What are PFICs and should you avoid them?

Passive Foreign Investment Company

A Passive Foreign Investment Company is a corporation located outside of the US which either;

1. A minimum of 75% of the Company’s gross income is classed as being “passive” (i.e. originating from investments or sources outside of regular business operations) or;
2. A minimum of 50% of the Company’s assets are investments producing income in the form of interest, capital gains, or dividends.

PFICs can include foreign-based mutual funds that meet either of the above criteria.

Should you avoid them?

Investments that are classified as PFICs are subject to strict and complex tax guidelines by the Internal Revenue Service (IRS), as outlined in Sections 1291 – 1298 of the U.S. income tax code. This means that the PFIC itself, as well as all shareholders are required to maintain accurate records of every transaction relevant to the PFIC, such as dividends received and income earned.

PFICs are taxed at a punitive rate while you hold them, and when you sell them. Along with the additional detailed reporting forms each and every year for every single PFIC you may own, the after-tax cost of these foreign funds usually makes them a bad investment to be avoided. It is always worth getting in touch with us to seek professional advice on this matter.