What term refers to passive investment in a foreign company’s financial assets?

A passive foreign investment company (PFIC) is a corporation, located abroad, which exhibits either one of two conditions, based on either income or assets: At least 75% of the corporation’s gross income is “passive”—that is, derived investments or other sources not related to regular business operations.

What is considered a PFIC?

A PFIC is a non-U.S. corporation that has at least 75% of its gross income considered passive income or at least 50% of the company’s assets are investments that produce passive income. Passive income generally includes dividends, interest, rent, royalties and capital gains from the disposition of securities.

What is passive income PFIC?

The literal definition of a Passive Foreign Investment Company is a foreign corporation of which at least 75 per cent of the income earned is “passive” i.e. dividends, interest etc., or 50 per cent of the assets held by the corporation generate passive income.

Is a foreign mutual fund a PFIC?

Foreign mutual funds typically are considered PFICs because they are foreign corporations that generate more than 75% of their income from passive sources such as capital gains and dividends (Fitzsimmons, “Downturn Begets PFIC Status,” 17 Canadian Tax Highlights 2 (February 2009)).

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What is a PFIC for US tax purposes?

The Passive Foreign Investment Company (PFIC) rules are designed to prevent U.S. persons from deferring tax on passive income earned through non- U.S. corporations, or from converting this income into capital gains that are taxed at preferential rates.

What are passive funds?

Passive funds are a type of funds that consistently tracks a market index to allow a fund get maximum gains. … All the securities along with their proportion in the portfolio will be the same as the index the fund is tracking. In passive funds, the fund manager does not actively choose what stocks will make up the fund.

What is passive income business?

What Is Passive Income? Passive income is money you can earn without too much ongoing effort. After you identify and establish a stream of passive income, you won’t need to tend to it every day—but that doesn’t mean you won’t have to do some work now and then. Read More: Passive Investing vs. Active Investing.

What is a form 8621?

Tax form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, is used to report income from foreign mutual funds, also referred to as passive foreign investment companies (PFICs).

How do you report foreign passive income?

Use Form 1116 to claim the Foreign Tax Credit (FTC) and subtract the taxes they paid to another country from whatever they owe the IRS. Use Form 2555 to claim the Foreign Earned-Income Exclusion (FEIE), which allows those who qualify to exclude some or all of their foreign-earned income from their U.S. taxes.

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Is cash a passive asset for PFIC?

Notice 88-22 deemed all cash as a per se passive asset for PFIC-testing purposes; the proposed rule reflects the fact that some amount of cash is needed as working capital to support the day-to-day operations of an enterprise.

Is a foreign ETF a PFIC?

If you pay attention you will notice that foreign funds and ETFs generally meet both PFIC tests: most of their income are passive and most of their assets generate passive income. Therefore, they are PFICs for tax purposes.

Is an annuity a PFIC?

There are limited cases, essentially where the taxpayer has some control over the annuities, that foreign annuities may be considered PFICs — Passive Foreign Investment Companies. Not only is accrued (yet unpaid) income taxed per year, but PFIC accounting is incredibly onerous and adds significant costs.

Is Vanguard A PFIC?

A common question we hear is, “how do I identify a PFIC?” A key point to understand is that mutual funds from U.S. companies with international investments—like Vanguard, for example—are generally not considered PFICs.

Is UK SIPP a PFIC?

Many foreign grantor trusts are not protected by the US-UK Tax Treaty, but the good news is that a SIPP does qualify. … In these circumstances, you can avoid having to report on individual Passive Foreign Investment Companies (PFICs) within the SIPP, which can be time-consuming and expensive.