Passive Foreign Investment Companies

PFIC (Passive Foreign Investment Companies) are non-U.S. based companies that either (i) generate 75% of gross income from “passive income” sources or (ii) use 50% of the company’s assets to generate “passive income.”

Generally, passive income is income generated from sources that are not related to the company’s regular business operations.

Principal forms of passive income as they relate to PFICs include interest, rents, royalties, capital gains, currency gains, and dividends. In general, most investors want to avoid PFICs because the IRS taxes gains from these investments at the ordinary income tax rate, as opposed to the lower capital gains tax rate.