(a) Deemed dividend election.

(1) In general.—This section provides rules for making the election under section 1291(d)(2)(B) (deemed
dividend election). Under that section, a shareholder (as defined in paragraph (j)(3) of this
section) of a PFIC that is an unpedigreed QEF may elect to include in income as a dividend the
shareholder’s pro rata share of the post-1986 earnings and profits of the PFIC attributable to the
stock held on the qualification date (as defined in paragraph (e) of this section), provided the PFIC
is a controlled foreign corporation (CFC) within the meaning of section 957(a) for the taxable year
for which the shareholder elects under section 1295 to treat the PFIC as a QEF (section 1295
election). If the shareholder makes the deemed dividend election, the PFIC will become a
pedigreed QEF with respect to the shareholder. The deemed dividend is taxed under section 1291
as an excess distribution received on the qualification date. The excess distribution determined
under this paragraph (a) is allocated under section 1291(a)(1)(A) only to those days in the
shareholder’s holding period during which the foreign corporation qualified as a PFIC. For
purposes of the preceding sentence, the holding period of the PFIC stock with respect to which
the election is made ends on the day before the qualification date. For the definitions of PFIC,
QEF, unpedigreed QEF, and pedigreed QEF, see paragraph (j)(1) and (2) of this section.

(2) Post-1986 earnings and profits defined.

(i) In general.—For purposes of this section,
the term post-1986 earnings and profits means the undistributed earnings and profits, within the
meaning of section 902(c)(1), as of the day before the qualification date, that were accumulated
and not distributed in taxable years of the PFIC beginning after 1986 and during which it was a
PFIC, but without regard to whether the earnings relate to a period during which the PFIC was a
CFC.

(ii) Pro rata share of post-1986 earnings and profits attributable to shareholder’s
stock.

(A) In general.—A shareholder’s pro rata share of the post-1986 earnings and profits of the
PFIC attributable to the stock held by the shareholder on the qualification date is the amount of
post-1986 earnings and profits of the PFIC accumulated during any portion of the shareholder’s
holding period ending at the close of the day before the qualification date and attributable, under
the principles of section 1248 and the regulations under that section, to the PFIC stock held on the
qualification date.

(B) Reduction for previously taxed amounts.—A shareholder’s pro rata share of
the post-1986 earnings and profits of the PFIC does not include any amount that the shareholder
demonstrates to the satisfaction of the Commissioner (in the manner provided in paragraph (d)(2)
of this section) was, pursuant to another provision of the law, previously included in the income of
the shareholder, or of another U.S. person if the shareholder’s holding period of the PFIC stock
includes the period during which the stock was held by that other U.S. person.

(b) Who may make the election.—A shareholder of an unpedigreed QEF that is a CFC for the
taxable year of the PFIC for which the shareholder makes the section 1295 election may make the
deemed dividend election provided the shareholder held stock of that PFIC on the qualification
date. A shareholder is treated as holding stock of the PFIC on the qualification date if its holding
period with respect to that stock under section 1223 includes the qualification date. A shareholder
may make the deemed dividend election without regard to whether the shareholder is a United
States shareholder within the meaning of section 951(b). A deemed dividend election may be
made by a shareholder whose pro rata share of the post-1986 earnings and profits of the PFIC
attributable to the PFIC stock held on the qualification date is zero.

(c) Time for making the election.—The shareholder makes the deemed dividend election in
the shareholder’s return for the taxable year that includes the qualification date. If the shareholder
and the PFIC have the same taxable year, the shareholder makes the deemed dividend election in
either the original return for the taxable year for which the shareholder makes the section 1295
election, or in an amended return for that year. If the shareholder and the PFIC have different
taxable years, the deemed dividend election must be made in an amended return for the taxable
year that includes the qualification date. If the deemed dividend election is made in an amended
return, the amended return must be filed by a date that is within three years of the due date, as
extended under section 6081, of the original return for the taxable year that includes the
qualification date.

(d) Manner of making the election.

(1) In general.—A shareholder makes the deemed
dividend election by filing Form 8621 and the attachment to Form 8621 described in paragraph
(d)(2) of this section with the return for the taxable year of the shareholder that includes the
qualification date, reporting the deemed dividend as an excess distribution pursuant to section
1291(a)(1), and paying the tax and interest due on the excess distribution. A shareholder that
makes the deemed dividend election after the due date of the return (determined without regard
to extensions) for the taxable year that includes the qualification date must pay additional interest,
pursuant to section 6601, on the amount of the underpayment of tax for that year.

