PFICs first became recognized through tax reforms passed in 1986. The changes were designed to close a tax loophole, which some U.S. taxpayers were using to shelter offshore investments from taxation. The instituted tax reforms not only sought to close this tax avoidance loophole and bring such investments under U.S. taxation but also to tax such investments at high rates, to discourage taxpayers from following this practice.
Typical examples of PFICs include foreign-based mutual funds and startups that exist within the scope of the PFIC definition. Foreign mutual funds typically are considered PFICs if they are foreign corporations that generate more than 75% of their income from passive sources, such as capital gains and dividends.
Investments designated as PFICs are subject to strict and extremely complicated tax guidelines by the Internal Revenue Service, delineated in Sections 1291 through 1298 of the U.S. income tax code.
The PFIC itself, as well as shareholders, is required to maintain accurate records of all transactions related to the PFIC, such as share cost basis, any dividends received, and undistributed income that the PFIC may earn. Learn everything you need to know about PFICs by downloading our white paper here.