For Passive Foreign Investment Companies (PFICs), the Instructions for Form 8621 state:
as well as:A separate Form 8621 must be filed for each PFIC in which stock is held directly or indirectly. In the case of a chain of ownership, under the five circumstances described above, unless otherwise provided, if the shareholder owns one PFIC and through that PFIC owns one or more other PFICs, the shareholder must file a Form 8621 for each PFIC in the chain.
However, reading the reading the Internal Revenue Code Section 1298(f)Indirect shareholder. Generally, a U.S. person is an indirect shareholder of a PFIC if it is: ...A shareholder of a PFIC where the PFIC itself is a shareholder of another PFIC,
So to me, the requirements to file 8621 for a PFIC in the chain of ownership seems to be ambiguous (assuming the child PFIC has a value less than $5,000). For a concrete example, I own shares of a European ETF (Amundi MSCI World - CW8). It tracks the MSCI world index via swaps (synthetic ETF). It holds about 130 stocks, and the stocks held are rebalanced extremely often. Most of the stocks are not PFICs, but I think it's possible that some of them are. Assuming that say, one of the stocks is a PFIC, (we'll call it child PFIC) and that I don't hold $5,000 of it indirectly through CW8, would form 8621 be required? According to Section 1298(f) regulations it would be a no for the years in which I held the fund, but imagine I do sell my CW8 for a gain (in the Section 1291. Would I be considered as having recognized a gain from child PFIC? How would that even be calculated, considering that the contribution of child PFIC to CW8's value comes from swaps, and is also constantly being bought and sold by CW8? How would it even work when I'm already paying Section 1291 taxes on the entire gain from the parent PFIC (CW8)? The only thing I could find with regard to this was this proposal from 1992, but it seems like there was no followup to it:A shareholder is not required under section 1298(f) and these regulations to file Form 8621 (or successor form) with respect to a section 1291 fund (as defined in § 1.1291-1(b)(2)(v)) for a shareholder's taxable year if -
(2) The section 1291 fund stock is indirectly owned by the shareholder under section 1298(a)(2)(B) and § 1.1291-1(b)(8)(ii)(B), and the value of the section 1291 fund stock indirectly owned by the shareholder is $5,000 or less...
[and]
The shareholder is not treated as receiving an excess distribution (within the meaning of section 1291(b)) with respect to the section 1291 fund during the taxable year or as recognizing gain treated as an excess distribution under section 1291(a)(2) as the result of a disposition of the section 1291 fund during the taxable year
https://www.taxnotes.com/research/feder ... n-of/157vh