PFIC Rules: A trap for unwary SPACs

What are PFICs?

Most U.S. shareholders of passive foreign investment companies (“PFICs”) don’t really understand the unique rules that apply to foreign corporations holding passive assets even for a relatively short period of time. Most tax advisors think of PFICs as foreign unregistered mutual funds that invest solely in stocks, bonds and other securities. However, PFIC rules can cause potentially harsh tax results for U.S. SPAC who believe they are simply investing in a newly formed operating business. U.S. investors and foreign should recognize this proverbial trap for the unwary and plan ahead of time.

A PFIC is generally any non-US corporation that meets one of two tests: the gross income or the assets test. A SPAC is a PFIC if:

  • either 75% or more of its gross income for the tax year comes from passive income, or
  • 50% or more of its assets produce, or are held to produce, passive income.

Passive income generally includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of a trade or business) and gains from the disposition of passive assets.

Source: SPACAlpha – PFIC Rules: A trap for unwary SPACs