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United States citizens and tax residents are discouraged from investing in Passive Foreign Investment Companies (PFICs) with primarily passive income and assets. Since 1986, the United States government has enacted a punitive regime against U.S investors investing in PFICs and one in which such investors would be subject to tax at the highest applicable marginal rate on any PFIC inclusions for the year.
A PFIC is a foreign corporation whose income for the tax year was at least 75% from passive income or whose average assets that produced passive income were at least 50%. Foreign Mutual Funds or Foreign ETF’s are usually considered PFIC’s. The PFIC rules and calculations are quite complex, and they often require making determinations such as 1) whether certain tax elections are available to mitigate some of the punitive PFIC provisions, 2) the amount of excess distributions for the current year and prior years, and 3) the amount of deferred tax and interest under the PFIC rules, among other things.
Due to the complexity of the PFIC rules, it is important for taxpayers who may be subject to these rules to contact a tax advisor who can help them navigate through this maze of traps. At Kaufman Accounting PC we have a team dedicated to help clients avoid these traps and who work every day with clients to minimize risks and to identify tax planning opportunities.