Does anyone know what PFIC stand for and what is it?

I know this is related to the investment accounting but don't quite understand the term.

Passive Foreign Investment Company. The PFIC regime basically prevents US persons from deferring taxes on passive income/investments by parking the assets in a foreign corporation. The rules apply to US persons owning shares of foreign corporations, at least 75 percent of the income of which is passive or at least 50 percent of the assets of which produce passive income.

Three alternative regimes are provided for PFIC shareholders. One allows tax to be deferred until dividends are distributed or the stock is sold but often imposes interest on the tax when it is finally imposed. The other two, which only apply when elected, either tax undistributed PFIC income to the shareholders as it is earned by the corporation or tax PFIC shareholders annually on appreciation or depreciation in the stock's value during the year.

The PFIC rules are quite complicated. For a good description of how they apply and affect shareholders, see the 20-F filed with the SEC by COLT Telecom Group plc (available at http://www.sec.gov/Archives/edgar/data/1... search for "PFIC" and you will get to the right section). Bittker & Lokken provide a good summary of the rules.

Passive Foreign Investment Company. It's a foreign company whose income is 75% passive or has over 50% of its assets in investments earning interest, dividends, and/or capital gains. Ownership in this type of company creates tax implications for American investors because the IRS handles the taxation of profits differently.