How to Avoid Common Missteps with Passive Foreign Investment Corporations (PFICs)

July 2017

BDO Tax Managing Partner Charles Barragato highlights common missteps with Passive Foreign Investment Corporations (PFICs) in the article Cleansing the PFIC taint: Planning and pitfalls. PFICs are an area of common tax missteps with missed elections. The default PFIC regime is not often advantageous for most clients. The article discusses how to remedy missteps and cleanse the PFIC “taint”.

BDO Insights

  • Taxpayers that hold PFIC stock are potentially subject to an additional tax on excess distributions unless they make a mark-to-market election or a qualified electing fund (QEF) election in the year PFIC stock is purchased.
  • If a taxpayer fails to make an election, the stock will always be considered PFIC stock, even in years when the company issuing the stock no longer qualifies as a PFIC.
  • A missed QEF election can be made in subsequent years but taxpayers would have to make a deemed-sale or deemed-dividend election to purge the PFIC taint for the stock.