Passive Foreign Investment Company (PFIC)

A Passive Foreign Investment Company (PFIC) is a foreign corporation that meets certain requirements, such as having at least 75% of its income from passive sources and distributing less than 25% of its income to shareholders. Passive income includes interest, dividends, rents, and royalties.

PFICs are taxed differently than domestic corporations and individuals. The U.S. government taxes PFICs at a flat rate of 35%, regardless of the PFIC's actual tax rate. In addition, PFIC shareholders are required to pay taxes on their share of the PFIC's income, even if the PFIC does not distribute any earnings.

There are two ways to avoid PFIC taxation:

• The first way is to elect to treat the PFIC as a qualified electing fund (QEF). If you elect QEF treatment, you will be taxed on your share of the PFIC's income as it is earned, rather than when it is distributed. You will also be able to claim a foreign tax credit for any taxes paid to the foreign country on the PFIC's income.
• The second way to avoid PFIC taxation is to sell your shares of the PFIC. If you sell your shares, you will be taxed on any capital gains, but you will not be taxed on the PFIC's income.

If you own shares of a PFIC, you should consult with a tax advisor to determine the best way to avoid PFIC taxation.

Here are some additional details about PFICs:

• PFICs are not subject to the same rules as domestic corporations and individuals. For example, PFICs are not required to file U.S. tax returns.
• PFICs are taxed at a flat rate of 35%, regardless of their actual tax rate. This can be a significant disadvantage for PFICs that are taxed at a lower rate in their home country.
• PFIC shareholders are required to pay taxes on their share of the PFIC's income, even if the PFIC does not distribute any earnings. This can be a significant burden for PFIC shareholders who do not receive any distributions from the PFIC.
• There are two ways to avoid PFIC taxation: QEF treatment and selling your shares of the PFIC. You should consult with a tax advisor to determine the best way to avoid PFIC taxation for your situation.