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Passive Foreign Investment Company – PFIC

The passage of the Foreign Account Tax Compliance Act (FATCA) in 2010 has meant an increased responsibility for U.S. persons to report investments held outside the U.S. The FATCA means, among other things, that the IRS requires all U.S. persons that directly or indirectly are shareholders of a passive foreign investment company (PFIC) to file Form 8621 for each tax year and report their investments. U.S. persons are all person who are U.S. residents, U.S. citizens, U.S. green card holders, other persons with a substantial connection to the U.S.

What is a passive foreign investment company (PFIC)?

A PFIC is a foreign (i.e. non-US) company or corporation that meets one of two conditions. Condition one, named the Income test, is that at least 75 percent of the company’s gross income is passive. Condition two, named the Asset test, is that at least 50 percent of the company’s assets are passive assets.

PFICs can sound like highly-specialized and complex investments, and, therefore, U.S. persons abroad might conclude that they are not directly or indirectly shareholders of a PFIC. However, this would be a mistake. Put simply, PFICs are investments outside the U.S. that contain very common financial products like mutual funds, hedge funds, and non-U.S. pension plans. U.S. persons living in Sweden, where it is very common to investments in mutual funds, and where most pensions plans invest in mutual funds, are likely to be, directly or indirectly, shareholders of a PFIC.

As will be described in a following post, there are exceptions from the FATCA reporting and filing requirements, and there is a variety of mutual funds, some that are excluded from the FATCA requirements. Welcome back for more information on PFICs and how they affect you.