A passive foreign investment company (“PFIC”) is generally defined as any foreign corporation if 75 percent or more of its gross income for the taxable year consists of passive income, or 50 percent or more of its assets consists of assets that produce, or are held for the production of, passive income.
Code §1297(c) contains a look-through rule that provides that if a foreign corporation owns, directly or indirectly, at least 25 percent of the value of the stock of another corporation, then the foreign corporation is treated (for purposes of Code §1297(a)) as holding its proportionate share of the assets, and as receiving directly its proportionate share of the income of, the 25-percent owned subsidiary.
Code §1298(b)(7) contains another look-through rule that provides that if a foreign corporation owns 25 percent or more (by value) of the stock of a domestic corporation (the “first-tier domestic corporation”), and if the foreign corporation is either subject to the accumulated earnings tax or waives any benefit under any treaty which otherwise would prevent the imposition of the accumulated earnings tax, then for purposes of determining whether the foreign corporation is a PFIC: (1) any shares of another domestic corporation, other than a regulated investment company or real estate investment trust (the “second-tier domestic corporation”), that are held by the first-tier domestic corporation are not treated as a passive asset; and (2) any amount included in the gross income of the first-tier domestic corporation with respect to the shares of such second-tier domestic corporation is not treated as passive income.
We have created two situational charts of recent private letter rulings that illustrate the application of these look-through rules. Images of the charts are shown below and links to PDFs of the charts are also available:
We will shortly add this chart to andrewmitchel.com, where you can find hundreds of similar situational charts.