What is a Regulated Investment Company - RIC
A regulated investment company (RIC) can be any one of several investment entities – for example, a mutual fund or exchange-traded fund (ETF), a real estate investment trust (REIT) or unit investment trust (UIT) – that is deemed eligible by the Internal Revenue Service (IRS) to pass through the taxes on capital gains, dividends or interest earned through investments to individual investors. A regulated investment company is qualified to pass through income under Regulation M of the IRS, with the specific regulations for qualifying as a RIC delineated in U.S. code, title 26, sections 851 through 855, 860 and 4982.
BREAKING DOWN Regulated Investment Company - RIC
The purpose of utilizing pass-through income is to avoid a double-taxation scenario in which both the investment company and its individual investors would be taxed on the income and profits generated by the company. The concept of pass-through income is also referred to as the conduit theory, as the investment company is functioning as a conduit for passing on capital gains, dividends and interest to individual shareholders. Without the regulated investment company allowance, both the investment company and its individual investors would have to pay taxes on the company's capital gains or earnings. With pass-through income, the company is not required to pay corporate income taxes on earnings passed through to shareholders. The only income tax imposed is on individual shareholders.
Requirements to Qualify as a RIC
To qualify as a regulated investment company, a company has to meet specific requirements. A corporation or other entity that would ordinarily be taxed as a corporation that is registered as an investment company with the Securities and Exchange Commission (SEC) in accordance the Investment Company Act of 1940 may elect to be deemed as a RIC as long as it meets specified requirements regarding its source of income and diversification of assets.
A RIC must derive a minimum of 90% of its income from capital gains, interest or dividends earned on investments. A RIC also must distribute a minimum of 90% of its net investment income in the form of interest, dividends or capital gains to its shareholders. Otherwise, the company may be subject to an excise tax by the IRS.
To qualify as a RIC, at least 50% of a company's total assets must be in the form of cash, cash equivalents or securities. No more than 25% of the company’s total assets may be invested in securities of a single issuer, unless the securities are government securities or securities of other RICs.