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What is a PFIC and Why are the Taxes So High?

What is a PFIC and why are the taxes associated with PFICs so high?  A Passive Foreign Investment Company or PFIC is classified by the IRS as a foreign corporation or entity who meets either an asset test or income test established by the agency.  The asset test is based upon a foreign corporation where at least 50% of the “average percentage” of its assets held during the taxable year either produce passive income or are being held for the production of passive income.  The income test is met if 75% or more of the foreign corporations gross income for the taxable year is classified as passive income by the IRS.

US taxpayers who are a “Direct” or “Indirect” Owner of a PFIC are required to file IRS form 8621 if they meet any of the following PFIC related circumstances:

  1. US Taxpayer Receives Direct or Indirect Distributions from a PFIC
  2. US Taxpayer Receives a Qualifying Gain Due to a Direct or Indirect Sale or Transfer of PFIC Stock
  3. Reports Information Regarding the Election of a Qualified Electing Fund or QEF or a “Market to Market” PFIC Election
  4. US Taxpayer is Making an Election Reportable within Part II of the IRS Form 8621
  5. US Taxpayer is Required to File an Annual Report Pursuant to Section 1298(f)

Generally speaking a US taxpayer is an “Indirect Shareholder” of a PFIC when:

  • The US Taxpayer holds 50% or more of the Shares of a Foreign Corporation that is not A PFIC, which Directly or Indirectly Owns Stock of a PFIC
  • The US Taxpayer Holds Shares of a PFIC where that PFIC is a Shareholder of another PFIC
  • The US Taxpayer Holds 50% or more of the Shares of a Domestic Corporation who Owns a Section 1291 Fund
  • The US Taxpayer is a Direct or Indirect Owner of a Pass Through Entity (Such as a partnership, S Corporation, trust or estate) where that Entity is a Direct or Indirect Shareholder of a PFIC

We hope this begins to help explain “What is a PFIC and why are the taxes associated with PFICs so high?”  If you have international investments or questions about PFIC issues we invite you to call 866-631-3470 for a free consultation.