A PFIC, or Passive Foreign Investment Company, is a type of foreign corporation that meets certain criteria under the U.S. tax code, specifically under the Internal Revenue Code (IRC). The PFIC rules were designed to discourage U.S. taxpayers from using offshore entities to defer tax on passive income or to convert such income into capital gains, which are taxed at a lower rate. US investors have additional reporting requirements regarding their investment in a Passive Foreign Investment Company (PFIC).
A foreign corporation (ie: located outside of the United-States) is classified as a PFIC if it meets one of the following tests:
Income Test: At least 75% of the corporation’s gross income for the tax year is passive income (such as dividends, interest, rents, royalties, and certain types of gains).
Asset Test: At least 50% of the corporation's assets are investments producing, or held to produce, passive income.
Upon request, KAPITAL can assist in assessing the PFIC qualification of an investment after receiving the relevant financial statement from an underlying asset.
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