977 / What is a passive foreign investment company (PFIC)?

A passive foreign investment company (PFIC) is a foreign corporation which satisfies either a passive income test (see Q ) or a passive asset test (see Q ). A foreign corporation is broadly defined to include any corporation organized outside the United States.

A foreign corporation will be classified as a PFIC if:

(i)      75 percent or more of its gross income for a taxable year is passive income (the income test, see Q ), and¹

(ii)     50 percent of its average asset value is held for the production of passive income (the asset test, see Q ).²

Foreign-based mutual funds are a common type of PFIC. PFICs are subject to detailed tax rules established to close tax loopholes that allowed U.S. taxpayers to shelter offshore investments from U.S. taxation. U.S. PFIC shareholders must also file Form 8621, which is extremely complex and will require the assistance of qualified tax counsel.

See Q for a discussion of exceptions to the PFIC rules. See Q and Q for a discussion of the tax treatment of U.S. shareholders in a PFIC.