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Passive Foreign Investment Company (PFIC)
Practical Law Glossary Item 4-382-3677 (Approx. 2 pages)
Glossary
Passive Foreign Investment Company (PFIC)
A foreign corporation is a PFIC for any taxable year in which at least either:
- 75% of its gross income is "passive income" (as defined in IRC § 1297(b)).
- 50%, on average and generally by value, of its assets (determined under IRC § 1297(f)) produce passive income or are held for the production of passive income.
Passive income generally includes:
- Dividends.
- Interest.
- Royalties.
- Rents (other than certain rents and royalties derived in the active conduct of a trade or business).
- Annuities.
- Gains from the sale or exchange of assets that produce passive income.
A US stockholder of a PFIC is subject to special US tax rules with respect to any gain it realizes on the sale (or other disposition) of its shares and any excess distributions from the PFIC. Under these special rules, a US stockholder is:
- Treated as if it realized any gain and excess distributions ratably over its holding period for the shares.
- Taxed at the highest ordinary income tax rate in effect for each year to which the gain or excess distribution is allocated.
- Liable for an interest charge in respect of the tax owed.
In certain circumstances, a US stockholder can avoid these rules by making a qualified electing fund (QEF) election or a mark-to-market election.