV investment. There is also a Form 5471 (Information Return of U.S. Persons With Respect To Certain Foreign Corporations). All of the regulations are somewhat dizzying.
Might. It just depends on the fund. I think Rock would fall under a unit trust or simply āfundā, though.
That said, from the looks of it, 8865 still doesnāt likely apply, because all categories of filers apply to 10% interest owners except for 3, and 3 only applies if you transfer property - and Iād have to dig for the referent, but property is quite distinct from cash. (Thereās tangible and intangible property, but cash is neither.)
You may be right that the funds donāt meet the definition of partnership or that property does not include cash. I suspect that most GV investors will not have 10% ownership of the fund. I just wanted to put these out there so people can at least have a conversation with their CPAs on it.
As a longtime lurker in these forums, I thought Iād contribute a tiny bit to this conversation. After a bunch of teeth-gnashing over the past ~6 months about whether to do the real estate option or the investment option, we ultimately decided to go with the investment option, and are in the very final rounds of completing our due diligence on two of the funds. I thought it might (or might not) be useful to share my thesis on why we think the investment option is the better route. You may or may not agree with all of these points, but this is how we arrived at the decision.
Transaction costs. The real estate option has a bunch of transaction costs. Youāre paying something like 6% off the bat to acquire a 500K property. The investment option has some set-up fees, but itās nothing like the nickel-and-diming on the real estate side.
Time/sweat/$$$ overhead. I own a couple of rentals here in the US and thereās upkeep involved. No matter how much you think itāll be hands off, it isnāt. The A/C dies, or the sewer line is broken. Thereās always something. And being 5000 miles away makes it really hard to manage all that stuff. If you want something more turn-key, you pay through the nose, or pay with stress, and usually a bit of both.
Covid/timing. The July 1 limitation on Lisbon/Porto/Algarve deadline makes it really hard to travel there to see properties. The investment option is a bit more cut and dry. F2F meeting isnāt a necessity. Way easier to get the ball rolling ASAP vs real estate.
Risk tolerance. While Iām not sure a PE firm in Portugal is where Iād put my first 350K, there are worse options. My expectations are moderated. If I get my money back with no gain after 6 years, Iād probably take it on the chin and say thatās the cost of doing business.
The taxes part seems scary but it isnāt. Make sure you work with one of the firms that is at least familiar with PFICs and QEFs. Call around a few CPAs in any major city and youāre usually bound to find someone that at least understands the moving parts. It might cost a few grand the first year, but after itās plug nā play. As someone on here said, as long as you know āitās a thingā, you can sort it out.
Golden Visa real estate investor bogeyman. This is a bit of my own personal view, so take it with some salt. It seems that Golden Visa real-estate investors have been identified as a contributor to some of the housing issues facing working-class folks in Portugal. Iām mindful of being on the wrong-side of prevailing sentiment when it comes time to apply for citizenship. You never know how the rules might shift over time, so Iām explicitly choosing the investment fund, and choosing a fund that doesnāt invest in real estate. My nightmare would be that Iām 3 years into a fund thatās heavily invested in Lisbon real estate, and they say theyāre disqualifying investment funds that invest in Lisbon real estate. Unlikely, I know, but given the capital is locked up, Iād rather have it be removed from areas of scrutiny, even if it means that capital yields less.
I see it as I transfer the money to XYZ Sociedade de Capital de Risco, S.A (fund manager) for the fund subscription. I could be wrong on this. I havenāt talked to my CPA again because I only need to worry about this issue in the 2021 tax return. This article talks about capital contribution. Itās not the same as subscribing to the fund, but almost the same idea (maybe?) https://hodgen.com/cash-into-your-foreign-corporation-means-form-926/
yeah, thatād be the name of the fund. You and your CPA can hash it out. But the article you reference talks about āyourā foreign corp, and the fund is definitely not yours Itās a regulated registered investment fund, so Iād think thatād get you out from underneath anything like 926. But thatās me.
I gave up and asked a CPA. For what its worth, she said I donāt need to worry about Form 926. It sounds as if some CPAs are giving different advice.
There appears to be a distinction depending on what percentage of ownership you have in the fund and what percentage is owned by US investors at least when you start contemplating Form 8865, Form 926, etc. So the advice may vary depending on your actual investment. This seems to validate the point Jeff is trying to make about the corporation being āyourā corporation. In other words, if YOU set up a foreign corp and transfer assets to it, it may be treated differently than transferring assets to a regulated PE fund.
Yeah, I totally get why form 926 exits ā to catch any asset transfers to foreign corporation as @jb4422 also pointed out couple of weeks back. Maybe the CPA misunderstood what I told them and thought that I am just transferring money to a company to invest in Portugal and not to a fundā¦ I havenāt talked to them again. I thought Iāll worry about it later this year because my investment was just made this year.
Itās a regulated registered investment fund, so Iād think thatād get you out from underneath anything like 926. But thatās me.