Passive Foreign Investment Company - PFIC

Definition of 'Passive Foreign Investment Company - PFIC'


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.

Investopedia explains '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.



comments powered by Disqus
Hot Definitions
  1. Oil Reserves

    An estimate of the amount of crude oil located in a particular economic region. Oil reserves must have the potential of being extracted under current technological constraints. For example, if oil pools are located at unattainable depths, they would not be considered part of the nation's reserves.
  2. Joint Venture - JV

    A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it.
  3. Aggregate Risk

    The exposure of a bank, financial institution, or any type of major investor to foreign exchange contracts - both spot and forward - from a single counterparty or client. Aggregate risk in forex may also be defined as the total exposure of an entity to changes or fluctuations in currency rates.
  4. Organic Growth

    The growth rate that a company can achieve by increasing output and enhancing sales. This excludes any profits or growth acquired from takeovers, acquisitions or mergers. Takeovers, acquisitions and mergers do not bring about profits generated within the company, and are therefore not considered organic.
  5. Family Limited Partnership - FLP

    A type of partnership designed to centralize family business or investment accounts. FLPs pool together a family's assets into one single family-owned business partnership that family members own shares of. FLPs are frequently used as an estate tax minimization strategy, as shares in the FLP can be transferred between generations, at lower taxation rates than would be applied to the partnership's holdings.
  6. Yield Burning

    The illegal practice of underwriters marking up the prices on bonds for the purpose of reducing the yield on the bond. This practice, referred to as "burning the yield," is done after the bond is placed in escrow for an investor who is awaiting repayment.
Trading Center