The fund may provide an annual statement to the bank and it may contain all the information thatās required on the PFIC Annual statement however that is not necessarily sufficient to make a QEF election. The fund itself must provide the PFIC Annual Statement and that statement has very specific requirements, outlined above. Clearly the fund manager does not truly understand whatās required for US taxpayers.
Agree that as far as I understand it, the holding bank (ex Bison) would have no role in doing this. Some people use different holding banks, so that makes no sense. I have now actually received my first annual statement, and expect my other fundās imminently. Both are from the fund and their direct management company.
I would run fast and far from this fund. For them to say that itās the bankās responsibility shows their ignorance and the lack of willingness to find out what a PFIC is. Or worst, if they deliberately lied, once you invest in their fund and they are not issuing the PFIC statement, you canāt do anything about it because they already have your money.
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It was 5 months ago I had a similar conversation with the aforementioned fund manager. They told me that they had many US investors and none of them raised PFIC as an issue. In other words, shut up and subscribe you stupid American. It is quite shocking that 5 months later they are still pushing the same narrative. Caveat emptor.
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Larry, would you consider actually sharing the contents of your PFIC statements for our edification? Obviously wipe off numbers and identifying information (including the fund name), but it would be interesting to know whatās in an actual statement. Or is it really just āinterestā ādividendsā ācap gainsā with some fluff and thatās it? Understood if thatās too much of a reach.
Vanguard has a directory of PFIC Annual Statements for all of their Canada-domiciled exchange-traded funds (ETFs) here: Vanguard Canada
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Thatā awesome, thanks for the examples!
oh, so it is just that simple. thanks!
Regarding New Edge fund. I spoke to Paulo Magro da Luz who works with the fund management company https://www.quadrantiscapital.com/. He stated that New Edge will not produce a PFIC statement. So, even though this fund is open to US citizens, it is not very attractive taxwise.
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Can anyone in the thread introduce me to a tax accountant/lawyer they feel comfortable working with on filing taxes with PFICs? You can PM the details.
I would like to do some due diligence with a professional before making my decision on the funds to invest with.
BTW, I am looking at Shilling Founders Fund, and they invest in startups - that rarely provide any dividend and are primarily illiquid assets that appreciate in value over time. In my non-legal and non-CPA understanding, they are not investing in passive income assets, so would probably really not qualify as a PFIC? Am I thinking about this correctly? They said they will issue PFIC statements each year through their accountants - that makes me feel better, but I was just wondering if they are a PFIC at all. Any thoughts on taking a stand that this is NOT a PFIC - as I cannot understand on what basis it would be? Or is it safer to just call it a PFIC and QEF elect anyway.
Total grey area. Youāre going to have to come to an understanding with your accountant on the matter and make a determination that you feel you can defend, because youāre the one thatās going to have to defend the choice, not the fund.
The thing is, itās still passive income to you, and the definition of passive income does seem to include capital gains. From IRS guidance:
The PFIC rules of the Internal Revenue Code address situations in which taxable U.S. persons indirectly hold assets that earn passive income (generally interest, dividends, capital gains, and similar types of income) through a foreign corporation. Without the PFIC rules, the income earned by these assets would be subject to U.S. tax only when and if that income is distributed as dividends by the foreign corporation or, as capital gains, when the shares of the foreign corporate stock are sold by the U.S. shareholder. In the absence of the PFIC rules, these types of investment arrangements could significantly lower the effective tax rate on passive income faced by U.S. investors from that incurred if the assets were held directly.
Under the PFIC statutory rules, a foreign corporation is considered a PFIC if at least 75 percent of the corporationās gross income for a given taxable year is passive income (the Income Test) or if at least 50 percent of the corporationās assets are assets that produce passive income (the Asset Test). The PFIC itself is not subject to U.S. tax under the PFIC regime; rather, only the U.S. owner of a foreign corporation is subject to that regime. The U.S. owner of shares of a foreign corporation consequently must obtain the appropriate information, usually from the corporation, in order to determine whether that corporation is a PFIC (by satisfying these and other tests) and if so what tax is due as a result.
That said, even PFIC QEF treatment here is hardly terrible. Ok, so capital gains are passed through to you and taxable when realized. The fund isnāt going to realize any gains til it sells a startup, which gets classified as cap gain, and it will take years and years. So instead of being able to treat the entire fund as one long capital gain, you get a bunch of smaller capital gains but theyāre all pretty long-term plays. And if a startup fails, you take the cap loss early too. That might even be beneficial to you.
That is, unless the fund actually ends up realizing business income as a result of being a part owner of the company. This is hard to know without knowing exactly how the investments are structured and whether the business income will pass through or not. I imagine it will probably not but who knows.
Another thing to always remember:
If a fund ends up being more than 50% owned by AmCits, it transitions from being a PFIC to a CFC. This isā¦ undesirable. Is this likely? No. Will IRS even notice? Probably not. Just something to keep in mind.
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this article has disappeared. Any chance any of you has a copy of it?
Does the QEF election happen when you file taxes for the year the investment was made? ie, if I invested in 2021, the QEF is made with 2021 tax filing in April/Oct of 2022? Or does it have to happen in the quarter the investment was made?
Also, is there now any better understanding if there is Form 926 necessary? Is a fund a foreign corporation or all the corporations the fund invests in is what requires the Form 926?
Of course, I am asking my accountant all these questions, but not sure they are the most well versed with doing foreign investment reporting so any research that has already been done will help me ask more sharper questions of them.
Unfortunately, no. I donāt have a copy of it. But this lawfirm published a lot of info on PFIC. You can look in their blog section. You can also make an appointment to talk to the CPA at this firm. She charges less than $300 for the consultation.
To your first question I was told by an expat CPA with whom I consulted that you would file with your taxes in the following year.
Itās not actually clear to me that 926 is all that necessary, depending on the actual investment.
The VC funds are all ārisk capital fundsā - and not corporations in any traditional sense. The intent of 926 appears to be very specific to corporations and partnerships, as described in sec 6038B, and I think the idea is to avoid you transferring a bunch of money to some company and then the company liquidating assets and thereby anonymizing the money in some way. shrug In any case, the FCR structure sure doesnāt seem like a corporation to me, and rather seems explicitly not to be one.
However you canāt use that as a blanket statement because you have to look at the structure of each individual investment. Mercan investments for example would def be 926-eligible, at least for the part that isnāt the purchase of the deed.
I did ask my accountant, but I suspect that, having finally reached the end of the tax season road (yes itās october), heās gone out to pasture for a while.
I also believe itās due by April/October, your tax filing deadline for the year the investment was made. See this IRS guidance:
When To Make the Election. Generally, a shareholder must make the election to be treated as a QEF by the due date, including extensions, for filing the shareholderās income tax return for the first tax year to which the election will apply (the āelection due dateā). See Retroactive election below for exceptions.
Admittedly, I think I made a bigger deal out of PFIC than was necessary. As the wise @jb4422 said somewhere upthread, if you know the regulations exists you are ahead of most people. In hindsight, I think that is true.
When I raised the PFIC issue with my longtime CPA, he said he was very uncomfortable with the notion and did not really want to invest the time in learning. He was relieved when I mentioned I was going to ask an expat-focused CPA. I then went to the CPA specializing in expats. They had no issues whatsoever and just took care of it and the fees were not that expensive. I donāt remember now which forms they filed but definitely FBAR was one of them. I have purposely tried to forget about anything PFIC related at this point.
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Could you DM me the expat focussed CPA referral? How did you go about finding them?