Identify and manage your fund’s exposure to risk.
As overseas investing by mutual funds continues to grow, so does the need to identify and manage exposure to tax liabilities.
What is a PFIC?
A foreign corporation is categorized as a Passive Foreign Investment Company (PFIC) if either 75% or more of its gross income is from passive income or 50% or more of the value of its assets either produce or are held for the production of passive income.
Is your process for identifying PFICs efficient and reliable?
We have developed a detailed source for PFIC data that can assist portfolio and asset managers in ascertaining the status of foreign equities.
The PFIC Analyzer is connected to an information database that combines the industry knowledge and technical resources of EY worldwide.
Tax implications of holding a PFIC
- Adverse tax treatment
An investor could be exposed to potentially severe tax liabilities by not identifying the PFIC status of the foreign equities held in a portfolio. Generally, US shareholders of PFICs, including certain funds such as Regulated Investment Companies (RICs), are subject to tax and interest charges on any "excess distributions" from a PFIC, including any gain on the disposition of PFIC stock.
- Impact on net asset values and annualized returns
If a RIC disposes of a PFIC stock that it had not previously identified and recognizes a gain, it is liable for tax on the gain and an interest charge. This tax and the associated interest charge cause the RIC's net asset value to decline without an ability to currently pass through the PFIC burden to RIC shareholders. Other funds, such as hedge funds, would pass the PFIC gain through to their partners and the partners would owe the additional tax and interest charges.
- Impact on insurance companies
The PFIC Analyzer is also applicable to any company with investments in foreign securities, particularly insurance companies. The insurance industry's variable annuity market has grown considerably in recent years, resulting in an increased number of fund offerings. To the extent that a company offers variable investment options (i.e., mutual funds), the impact of the PFIC rules on the tax-exempt status of such products should be taken into consideration.
|Four reasons why you should subscribe to the PFIC Analyzer |
|1. ||Cost-effective |
The PFIC Analyzer provides a cost-effective method of identifying PFICs that is less cumbersome than a company-by-company analysis. We analyze a subscriber's portfolio and provide a report containing the PFIC or non-PFIC status of the securities reflected in the portfolio.
|2. ||Comprehensive |
There are more than 16,000 securities reflected in the PFIC Analyzer, making it one of the broadest resources of PFIC information available.
|3. ||Reduces exposure to risk |
If foreign equities are not properly identified, a fund's net asset value and annualized return can be affected by interest charges on PFICs, creating financial risk for its managers.
|4. ||Accessibility |
A PFIC Analyzer client can submit their international portfolio holdings up to three times per year (per fund) for review. In addition, if you are seeking a one-off search between "runs", you have the option to access the database directly with a license agreement through EY Product Sales.