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The rules governing Passive Foreign Investment Companies (“PFICs”) are a bit similar to the rules for CFCs. Shareholders of a PFIC are subject to the undistributed earnings tax. A (foreign) corporation is a PFIC if one of two conditions is satisfied. First, 75% or more of the foreign corporation’s is passively sourced. Second, 50% or more of the foreign corporation’s assets are passive asset (which are assets which do not produce business income). IRC §1297(a)(1) and (2). The definition of passive income includes interest, dividends, rents, and gains from the sale of a passive asset. Note, however, that passive income does not include interest that is derived from a business’ active conduct.
