Passive Foreign Investment Company (PFIC)

Definition:

A US tax term defined as a non-US corporation where either (i) at least 75% of its gross income is “passive” (generally investment income, including interest, certain dividends, and rents and royalties not derived in an active business) or (ii) 50% of the value of its assets is attributable to assets that produce passive income (generally including cash and financial investments). The PFIC rules were intended to deter US investors from using offshore investment vehicles to defer income. However, because the rules are drafted broadly, they may in fact capture US investments in corporations engaged in active businesses (for example, in the case that a corporation holds substantial amounts of cash relative to its other assets).

Subject to some exceptions, US investors in PFICs are subject to a special tax regime that may result in adverse US federal income tax consequences, including increased tax liabilities on dispositions and certain dividends, and additional reporting requirements. The rules impact only US shareholders, rather than the non-US corporations in which they invest.

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