A PFIC stands for Passive Foreign Investment Company. It is a specific type of foreign corporation that has significant implications for U.S. taxpayers, including expatriates. The Internal Revenue Service (IRS) defines a PFIC based on income and asset tests:
- Income Test: At least 75% of the corporation's gross income for the tax year is passive income (e.g., interest, dividends, royalties).
- Asset Test: At least 50% of the corporation's assets are investments producing passive income.
The PFIC rules were designed to prevent U.S. taxpayers from deferring tax on passive income or converting such income into preferentially taxed capital gains through the use of offshore investment vehicles.
U.S. expats who own shares in a PFIC, either directly or through an investment fund, are subject to complex reporting requirements. They must file IRS Form 8621, also known as Information Return by a Shareholder of a Passive Foreign Investment Company, or Qualified Electing Fund for each PFIC in which they hold shares.
Learn more about PFIC filing here: What Is a PFIC, and How Does It Affect My Taxes?