What is a Qualified Electing Fund (QEF)?
A Qualified Electing Fund (“QEF”) election is an optional taxation method that can be used on a Passive Foreign Investment Company (“PFIC”). When available, it is almost always a favorable tax position to take.
It is important to note, in relation to the chain of ownership, only the first U.S. person who is a direct or indirect shareholder in the PFIC may make this election. The difficulty some have in making this election stems from the informational requirements on the PFIC.
The QEF election allows a PFIC to be treated the same as a U.S. based mutual fund. Income or gains increase the stock basis and are included in income. Any income is treated as ordinary income and a capital gain is treated as a long-term capital gain. However, this also means the non-U.S. based company must comply with IRS reporting requirements. This necessitates there being a large enough percentage of U.S. shareholders to convince the fund managers to fulfill the IRS’s requirements.
Additional difficulties can occur when a U.S. taxpayer makes this election beyond the first year. There are limited circumstances in which a U.S. shareholder may make a retroactive QEF election; pursuing a retroactive QEF election may involve a private letter ruling from the IRS. PFIC shares already subject to the default Section 1291 Election have complicated rules tied to them and will be bound to both sets of rules. This PFIC status may be “purged” through one of three additional elections. A U.S. shareholder may elect to make a gain recognition through a mark-to-market election or a deemed sale, which treats the PFIC shares as if they were sold at the time of the QEF election. Alternately, if the shareholder is a corporation, a deemed dividend election may be utilized. Finally, sometimes given market conditions, it is advisable for a taxpayer to employ a sell and re-purchase theory in order to obtain the election.
Regardless, we recommend exploring the following options with us or your tax attorney to better ensure you are maximizing your tax positions in light of 2012 tax law changes affecting passive income and PFIC tax returns:
- Retroactive QEF
- Sell & Reacquire
- Keep as a PFIC
Also see: IRS Form 8621, PFIC,
Related Terms: Passive Foreign Investment Company, PFIC, Foreign Corporation, IRS form 8621, Passive loss income, Offshore investment accounts, Offshore mutual funds, Retroactive QEF, Sell & Reacquire QEF, Section 1291 election, International capital gains