OFFSHORE PRIVATE EQUITY COMPANIES: How to file new IRS Form 8621 for a Qualified Electing Fund or Passive Foreign Investment Company – It’s mandatory for tax years 2014 and beyond.

http://www.theguardian.com/world/2012/aug/23/gawker-mitt-romney-offshore-accountsThere are approximately 480,000 active offshore companies in the BVI and about 100,000 offshore companies registered in the Cayman Islands. I estimate that over 95% of these offshore companies meet the IRS definition of a Passive Foreign Investment Company (PFIC) and/or Qualified Electing Fund (QEF). Most all these offshore companies are currently non reporting and non-compliant (and the IRS knows this); and beginning in 2014 the IRS is making it necessary/mandatory for an American shareholder in any PFIC to file new Form 8621. http://www.irs.gov/pub/irs-pdf/f8621.pdf

What’s going to happen in the BVI and in Cayman? Time will tell. Dealing with FATCA, PFICs, FBARs and form 8621 compliance is an on going issue. https://www.linkedin.com/pulse/new-irs-form-8938-created-fatca-2010-can-filing-avoided-tax-havens?trk=prof-post

Sidebar: Goldman Sachs (Cayman) Trust, Limited operates as a subsidiary of Goldman Sachs (Cayman) Holding Company providing services to PFICs of clients and their executives. https://www.youtube.com/watch?v=wBUz2RocJ8A

Offshore Tactics Helped Increase Romneys’ Wealth http://www.nytimes.com/2012/10/02/us/politics/bains-offshore-strategies-grew-romneys-wealth.html?_r=1

http://www.theguardian.com/world/2012/aug/23/gawker-mitt-romney-offshore-accounts

Was this a US$2billion tax avoidance scheme using Cayman Island PFICs/companies?  https://www.linkedin.com/pulse/dear-wealth-managerstax-attorneys-tax-havens?trk=pulse_spock-articles ♣ contact taxman@batelnet.bs for more information

Charles Schwab is “hiding out” in the Cayman Islands too… http://cym.bizdirlib.com/node/514

If a US person owns even one share in a QEF/PFIC he will need to file the form. In this article I will show you how to File Part I of Form 8621 for a US taxpayer who has transferred $1,000,000 in the Startup year to his “offshore private equity company”.

BUT DON’T GET ALARMED. EVEN If US person X is in the 35% income tax bracket, his tax liability for 2014 on the $100,000 in ordinary income earned by the offshore QEF would be about $70. http://www.law.cornell.edu/uscode/text/26/1293

Using the example #1 at this link https://tomazz1.wordpress.com/2014/03/08/tax-planning-for-pfics-and-cfcs-and-fatca/ US person X buys 100 shares in Foreign Company A (FCA) for $1,000,000. FCA is a new, start up offshore company in its first year. Each share has a price/value of $10,000 – and there are 50,000 authorized share capital for FCA in the company’s Articles of Incorporation. Please, review the link for the corporate structure using two QEFs – one owned by the other.

Question #1 of Part I on Form 8621 asks you for … “Description of each class of shares held by the shareholder.” US taxpayer would answer 99 non-voting stock + 1 voting share (all with a value of $10,000 each).

Question #2 of Part I on Form 8621 asks “Date shares acquired during the taxable year, if applicable” US taxpayer would answer that the shares were purchased on June 1, July 1, August 30th, and December 29th in 2014.

Question #3 of Part I on Form 8621 asks US person X to supply “Number of shares held at the end of the taxable year:” US person X would answer 99 non-voting stock + 1 voting share or 100 shares in TOTAL Question #4 is a check box: Value of shares held at the end of the taxable year (check the appropriate box, if applicable): (a) $0-50,000 (b) $50,001-100,000 (c) $100,001-150,000 (d) $150,001-200,000(e) If more than $200,000, list value: US person X answers (e) and writes in the box $1,000,000.

Question 5 of part I asks: Type of PFIC and amount of any excess distribution or gain treated as an excess distribution under section 1291, inclusion under section 1293, or inclusion or deduction under section 1296: (a) Section 1291 $_________ (b) Section 1293 (Qualified Electing Fund) $100,000 (c) Section 1296 (Mark to Market) $ _______ US person answers (b) for a Qualified Electing Fund and types in $200 (assuming pro rata share 0f  $100,000) See https://www.law.cornell.edu/uscode/text/26/1293.

In Part II US person checks box A and declares his investment is in a Pedigreed Qualified Electing Fund. The word “pedigreed” is an IRS term that appears in the instructions for Form 8621. http://www.irs.gov/pub/irs-pdf/f8621.pdf  http://www.irs.gov/pub/irs-pdf/i8621.pdf

When US person X checks Box A in Part II it tells him to Complete lines 6a through 7c of Part III.  6a of Part III tell US person X to enter his pro-rata share of the ordinary earnings of the QEF. Assuming there was $100,000 in ordinary income from short term capital gains, US person X enters $200 (100 shares divided by 50,000 shares outstanding = X’s pro rata share of FCA ordinary income).

