Passive Foreign Investment Company (PFIC)

What is a ‘Passive Foreign Investment Company – PFIC’

A passive foreign investment company (PFIC) is a foreign-based corporation that exhibits either one of two conditions. The first condition, based on income, is that at least 75% of the corporation’s gross income is “passive,” income that is derived from investments rather than from the company’s regular business operations. The second condition that determines a company as a PFIC, based on assets, is that at least 50% of the company’s assets are investments that produce income in the form of earned interest, dividends or capital gains.

Explaining ‘Passive Foreign Investment Company – PFIC’

PFICs, as defined by the Internal Revenue Service (IRS) tax code, include foreign-based mutual funds, partnerships and other pooled investment vehicles having at least one U.S. shareholder. The majority of investors in PFICs must pay the higher personal income tax rate on all distributions and capital gains resulting from increases in share values, regardless of whether the lower capital gains tax rate would ordinarily apply to such income if it was derived from investments in a U.S.-based corporation.

The History of PFICs

PFICs became recognized through tax reforms in 1986, which were designed to close a tax loophole that some U.S. taxpayers were using to shelter offshore investments from U.S. taxation. The instituted tax reforms not only sought to close the loophole and bring such investments under U.S. taxation, but also to tax such investments at high rates, so as to discourage U.S. taxpayers from making them.

PFICs and the IRS

Investments designated as PFICs are subject to strict and extremely complicated tax guidelines by the Internal Revenue Service, delineated in Sections 1291 through 1297 of the U.S. income tax code. The PFIC itself, as well as shareholders, are required to maintain accurate records of all transactions related to the PFIC, such as share cost basis, any dividends received, and undistributed income that the PFIC may earn.

Passive Foreign Investment Company (pfic) FAQ

What term refers to passive investment in a foreign company’s financial assets?

A passive foreign investment company (PFIC) is a partnership, found abroad, which displays both of two conditions, in view of either pay or resources: At least 75% of the enterprise’s gross pay is “passive”— that is, inferred investments or different sources not identified with standard business operations. March 1, 2020

Can a foreign partnership be a PFIC?

The resource test depends on net resources. Foreign associations can be viewed as PFICs by U.S. detailing guidelines relying upon what kind of pay they create. It is simple not to focus on some PFICs that are imbedded in different investments vehicles, for example traded on an open market associations. March 4, 2020

What is a PFIC statement?

What is a PFIC? The yearly PFIC Statements contain detailing data that can empower financial specialists delegated “U.S. People” to make the Qualified Electing Fund (“QEF”) political decision for U.S. charge revealing administrations. …

What is considered a PFIC?

A passive foreign investment company (PFIC) is a partnership, found abroad, which shows both of two conditions, in light of either pay or resources: At least 75% of the enterprise’s gross pay is “passive”— that is, determined investments or different sources not identified with ordinary business activities. March 1, 2020

How is a PFIC taxed?

All capital additions from the offer of PFIC shares are treated as standard pay for government personal expense purposes and subsequently are not charged at particular long haul capital increase rates (Sec. 1291(a)(1)(B)). Sep 30, 2011

What is a PFIC for US tax purposes?

The passive foreign investment company (PFIC) system expects to dishearten US people from shaping a foreign organization and utilizing that company to put resources into principally passive investments, consequently endeavoring to move pay out of the US government charge net. Feb 20, 2017

Is a foreign mutual fund a PFIC?

Foreign shared assets commonly are viewed as PFICs on the grounds that they are foreign enterprises that create over 75% of their pay from passive sources, for example, capital additions and profits (Fitzsimmons, “Slump Begets PFIC Status,” 17 Canadian Tax Highlights 2 (February 2009)). Sep 30, 2011

Further Reading

  • IRS Economists Say the Darndest Things – [PDF]
  • The Active Banking Exception to Passive Foreign Investment Income under New Proposed Tax Regulations – [PDF]
  • Effects of new tax law on the project finance community – [PDF]
  • Getting Caught Between the Borders: The Proposed Exemption of the Canadian Mutual Fund from the Passive Foreign Investment Company Rules – [PDF]
  • Proposed Regulations on PFIC Active Insurance Exception – [PDF]
  • Tax Simplification Bill – [PDF]
  • New Guidance Regarding Ownership of Passive Foreign Investment Companies. – [PDF]
  • Exemption from PFIC Regime for Indirect Ownership Expanded: The IRS Clarifies That Shares Held through a Variety of Tax-Exempt Organizations, Plans, and … – [PDF]
  • The PFIC Rules: The Case of Throwing the Baby Out With the Bathwater – [PDF]