What is a PFIC?

PFIC stands for a Passive Foreign Income Corporation.  A passive foreign investment company (PFIC) is a non U.S. corporation which exhibits either one of two conditions, based on either income or assets:

1. At least 75% of the corporation's gross income is "passive"—that is, derived investment or other sources not related to regular business operations.
2. At least 50% of the company’s assets are investments, which produce income in the form of earned interest, dividends, or capital gains from the disposition of securities.

What is PFIC statements used for?

The annual PFIC Statements contain reporting information that can enable investors classified as “U.S. Persons” to make the Qualified Electing Fund (“QEF”) election for U.S. tax reporting services. This will make it easier for investors affected by the U.S. PFIC rules to make the appropriate elections when complying with U.S. tax filing requirements.  Under the QEF election, on an annual basis, investors include their pro-rata share of the fund’s earned income for U.S. tax purposes. The QEF election allows investors to defer taxes on unrealized capital gains and to receive more favourable tax treatment on their share of capital gains that were realized within the fund.  An investor’s cost base for units of the funds would increase correspondingly based on the income included under the QEF election.  The fund provides investors with information required to file a QEF election on IRS Form 8621.

Please contact Liz at Liz.lee@iptax.com if you have any questions on PFIC.