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. International ETF

    Any exchange-traded fund that invests in foreign-based securities. ...
  5. Portfolio Income

    Income from investments, dividends, interest, royalties and capital ...
  6. Regulated Investment Company - ...

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

    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. Retirement

    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.
  3. Mutual Funds & ETFs

    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.
  4. Mutual Funds & ETFs

    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.
  5. Mutual Funds & ETFs

    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.
  6. 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.
  7. Term

    What is Passive Income?

    Passive income is earned by someone from ventures in which they did not actively participate.
  8. Investing Basics

    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. Taxes

    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

    4 Best Passive Income Investments

    Generating income from passive investments begins with knowing which ones are the best fit for your portfolio.
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. 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 >>
  3. 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 >>
  4. How are capital gains and dividends taxed differently?

    The U.S. tax code gives similar treatment to dividends and capital gains, although this will change slightly in 2013. Currently, ... Read Answer >>
  5. Is there a difference between capital gains and dividend income?

    Selling something for a profits leads to capital gains. A payment made by a corporations to stockholders is a dividend. Both ... Read Answer >>
  6. Do mutual funds pay dividends?

    Find out when mutual funds pay dividends and how these distributions are generated, including what types of assets are included ... Read Answer >>
Hot Definitions
  1. Physical Capital

    Physical capital is one of the three main factors of production in economic theory. It consists of manmade goods that assist ...
  2. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  3. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  4. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  5. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  6. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
Trading Center