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Rise of the PFIC: Potential Benefits for U.S. Individuals Investing in Alternative Investment Funds Through a Foreign Corporation  


Author:  Lisa Donn Sergi.; Edward H. Dougherty.


Source: Volume 32, Number 04, Summer 2015 , pp.25-33(9)




Journal of Taxation of Investments

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Abstract: 

Passive foreign investment companies (PFICs) have traditionally been used by investment funds as a vehicle for investment by U.S. tax-exempt and foreign investors, but their application could be far broader. With interest rates at historic lows, deductions often limited for high-net-worth taxpayers, and U.S. tax rates on the rise, PFICs may offer benefits for a more diverse group of U.S. investors than ever before. For example, taxable U.S. investors who make a qualified electing fund (QEF) election may benefit from the ability to offset income with otherwise limited Section 212 expenses. Still other U.S. investors may choose to forgo the QEF election if the fund’s investment returns are greater than the grossed-up interest charge. This article provides a brief overview of the PFIC rules, lays out the benefits and drawbacks of various PFIC regimes, and highlights which investors and investments might benefit from this type of offshore structure.Copyright © 2015 Deloitte Development LLC. All rights reserved.

Keywords: passive foreign investment company, PFIC, qualified electing fund, QEF, IRC Sec. 212, investment funds

Affiliations:  1: Deloitte Tax LLP; 2: Deloitte.

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