6c says “Enter this amount on your tax return as ordinary income” US person X therefore adds $200 to his form 1040. If US person X is in the 35% income tax bracket, his tax liability for 2014 on the QEF A above would be about $70.

THE IRS CALLS QUALIFIED ELECTING FUNDS THAT FILE FORM 8621 IN THEIR FIRST YEAR of business- PEDIGREED QEFs. It should be obvious by the terminology that they prefer pedigreed QEFs to all other types of non-pedigreed QEFs and PFICs.

Advantages and comparison of the PFIC/QEF regime with the CFC regime

 Unlike the CFC provisions of section 951 thru 958 (Controlled Foreign Corporations), there is no “element of control” that applies to directors or shareholders of a PFIC or QEF. If a majority of the directors are US persons under the CFC rules, the offshore company would be a CFC, and US shareholders would need to pay taxes on the company’s Subpart F income even if undistributed to them .

There are no such director control provisions for QEFs or PFICs. A sole US person could be the only director of the PFICs /QEFs, or there could be several US directors for the PFIC. In either case, there are no “control” issues or adverse tax consequences in having all US directors under the QEF/PFIC regime.

NOTE: Management and employees for a QEF/PFIC should/must be in the offshore jurisdiction, and NOT within the USA. A foreign company that has its management within the US (with or without using a physical US office or permanent establishment), would/might be construed as “Doing business within the United States” and all of the offshore company profits could be subject to US taxes by the IRS.

In addition the PFIC/Foreign Company/QEF would need to file a US income tax return if it’s doing business within the United States. Distributions of earnings and profits by a CFC will usually be considered a dividend under the CFC regime and taxable. But, under the PFIC/QEF regime when a QEF makes the election to be taxed currently as described above, this is not a problem, and distributions can be made without the fear that the IRS will classify them as a TAXABLE DIVIDEND.

For example, if QEF (i.e., FCB) in example #1 (FCB) buys shares in a domestic US company with $1,000,000 of earnings and profits and that company buys a private home, this would not be considered a dividend distribution to its shareholders, BUT under the CFC regime it would be considered a taxable dividend. https://tomazz1.wordpress.com/2014/03/08/tax-planning-for-pfics-and-cfcs-and-fatca/

Finally: The IRS does not require that a PFIC/QEF file a US income tax return. IRS can’t/won’t audit a “no tax return required/filed” situation! For offshore Bahamian or Anguilla companies with banking at a Bermuda bank, visit this link https://tomazz1.wordpress.com/2014/04/13/offshore-company-formations-banking-Bahamas/ Call or email me if you have questions taxman@batelnet.bs

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About New Providence

Overseas agent - Anguilla registrar (since 2001) Company Formations/Trusts New Providence Estate Planners, Ltd. (since 1995) 54 Sandyport Drive P.O. Box CB 11552 Nassau Bahamas 1 242 327 7359 Fax/phone: (242) 327-7359 E-mail: taxman@batelnet.bs www.bahamasbahamas.com http://seekingalpha.com/user/7226491/profile Need good advice for your international operations? Hire us. Need planning that really works to fend off the IRS? I have 23 years experience. We form offshore company and foreign trusts. Over 1,330 offshore companies since 1995. We can win with FATCA, because we know US Tax Code.
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3 Responses to OFFSHORE PRIVATE EQUITY COMPANIES: How to file new IRS Form 8621 for a Qualified Electing Fund or Passive Foreign Investment Company – It’s mandatory for tax years 2014 and beyond.

  1. Pingback: Cut capital gains tax rate to below 1% pa with Qualified Electing Fund (called QEF by IRS). Mitt Romney filed 10 form 8621 for his 10 QEFs in 2010. Must be something to it, ya think? | $1.2 trillion dollars on deposit in Cayman Banks – up 10% in 200

  2. Goldman Sachs (Cayman) Trust Limited does not publish their Cayman email address and probably won’t take an account under $20 million, but they are in the Caymans and almost all the other tax havens too. Avoiding US CG taxes with PFICs and QEFs is the biggest tax break for them too IMO.
    http://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=139744266

    http://www.bloomberg.com/news/2013-05-09/goldman-sachs-traders-lost-money-on-two-days-in-first-quarter.html Founded in 1991 Goldman Sachs (Cayman) Trust Limited provides full offshore fund administration and shareholder services primarily for hedge funds utilizing Goldman Sachs & Co as the prime broker.

  3. Pingback: Cut capital gains tax rate to below 1% pa with Qualified Electing Fund (called QEF by IRS). Mitt Romney filed 17 form 8621 for his 17 QEFs in 2010. Goldman Sachs (Cayman) Trust, Limited operates as a subsidiary of Goldman Sachs (Cayman) Holding Company. W

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