QEF (Qualifying Electing Fund) Election For PFIC
Many banks, investment funds and information material tout a QEF election as the easy way out of escaping the default PFIC treatment. But, it is anything but that. This is based on the presumption that the company will provide the required information and make the required reporting in order to make a QEF election in the first place.
This is often not the case. While there are some large Canada mutual funds that provide the requisite information and reporting to make a QEF election, this is definitely the exception. While a QEF election is preferable to the default taxation of PFICs, unfortunately this is simply not an available option for the majority of PFIC holders.
For each year of the PFIC ending in a taxable year of a shareholder to which the QEF election applies, the PFIC must provide the shareholders with a PFIC Annual Information Statement. The statement must contain certain information, including:
- The shareholder’s pro rata share of the PFIC’s ordinary earnings and net capital gain for that taxable year, or
- Sufficient information to enable the shareholder to calculate its pro rata share of the PFIC’s ordinary earnings and net capital gain for that taxable year.
What Is A QEF Election?
A QEF (Qualifying Electing Fund) election allows a PFIC to be treated essentially the same as a partnership in that income is taxed at the ordinary income tax rate and capital gains are treated as capital gains. This is generally more favorable than a mark-to-market (MTM) election or the default punitive rules under Section 1291.
However, the investment company (the PFIC) must provide the shareholders with a PFIC Annual Information Statement signed by an authorized representative of the PIFC; an additional regulatory hurdle and burden that most PFICs are unable and unwilling to provide.
We are often asked if a taxpayer can make a QEF election without the PFIC Annual Information Statement and the answer is unfortunately no even if you have the information that typically would be provided by the PFIC.
If you don’t have the statement that meets all the regulatory requirements, the QEF election cannot be made. If you have not made a timely Qualifying Electing Fund election, then there are other complex considerations required in order to make a retroactive election.
PFIC and QEF rules can also overlap with broader expat foreign business reporting requirements. Tax Samaritan can help U.S. taxpayers abroad understand which forms and elections may apply to their foreign investments and entities.
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