Passive Foreign Investment Company | Practical Info You Need To Know

Passive Foreign Investment Company

What Is A Passive Foreign Investment Company (PFIC)?

Any foreign company that meets either the asset test or income test is a passive foreign investment company.

The asset test is met if 50% or more of the foreign corporation’s assets produce or could produce passive income.

The income test is met if 75% or more of the foreign corporation’s gross income is passive income which includes income such as:

  • Rents and royalties derived in the active conduct of a trade or business
  • Interest and dividends
  • Annuities

In other words, the company’s income is based primarily on investments versus a standard operating business that provides a service or produces a product.

The most common passive foreign investment company that U.S. taxpayers will encounter are foreign-based mutual funds, partnerships or other pooled investment vehicles such as ETFs (exchange traded funds).

The Pain Of A Passive Foreign Investment Company

A passive foreign investment company (PFIC) is subject to severe and extremely complex tax and tax reporting treatment on these investments.

A passive foreign investment company shareholder must keep extensive records in order to comply with all required tax reporting and perform the necessary tax calculations that includes a record of all transactions, including purchase transaction, basis, dividends and sales transactions.

It is very clear that the pain incurred by investing in a passive foreign investment company from U.S. tax treatment is meant to discourage any such investment by U.S. taxpayers. While there are elections available to lessen the severity of tax due, there is no options to lessen the cost of compliance. Thus, often the best course is to avoid such investments altogether.

To learn more about passive foreign investment companies (PFICs), please see our article on “What Is A PFIC?”.

Our goal at Tax Samaritan is to provide the best counsel, advocacy and personal service for our clients. We are not only an expat tax preparation and representation experts, but strive to become valued business partners. Tax Samaritan is committed to understanding our client’s unique needs; every tax situation is different and requires a personal approach in providing realistic and effective solutions.
If you would like a quote, please click on the button below for a free, no obligation Tax Preparation quote and/or free 30-minute consultation to discuss your situation regarding tax reporting of a passive foreign investment company further:

Tax Samaritan is a team of Enrolled Agents with over 25 years of experience focusing on US tax preparation and representation. We maintain this tax blog where all articles are written by Enrolled Agents. Our main objective is to educate US taxpayers on their tax responsibilities and the selection of a tax professional. Our articles are also designed to help taxpayers looking to self prepare, providing specific tips and pitfalls to avoid.

When looking for a tax professional, choose carefully.  We recommend that you hire a credentialed tax professional such as Tax Samaritan that is an Enrolled Agent (America’s Tax Experts). If you are a US taxpayer overseas, we further recommend that you seek a professional who is experienced in expat tax preparation, like Tax Samaritan (most tax professionals have limited to no experience with the unique tax issues of expat taxpayers).

Randall Brody is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals. To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits and adhere to a stringent code of ethics.

Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.

All About Randall Brody
Randall is the Founder of Tax Samaritan, a boutique firm specializing in the preparation of taxes and the resolution of tax problems for Americans living abroad, as well as the other unique tax issues that apply to taxpayers. Here, they help taxpayers save money on their tax returns.

Leave a Reply

Your email address will not be published. Required fields are marked *