(2) Attachment to Form 8621.—The shareholder must attach a schedule to Form 8621
that demonstrates the calculation of the shareholder’s pro rata share of the post-1986 earnings and
profits of the PFIC that is treated as distributed to the shareholder on the qualification date
pursuant to this section. If the shareholder is claiming an exclusion from its pro rata share of the
post-1986 earnings and profits for an amount previously included in its income or the income of
another U.S. person, the shareholder must include the following information:

(i) The name, address, and taxpayer identification number of each U.S. person that
previously included an amount in income, the amount previously included in income by each such
U.S. person, the provision of the law pursuant to which the amount was previously included in
income, and the taxable year or years of inclusion of each amount; and

(ii) A description of the transaction pursuant to which the shareholder acquired,
directly or indirectly, the stock of the PFIC from another U.S. person, and the provisions of law
pursuant to which the shareholder’s holding period includes the period the other U.S. person held
the CFC stock.

(e) Qualification date.

(1) In general.—Except as otherwise provided in this paragraph (e),
the qualification date is the first day of the PFIC’s first taxable year as a QEF (first QEF year).

(2) Elections made after March 31, 1995, and before January 27, 1997.

(i) In general.
The qualification date for deemed dividend elections made after March 31, 1995, and before
January 27, 1997, is the first day of the shareholder’s election year. The shareholder’s election year
is the taxable year of the shareholder for which it made the section 1295 election.

(ii) Exception.—A shareholder who made the deemed dividend election after May 1,
1992, and before January 27, 1997, may elect to change its qualification date to the first day of the
first QEF year, provided the periods of limitations on assessment for the taxable year that includes
that date and for the shareholder’s election year have not expired. A shareholder changes the
qualification date by filing amended returns, with revised Forms 8621 and the attachments
described in paragraph (d)(2) of this section, for the shareholder’s election year and the share-
holder’s taxable year that includes the first day of the first QEF year, and making all appropriate
adjustments and payments.

(3) Examples.—The rules of this paragraph (e) are illustrated by the following examples:

Example 1

(i) Eligibility to make deemed dividend election. A is a U.S. person who files
its income tax return on a calendar year basis. On January 2, 1994, A purchased one percent of the
stock of M, a PFIC with a taxable year ending November 30. M was both a CFC and a PFIC, but
not a QEF, for all of its taxable years. On December 3, 1996, M made a distribution to its
shareholders. A received $100, all of which A reported in its 1996 return as an excess distribution
as provided in section 1291(a)(1). A decides to make the section 1295 election in A’s 1997 taxable
year to treat M as a QEF effective for M’s taxable year beginning December 1, 1996. Because A
did not make the section 1295 election in 1994, the first year in its holding period of M stock that
M qualified as a PFIC, M would be an unpedigreed QEF and A would be subject to both sections
1291 and 1293. A, however, may elect under section 1291(d)(2) to purge the years M was not a
QEF from A’s holding period. If A makes the section 1291(d)(2) election, the December 3
distribution will not be taxable under section 1291(a). Because M is a CFC, even though A is not a
U.S. shareholder within the meaning of section 951(b), A may make the deemed dividend election
under section 1291(d)(2)(B).

(ii) Making the election. Under paragraph (e)(1) of this section, the qualification date, and
therefore the date of the deemed dividend, is December 1, 1996. Accordingly, to make the deemed
dividend election, A must file an amended return for 1996, and include the deemed dividend in
income in that year. As a result, M will be a pedigreed QEF as of December 1, 1996, and the
December 3, 1996, distribution will not be taxable as an excess distribution. Therefore, in its
amended return, A may report the December 3, 1996, distribution consistent with section 1293
and the general rules applicable to corporate distributions.

Example 2. X, a U.S. person, owned a five percent interest in the stock of FC, a PFIC with
a taxable year ending June 30. X never made the section 1295 election with respect to FC. X
transferred her interest in FC to her granddaughter, Y, a U.S. person, on February 14, 1996. The
transfer qualified as a gift for federal income tax purposes, and no gain was recognized on the
transfer (see Regulation Project INTL-656-87, published in 1992-1 C.B. 1124; see
§ 601.601(d)(2)(ii)(b) of this chapter). As provided in section 1223(2), Y’s holding period includes
the period that X held the FC stock. Y decides to make the section 1295 election in her 1996 return
to treat FC as a QEF for its taxable year beginning July 1, 1995. However, because Y’s holding
period includes the period that X held the FC stock, and FC was a PFIC but not a QEF during that
period, FC will be an unpedigreed QEF with respect to Y unless Y makes a section 1291(d)(2)
election. Although Y did not actually own the stock of FC on the qualification date (July 1, 1995),
Y’s holding period includes that date. Therefore, provided FC is a CFC for its taxable year
beginning July 1, 1995, Y may make a section 1291(d)(2)(B) election to treat FC as a pedigreed
QEF.

