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 has one of the following attributes:

1. At least 75% of the corporation's income is considered "passive", which is based on investments rather than standard operating business.

2. At least 50% of the company's assets are investments that produce interest, dividends and/or capital gains

PFICs include foreign-based mutual funds, partnerships and other pooled investment vehicles that have at least one U.S. shareholder. Most investors in PFICs must pay income tax on all distributions and appreciated share values, regardless of whether capital gains tax rates would normally apply.

BREAKING DOWN 'Passive Foreign Investment Company - PFIC'

PFICs are subject to complicated and strict tax guidelines by the Internal Revenue Service (IRS), which covers treatment of these investments in Sections 1291 through 1297 of the income tax code. Both the PFIC and the shareholder must keep accurate records of all transactions, including share basis, dividends and any undistributed income earned by the company.

The strict guidelines are set up to discourage ownership of PFICs by U.S. investors. PFIC shares won't even receive a step-up in cost basis as is the case with nearly all other marketable, appreciable assets. An option that investors have is to seek qualification of a PFIC investment as a qualified electing fund (QEF). This may reduce the tax rate on certain transactions but also forces the investor to pay taxes even on income earned by the foreign company that is not distributed to shareholders.

RELATED TERMS
  1. Hub And Spoke Structure

    An investment structure in which several investment vehicles, ...
  2. Net Investment Income

    Income received from investment assets (before taxes) such as ...
  3. Passive Income

    Earnings an individual derives from a rental property, limited ...
  4. Qualified Dividend

    A type of dividend to which capital gains tax rates are applied. ...
  5. International ETF

    Any exchange-traded fund that invests in foreign-based securities. ...
  6. Regulated Investment Company - ...

    A mutual fund, real estate investment trust (REIT) or unit investment ...
Related Articles
  1. Personal Finance

    Understanding Taxation Of Foreign Investments

    Technically, any gains from foreign investments owned by an American citizen are subject to tax by the company's home country as well as the IRS. However, the Foreign Tax Credit enables you to ...
  2. ETFs & Mutual Funds

    The Basics of Income Tax on Mutual Funds

    Learn about the basics of income tax on mutual funds, including what types of income may be subject to the capital gains tax rate.
  3. ETFs & Mutual Funds

    How Tax-Efficient Is Your Mutual Fund?

    Learn about factors that influence the tax-efficiency of your mutual fund, how income from your investment is taxed and what to look for when choosing a fund.
  4. Investing

    What Taxes Do I Owe On Retirement Accounts Abroad?

    If you're a U.S. retiree, but previously worked abroad, here's what you need to know about taxes on foreign pensions and retirement accounts.
  5. Personal Finance

    The Impact Of U.S. Corporate Taxation On Investment Decisions And CFC Transfer Pricing

    To avoid taxation, businesses do careful tax planning, taking into consideration more than one country's taxation system.
  6. ETFs & Mutual Funds

    Understanding Taxes on Mutual Funds Dividends

    Learn about the basics of mutual fund dividend taxation, including how and why mutual funds pay dividends and when different tax rates apply to dividend income.
  7. Retirement

    Is Passive Investing Effective for Retirement Savings?

    Learn about the differences between active and passive investing for those approaching retirement. Discover how passive investing is gaining popularity.
  8. Retirement

    Understanding How Dividends Are Taxed

    Learn how dividends are taxed by the IRS, and understand the different types of dividend income as well as the capital gains tax rates.
  9. Personal Finance

    Comparing Long-Term vs. Short-Term Capital Gain Tax Rates

    Learn about the difference between short- and long-term capital gains and how the duration of your investment can impact your tax liability.
  10. Investing

    What is Passive Income?

    Passive income is earned by someone from ventures in which they did not actively participate.
RELATED FAQS
  1. Are dividends considered passive or ordinary income?

    Find out why dividends are not considered passive income and why some dividends are subject to a reduced tax rate based on ... Read Answer >>
  2. Is dividend income taxable?

  3. Is there any advantages or disadvantages on how often a fund pays out dividends ...

    I am looking for a mutual fund for an IRA. I would like at least +30 years of growth. In my situation, I will not be looking ... Read Answer >>
  4. How often do mutual funds pay capital gains?

    Find out how often mutual funds distribute capital gains income, including the basics of how mutual funds work and why frequent ... Read Answer >>
  5. What is the difference between income tax and capital gains tax?

  6. Do mutual fund companies pay taxes?

    Learn how mutual funds are incorporated as regulated investment companies and are exempt from paying taxes under certain ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center