Greetings from Debra Rudd.

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Your questions are great

I love reading the questions you have been sending. I’m sorry if it takes a little while to respond. Some of them are very difficult questions. Some are “easy” but introduce issues I wouldn’t have considered otherwise.

It makes me very happy that these exchanges are making me more knowledgeable on the topic and better equipped to handle a wide variety of PFIC issues. Hopefully you are getting something useful out of it, too. Please keep sending in your questions. 🙂

Today’s topic: Is my foreign holding company a PFIC? Or… what?

The question came from reader W:

If my foreign corporation owns an investment account that receives dividends, and that is 100% of its income then my foreign corporation IS a PFIC, right?

The answer is slightly more complicated than it first appears. The foreign corporation could be a PFIC — it appears to meet both the income test and the asset test that are found in the PFIC definition in Internal Revenue Code Section 1297(a). But it could be a controlled foreign corporation (or “CFC,” as we tax aficionados call it) and not a PFIC at all.

Hypothetically, you could own shares in a corporation that is either a CFC or a PFIC, both a CFC and a PFIC, or neither. I’m not going to talk about the “both” or “neither” scenarios today — I want to focus instead on how you determine whether you have a PFIC or a CFC for tax purposes in more general terms.

(Okay, maybe I’ll mention them briefly because it’s fun.)

I know what a PFIC is; what is a CFC?

I will assume that you are familiar with the definition of passive foreign investment company, or PFIC. That was covered somewhat extensively last week. (For those just joining the newsletter or in need of a quick refresher, type “26 USC 1297” into your search engine of choice and read subsection (a). There are two tests you apply to determine if you have a PFIC — if 75% or more of the income is passive, or 50% or more of the assets are passive, you have a PFIC.)

Now let’s talk about what a controlled foreign corporation, or CFC, is. To be a CFC, an entity must meet four criteria:

  • It is a corporation that is
  • foreign and is
  • controlled by
  • US shareholders.


A “corporation” is a business entity organized under a Federal or State statute, an association (as defined under Regs. § 301.7701-3), and various other types of entity. A long list of foreign entity types that are classified as a corporation for US tax purposes can be found in Regs. § 301.7701-2(b)(8)(i).

The important thing to remember: sometimes the IRS will look at a foreign entity and treat it like a corporation for tax purposes, even though the other country calls the entity something completely different. Most of the time it is easy to decide, but sometimes you will have something that you think is a trust or partnership, but will have the necessary characteristics to be taxed as a corporation under US tax law.

Foreign Corporation

A corporation is foreign when it is not “organized in the United States or under the law of the United States or of any State” (IRC § 7701(a)(4)). In other words, it is organized in some place other than the US.


According to Section 957(a), a foreign corporation is controlled foreign corporation when:

More than 50 percent of:

(1) the total combined voting power of all classes of stock of such corporation entitled to vote, or

(2) the total value of the stock of such corporation,

is owned (within the meaning of section 958 (a)), or is considered as owned by applying the rules of ownership of section 958 (b), by United States shareholders on any day during the taxable year of such foreign corporation.

So a controlled foreign corporation exists when US shareholders have more than 50% of the corporation by value or voting power.

US Shareholders

I said it would get a little complicated. Here is the slightly complicated part.

The definition above referred to the term “United States shareholders”. US shareholders are, according to IRC § 951(b), US persons (a term that means what it usually means except for the exceptions found in IRC § 957(c), but for our purposes let’s just assume it has the regular meaning) who own “10% or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation.”

You are not a “US shareholder” unless you have at least 10% of the voting power. The foreign corporation is not a CFC unless “US shareholders” (people who each have at least 10% of the voting power) own more than 50% of the total value or voting power.

Recap – Definition of CFC

So to recap . . . you own shares of a CFC if all of the following are true:

  • You are a US person under the meaning of IRC § 957(c),
  • You own shares in a foreign corporation,
  • The foreign corporation has “US shareholders”, and
  • The “US shareholders’” total ownership exceeds 50% of the total value or voting power of the corporation.

But wait. The same company that I just said was a PFIC, by virtue of the asset test and income test of Section 1297(a), is also a CFC. How can that be? Congress solved this problem by…you guessed it, writing more laws.

