I want to breakdown what a PFIC is and how you can utilise them to reduce your tax bill potentially, depending on your circumstances. I hope by the end I will have explained what a PFIC Tax is and how it might effect you and what you can do about it.
A PFIC?
Passive Foreign Investment Company. States any pooled investment registered outside the U.S. is deemed liable to PFICs, includes, funds, investment trusts, and foreign pension investments.
PFICs are taxed with much higher rates than U.S. mutual funds, stocks or exchange traded funds.
What is a PFIC and how to tell?
PFICs is anything that is not based in the U.S, so any non-U.S stock or mutual fund. One aspect is that if you are holding a U.S fund I.E Morgan Stanley, that holds foreign stocks or funds, this is not deemed a PFICs. However, anything outside of the U.S a fund with HSBC for example would be deemed as PFICs.
A way to tell is if it has one of these two characteristics
- 75% or more of its gross income for the taxable year is passive income, or
- At least 50% of its assets are held to produce passive income.
What are the tax liabilities of PFICs?
PFICs has a number of ways of being taxes depending on how it structured.
- Qualified Electing Fund, this is taxed on your PFIC pro-rata share on undistributed earnings, on the long term and ordinary income. This will need specific documentation prior to set up.
- Mark to Market, this is where it is treated as if you sold the stock on the last day and bought and repurchased it back at its fair market value with value taken on the last day to calculate your gain or loss. The increase is taxed at your ordinary gains. This option needs to documented before you opt to buy as can’t change midway through the investment.
- 1219 If you choose this route, you’re taxed on excess distributions and would then realize gain on the sale or disposition of stock holdings.
I hope I managed to cover the topic of ‘PFICs Tax Explained’ if you would like more guidance on this subject, please use the form below to send me any questions and I can arrange a call if it is required.
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