The PFIC Puzzle: Treasury Guidance Tests Us All

Congress enacted the passive foreign investment company (PFIC) rules in 1986 to limit U.S. persons from deferring U.S. federal income tax by foreign investment. Certain U.S. persons would invest in foreign corporations then convert ordinary income derived from these investments to capital gains upon disposition. The PFIC rules work together with the controlled foreign corporation (CFC) rules as the main anti-deferral provisions within the tax code. In general, a foreign corporation is considered a PFIC if (1) at least 75% of its gross income is passive income (having earnings made through investments rather than regular business operations), or (2) at least half of its assets produce passive income. This practice note discusses the key differences between the proposed, final, and new proposed regulations, and how these rules may subject your clients to U.S. federal income tax. If your client has overseas insurance affiliates, take heed; Treasury is now considering the necessity of changes for a test to determine whether offshore insurance businesses fall under the PFIC tax regime.

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Related Content

• Final Passive Foreign Investment Company Regulations
  Discover more about PFICs. This practice note aims to resolve the key differences between proposed, final, and new proposed regulations issued in response to the TCJA and their effect on: the active financing exception; the determination of ownership and attribution through partnerships; and the treatment of assets and related income subject to the look-through rule.
• Controlled Foreign Corporations Tax Fundamentals
  Analyze the interplay between the CFC and PFIC regimes with this practice note. To determine whether a corporation is a CFC, the practice note explores key Subpart F concepts: definition of a U.S. shareholder, definition of a U.S. person, definition of ownership, categories of Subpart F income, plus filing requirements and penalties. The practice note concludes with a discussion of Form 5471 and some planning issues for your consideration, such as the transfer pricing and the foreign tax credit implications of Subpart F income.

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