(f) Adjustment to basis.—A shareholder that makes the deemed dividend election increases
its adjusted basis of the stock of the PFIC owned directly by the shareholder by the amount of the
deemed dividend. If the shareholder makes the deemed dividend election with respect to a PFIC
of which it is an indirect shareholder, the shareholder’s adjusted basis of the stock or other
property owned directly by the shareholder, through which ownership of the PFIC is attributed to
the shareholder, is increased by the amount of the deemed dividend. In addition, solely for
purposes of determining the subsequent treatment under the Code and regulations of a share-
holder of the stock of the PFIC, the adjusted basis of the direct owner of the stock of the PFIC is
increased by the amount of the deemed dividend.

(g) Treatment of holding period.—For purposes of applying sections 1291 through 1297 to the
shareholder after the deemed dividend, the shareholder’s holding period of the stock of the PFIC
begins on the qualification date. For other purposes of the Code and regulations, this holding
period rule does not apply.

(h) Coordination with section 959(e).—For purposes of section 959(e), the entire deemed
dividend is treated as included in gross income under section 1248(a).

(i) Election inapplicable to shareholder of a former PFIC or of a section 1297(e) PFIC.—A
shareholder may not make the section 1295 and deemed dividend elections if the foreign
corporation is a former PFIC (as defined in paragraph (j)(2)(iv) of this section) or a section
1297(e) PFIC (as defined in paragraph (j)(2)(v) of this section) with respect to the shareholder.
For the rules regarding the election by a shareholder of a former PFIC, see § 1.1298-3. For the
rules regarding the election by a shareholder of a section 1297(e) PFIC, see § 1.1297-3.

(j) Definitions.

(1) Passive foreign investment company (PFIC).—A passive foreign invest-
ment company (PFIC) is a foreign corporation that satisfies either the income test of section
1296(a)(1) or the asset test of section 1296(a)(2). A corporation will not be treated as a PFIC with
respect to a shareholder for those days included in the shareholder’s holding period when the
shareholder, or a person whose holding period of the stock is included in the shareholder’s
holding period, was not a United States person within the meaning of section 7701(a)(30).

(2) Types of PFICs.

(i) Qualified electing fund (QEF).—A PFIC is a qualified electing
fund (QEF) with respect to a shareholder that has elected, under section 1295, to be taxed
currently on its share of the PFIC’s earnings and profits pursuant to section 1293.

(ii) Pedigreed QEF.—A PFIC is a pedigreed QEF with respect to a shareholder if the
PFIC has been a QEF with respect to the shareholder for all taxable years during which the
corporation was a PFIC that are included wholly or partly in the shareholder’s holding period of
the PFIC stock.

(iii) Unpedigreed QEF.—A PFIC is an unpedigreed QEF for a taxable year if—

(A) An election under section 1295 is in effect for that year;

(B) The PFIC has been a QEF with respect to the shareholder for at least one,
but not all, of the taxable years during which the corporation was a PFIC that are included wholly
or partly in the shareholder’s holding period of the PFIC stock; and

(C) The shareholder has not made an election under section 1291(d)(2) and
this section or § 1.1291-10 with respect to the PFIC to purge the nonQEF years from the
shareholder’s holding period.

(iv) Former PFIC.—A foreign corporation is a former PFIC with respect to a
shareholder if the corporation satisfies neither the income test of section 1297(a)(1) nor the asset
test of section 1297(a)(2), but its stock, held by that shareholder, is treated as stock of a PFIC,
pursuant to section 1298(b)(1), because the corporation was a PFIC that was not a QEF at some
time during the shareholder’s holding period of the stock.

(v) Section 1297(e) PFIC.—A foreign corporation is a section 1297(e) PFIC with
respect to a shareholder (as defined in paragraph (j)(3) of this section) if—

(A) The foreign corporation qualifies as a PFIC under section 1297(a) on the
first day on which the qualified portion of the shareholder’s holding period in the foreign
corporation begins, as determined under section 1297(e)(2); and

(B) The stock of the foreign corporation held by the shareholder is treated as
stock of a PFIC, pursuant to section 1298(b)(1), because, at any time during the shareholder’s
holding period of the stock, other than the qualified portion, the corporation was a PFIC that was
not a QEF.

(3) [Reserved]. For further guidance see § 1.1291-9T(j)(3).

(k) Effective/applicability date.

(1) The rules of this section, except for paragraph (j)(2)(v)
of this section, are applicable as of April 1, 1995.

(2) The rules of paragraph (j)(2)(v) of this section are applicable as of December 8,
2005.

(3) [Reserved]. For further guidance see § 1.1291-9T(k)(3). [Reg. § 1.1291-9.]

[T.D. 8701, 12-26-96. Amended by T.D. 8750, 12-31-97; T.D. 9231, 12-7-2005; T.D. 9360,
9-26-2007 and T.D. 9650, 12-30-2013.]


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