How Does A Passive Foreign Investment Company Work?

A passive foreign investment company, also known as a PFIC, is a specific type of foreign investment vehicle.  It is clearly delineated by the IRS to be different from direct foreign investment companies and must fulfill two elements in order to be categorized under this designation: the ownership must be headquartered outside the U. S. and the majority of the assets must be held in passive investments.

Passive Income

A foreign company is considered a PFIC if the majority of its assets are based in passive investments. Passive investments earn income through at least one of the following means: dividend payments, capital gain amounts and interest payments.  

Income from these vehicles is therefore passively generated money. Incidentally, passive income is also how the company makes its profit.  It does not necessarily have to be the primary moneymaking method of the company, however. For example, foreign natural resource exploration firms can also be PFICs if their money accrues interest while it is being held for future exploration use.

Tax Implications

Americans that invest in PFICs are required to add the profits from those investments as part of their ordinary income declaration during the filling out of their tax returns.

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