Passive foreign investment companies, or PFICs, are subject to some of the most complex provisions of the tax law. You may own one and not even know it.

A passive foreign investment company is any foreign corporation for which

  • 75 percent or more of its gross income for the tax year is from passive income, or
  • 50 percent or more of its assets produce passive income or are held to produce passive income.

Passive income includes most investment income, including, but not limited to, interest, dividends, rents, annuities, and the sale or exchange of capital assets.

Almost all foreign mutual funds are PFICs. Stock you hold directly in a corporation can also be PFIC stock if the foreign corporation’s activities meet one of the above tests.

The default method of taxation for a PFIC is in Section 1291 of the tax code. Under this method, you pay a lot of tax on so-called excess distributions.