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. Marginal Analysis

    An examination of the additional benefits of an activity compared to the additional costs of that activity. Companies use marginal analysis as a decision-making tool to help them maximize their profits. Individuals unconsciously use marginal analysis to make a host of everyday decisions. Marginal analysis is also widely used in microeconomics when analyzing how a complex system is affected by marginal manipulation of its comprising variables.
  2. Treasury Inflation Protected Securities - TIPS

    A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS are considered an extremely low-risk investment since they are backed by the U.S. government and since their par value rises with inflation, as measured by the Consumer Price Index, while their interest rate remains fixed.
  3. Gilt-Edged Switching

    The selling and repurchasing of certain high-grade stocks or bonds to capture profits. Gilt-edged switching involves gilt-edged security, which can be high-grade stock or bond issued by a financially stable company such as the Blue Chip companies or by certain governments.
  4. Master Limited Partnership - MLP

    A type of limited partnership that is publicly traded. There are two types of partners in this type of partnership: The limited partner is the person or group that provides the capital to the MLP and receives periodic income distributions from the MLP's cash flow, whereas the general partner is the party responsible for managing the MLP's affairs and receives compensation that is linked to the performance of the venture.
  5. Class Action

    An action where an individual represents a group in a court claim. The judgment from the suit is for all the members of the group (class).
  6. Retail Sales

    An aggregated measure of the sales of retail goods over a stated time period, typically based on a data sampling that is extrapolated to model an entire country. In the U.S., the retail sales report is a monthly economic indicator compiled and released by the Census Bureau and the Department of Commerce.
Trading Center