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Orlaith O'Reilly avatar
Written by Orlaith O'Reilly
Updated over a week ago

If your US Delaware SPV has invested in a foreign company there are some details you may need to consider. Please refer to the information provided below.

What is a PFIC

A PFIC is a Passive Foreign Investment Company, which is a type of foreign investment vehicle that is subject to special tax rules under U.S. tax law.

If a U.S. person or entity owns shares in a PFIC, they may be subject to a special tax regime called the "PFIC excess distribution regime." Under this regime, any gains realized on the sale of PFIC shares or any distributions received from a PFIC can be subject to additional tax obligations.

Why do we need to know this?

  • If a U.S. person or entity owns shares in a PFIC, they may be subject to a special tax regime called the "PFIC excess distribution regime".

  • To provide Tax Services for the SPV and Investors we need to verify if a foreign target company is a PFIC and reflect this in the SPV’s tax return.

  • To comply with the PFIC excess distribution regime, U.S. taxpayers must file Form 8621 with their tax return for each year they hold shares in a PFIC.

  • The tax treatment of PFICs can vary, so it's important to seek professional advice before investing.

  • To confirm the status of your foreign investment we will send you a Foreign Investment Declaration statement to sign prior to completing your SPV’s tax return.

How do you know if you have invested in a PFIC

There are two tests to determine if a company is a PFIC.

  • Asset test: A PFIC is defined as any foreign corporation if, for the taxable year, the average percentage of assets held by such corporation during the taxable year which produce passive income* or which are held for the production of passive income is at least 50%. Passive assets are assets that produce passive income for purposes of the PFIC income test or are held for the production of such income. Cash is generally considered a passive asset. Assets are measured at fair market value for this test.

  • Income test: A PFIC is defined as any foreign corporation if, for the taxable year, 75% or more of its “gross income” is “passive income.” The PFIC income test is determined by taking into account all gross income of the relevant foreign corporation for its taxable year. The average is generally determined by looking at the assets on a quarterly basis if the data is available.

It's also important to note that the tax treatment of PFICs can vary depending on the specific circumstances of the holder and the PFIC itself.

*Passive income refers to income generated by a foreign investment vehicle that is not earned through an active trade or business, including dividends, interest, rents, royalties, and capital gains. The tax treatment of passive income earned through a PFIC can be complex and subject to special rules under U.S. tax law. Seek professional advice before investing in a PFIC.

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