Passive Foreign Investment Company - PFIC
Categories: International, Managed Funds
A passive foreign investment company (PFIC) is pretty no-nonsense: it’s a foreign company that makes a lot of passive income.
What counts as “making a lot of passive income,” you ask? Either at least 75% of the company’s gross income is earned passively...like through investments...or at least 50% of the company’s assets are earned-interest assets, like getting dividend payouts.
Who cares if a company is a PFIC? The IRS, of course. In 1986, a tax loophole was closed, which some U.S. citizens were using to hide investments from taxation in offshore accounts. If you didn’t know, you have to report all income to the IRS, even if they’re not going to tax you on it...so just hiding investments alone is a big IRS no-no.
Anyway, the tax loophole that was closed talked about PFICs for the first time, bringing them out into the open.
The IRS treats PFICs very specially (hello, Form 8621), with specific, complicated, and strict tax requirements. The loose leash on PFICs just got a whole lot tighter.