A CFC is not a PFIC if you’re a US shareholder

This is made explicit in IRC § 1297(d)(1):

For purposes of this part, a corporation shall not be treated with respect to a shareholder as a passive foreign investment company during the qualified portion of such shareholder’s holding period with respect to stock in such corporation.

Simply put, if you are a US shareholder (under the meaning just discussed) of a CFC, then it is treated as if it is not a PFIC for you.

[You own shares in a CFC] + [You have at least 10% voting power] = [It is not a PFIC for you]

You report the existence of (and income from) the foreign corporation as a CFC on your tax return. Not a PFIC. That means filing Form 5471 and not Form 8621.

(But be warned. Form 5471 is not less complicated than Form 8621. And Form 5471 carries a minimum $10,000 penalty for failure to file or filing late, whereas there are no such penalties for Form 8621.)

My guess is you probably have a CFC and not a PFIC

My guess is that reader W is talking about a simple holding company that a US person might set up to hold their various offshore investments. I do not have the full details, so this is just an assumption.

In the scenario I am imagining, a single US taxpayer owns 100% of the shares and 100% of the voting power of the foreign corporation.

Those two facts mean the US taxpayer has a Controlled Foreign Corporation, and the person is a US shareholder of the CFC. When both of those things are true, the corporation is treated as if it is not a PFIC for that taxpayer, even if it meets the asset test and/or the income test under Section 1297(a). Even if it holds nothing but stocks that produce nothing but dividends, it is a CFC and not a PFIC.

[You own shares in a CFC] + [You have at least 10% voting power] = [It is not a PFIC for you]

If you are not a “US shareholder”, it gets interesting

Let’s pretend for a moment that there is a foreign corporation that is 100% owned by US persons. You are not a US shareholder because, while you are a US person who owns 10% of the value of the corporation, you do not have 10% or more of the voting power so you do not meet the definition of a US shareholder under Section 951(b).

In that case, you have a CFC and, potentially, also a PFIC. The rule that says CFC trumps PFIC status (Section 1297(d)) doesn’t apply to you because one of the criteria for that rule is that you must be a US shareholder under Section 951(b) — you must have 10% or more of the voting power of the corporation.

What do you do then?

When that happens, you have to evaluate the company under the asset test and the income test described in Section 1297(a) to see if it is a PFIC. If it is both a CFC at the company level and a PFIC at the shareholder level, you may be filing both Form 5471 and Form 8621.

I don’t see this often, but it is possible.

It is also possible that you can have shares in a foreign corporation that is not a CFC but is a PFIC, and you are required to file both Form 5471 and Form 8621 for that corporation. Form 5471 captures more than just CFCs.

The takeaway? There is some overlap in the reporting requirements and you may have to file two forms to report the same asset. The Section 1297(d) rule that says a CFC is not a PFIC and saves you from having to file two forms has somewhat limited application in the real world.


Yes, really. That was a revelation I will not easily forget (it happened years ago, and I still remember). The government wants people to file two separate information returns for the same asset? Four, potentially, if you count Form 8938 (you at least have to mention that the asset exists and you filed a form for it) and FBAR (assuming you have signature authority on the company bank accounts)? And fines upon fines if you somehow mess the paperwork up ($10,000 for 5471, $10,000 for 8938, and potentially much, much higher for the FBAR). No wonder so many people are expatriating.

My firsthand experience with IRS agents who actually understand the complexity and, frankly, ridiculousness of some of the filing requirements placed on many regular US citizens is that they respond with sympathy. I have also dealt with a few agents who use this complex web of rules as a “gotcha!” to bring in more revenue.

I personally wouldn’t rely on the presumed kindness and decency of IRS agents to get me through an audit. Nor would I file anything unless I have a clear understanding of what the requirements are and what I need to do to fulfill them. Figure out what you’re dealing with and do the right paperwork. And do the paperwork right.

Thanks, disclaimers, etc.

As always, thank you for reading, and I will be sending another PFICs Only email out next Thursday. Remember that this is not advice to you or anyone you know — hire a professional if you need some help. Please also continue to send me your questions about PFICs — they have been great.