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

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 for PFIC purposes?

Passive income is any income of a kind that would be foreign personal holding company income (“FPHCI”) as defined in section 954(c), subject to certain exceptions in the PFIC rules.

What is a foreign investment account?

A foreign account is a specified foreign financial asset even if its contents include, in whole or in part, investment assets issued by a U.S. person. You do not need to separately report the assets of a financial account on Form 8938, whether or not the assets are issued by a U.S. person or non-U.S. person.

What is passive income business?

Passive income includes regular earnings from a source other than an employer or contractor. The Internal Revenue Service (IRS) says passive income can come from two sources: rental property or a business in which one does not actively participate, such as being paid book royalties or stock dividends.

Is my investment a PFIC?

So how do I know if I have a PFIC? The two criteria given in the PFIC definition in Section 1297(a) are known as the “income test” and the “asset test”. The income test tells you to determine if 75 percent or more of the gross income of the corporation is passive. If it is, the corporation is a PFIC.

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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.

How do I know if my investment is a PFIC?

You can generally tell if a foreign corporation or foreign investment fund is considered a passive foreign investment company (PFIC) if it meets one of the following two characteristics: 75% or more of its gross income for the taxable year is passive income, or.

Are intangible assets passive?

Intangible assets (i.e., intellectual property) that produce identifiable amounts of income, such as patents and licenses, are characterized on the basis of income derived from the intangible assets. Cash is a passive asset, even if it is held as part of the corporation’s working capital.

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.

What is CFC PFIC?

“anti-deferral” regimes apply to U.S. shareholders of controlled foreign corporations (“CFCs”) and U.S. investors in passive foreign investment companies (“PFICs”).