1. U.S. Taxation of Foreign Investments November 13 th, 2014

2. Definition of a PFIC PFIC stands for Passive Foreign Investment Company A foreign company is a PFIC if : a) 75% or more of its gross income is passive (interests, dividends, capital gains, royalties etc.), OR b) 50% or more of the average value of its assets consists of assets that produce or are held for the production of passive income As a practical matter, the IRS considers pooled investments registered outside of the United States to be PFICs. This includes all foreign mutual funds, ETFs, etc.

3. U.S. Taxation of Foreign Mutual Funds The PFIC provisions apply to any U.S. person who owns directly, indirectly or by attribution an investment in a foreign corporation or fund that is considered a PFIC. The tax provisions refer to the tax treatment of distributions and/or gains from the sale of PFICs.

4. Tax Treatment of PFICs The total amount of gain from the disposition of a PFIC stock is called an excess distribution The gain from the sale of a PFIC stock is first divided by the number of days in a shareholder’s holding period and then allocated as follows: 1) Amounts allocated to days in the current year 2) Amounts allocated to days in prior tax years The amounts allocated to the prior year PFIC periods are subject to the highest tax rates for each year and an interest charge is applied as if there was an underpayment of taxes for the years in question.

5. Tax Treatment of PFICs Cont’d Example of gain allocation:

6. Tax Treatment of PFICs Cont’d Amounts allocated to the prior years are never included in the investor’s taxable income. Amounts allocated to the current year are included in taxable income and taxed at ordinary income tax rates. Losses from sales of PFICs are not recognized, ie. they cannot be netted against gains from sales of PFICs

7. Case 1 – with PFIC: FACTS: Oleh chadash emigrates to Israel in 2007. Married Israeli woman (non U.S. citizen) and is eligible for the 10 year exemption in Israel for reporting foreign source income. In 2013, taxpayer has the following: 1) Total dividends from U.S. stocks:$170,000 2) Net losses from disposition of PFIC $ 67,827 3) Israeli taxes paid:$ 0 No other income/credits to report

8. Case 1 - PFIC Tax Calculation Total gain: $79,243

9. Case #1, Page 1 Case #1, Page 2

10. New 3.8% Tax On Net Investment Income Form 8960  New tax levied starting 2013  The net investment tax is 3.8% on the lesser of: Modified adjusted gross income over the threshold amount (next slide), or Net investment income.  Imposed on individuals, estates and trusts.

11. New 3.8% Tax On Net Investment Income Con’t The Net Investment Income Tax applies if modified adjusted gross Income for the year exceeds the following thresholds: Net Investment Income Tax Thresholds Filing statusModified Adjusted Gross Income Married Filing Jointly or Qualifying Widow(er) $250,000 Single or Head of Household $200,000 Married Filing Separately $125,000

12. New 3.8% Tax On Net Investment Income Con’t Modified Adjusted Gross Income Modified adjusted gross income (MAGI) for the purpose of the net investment income tax is adjusted gross income with certain add-backs and deductions. Taxpayers who invest in PFICs increase adjusted gross income by the entire amount of PFIC gain.

13. Case 1: Form 8960: Net Investment Income Tax Line 13: Modified AGI AGI:$173,884 plus Adj: Total gain from disposition of section 1291 fund:$ 79,243 $ 253,127

14. Case 2 – No PFIC: FACTS: Same taxpayer as case 1, except income is as follows: 1) Total dividends from U.S. stocks:$170,000 2) Net loss from Israeli investments (not taxed as PFICs):$ 67,827 3) Israeli taxes paid:$ 0 No other income/credit items

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