Passive Foreign Investment Companies

It is a company which has the following characteristics:

• It is located in a foreign country and
• either 75% of the company’s gross income is passive, that is, from sources not directly related to the company’s core operations or
• at least 50% of the company’s assets are investments, generating revenue in the form of dividends, interest, capital gains, etc.

Example of PFIC: Abroad based private equity funds, hedge funds, mutual funds, startups as per the definition of PFIC, etc.

Internal Revenue Services (IRS) has stringent and highly complicated tax provisions pertaining to PFICs.

Below are the default rules governing the taxation of PFIC in the US:

• All the distributions are considered as regular income and are taxed at the highest federal tax rate;
• Capital gains (increase in the value of assets) are not long-term capital gain rate, they are considered as normal income and are taxed at the highest current federal tax rate irrespective of the marginal tax rate for which your income is eligible to;
• If you have opted for deferred gains in your PFICs, you will be subject to pay non-deductible penalty interest which is compounded daily till the time gains are released.

Please note that you can salvage some tax by opting for the Mark-to-Market accounting method on your foreign investments or by filing the investment Qualified Electing Fund (QEF), which has its own set of complications.

• Default Election: Section 1291, as already defined above.
• QEF Election: If the fund where you made investments complies with IRS guidelines, then your PFIC income is considered and taxed as the regular income. But there are separate provisions on capital gains and reporting.
• Mark-to-Market Election: Taxpayers report yearly gains and unrealised losses at market value as ordinary income for tax returns purposes

Citizens and Green Card holders owning shares in a PFIC have to mandatorily file IRS Form 8621. It is used for the purpose of reporting distributions, gains, income and appreciation in QEF elections. 8621 is a lengthy and complex form per se. Thus, it is crucial to consult experienced and competent professionals while handling PFIC compliances and taxation issues.

We have helped many Indian entrepreneurs and US citizens to sort all and any of their taxes issues.

We help you with issues related to PFICs, along with providing a range of other services to take full accountability as your virtual CFO.