Saving Taxes with the Controlled Foreign Corporation (CFC) Overlap Rule for Passive Foreign Investment Company (PFIC)

Tax Planning with PFIC – CFC Overlap Rule

The 1997 Tax  Act added a provision that treats a PFIC that is also a CFC as not a PFIC with respect the U.S. shareholders of the CFC.[1]   This rule is found in tax code section 1297(d).

The rule applied to the portion of the shareholder’s holding period after December 31, 1997, during which the corporation was a CFC and the shareholder was a U.S. shareholder.

The tax law provides

“(d) Exception for United States Shareholders of Controlled Foreign Corporations-

“(1) In general”
“For purposes of this part, a corporation shall not be treated with respect to a shareholder as a passive foreign investment company during the qualified portion of such shareholder’s holding period with respect to stock in such corporation.”

“(2) For purposes of this subsection, the term “qualified portion” means the portion of the shareholder’s holding period—”
“(A) which is after December 31, 1997, and”
“(B) during which the shareholder is a United States shareholder (as defined in section 951(b)) of the corporation and the corporation is a controlled foreign corporation.”

Congress added this provision to reduce the complexity caused by the interaction of these two anti-deferral regimes.[2]

This means that shareholders of a controlled foreign corporation do not file the PFIC form 8621.  Also, the harsh, very harsh, anti-taxpayer PFIC laws do not apply. This new law started on January 1, 1998.

form 8621, pfic, overlap, overlap rule, CFC,

Tax Planning CFC and PFIC Overlap Rule on Form 8621.

I have inserted the portion of Form 8621 that explains this law.  

Please note, that the shareholder of the foreign corporation does file a simplified  Form 8621 completing only the five easy lines on Part I.

If you are a CPA and need help, then give me a call.  If you are not a CPA, then have your CPA call me.

Please do not call me if you do not have a CPA.


[1] I.R.C. § 1297(e).

[2] 1997 House Report, supra note 302, at 533.

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