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The Income Test
75% or more of its gross income for the taxable year is passive income.
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The Asset Test
50% or more of its average assets during the taxable year produce passive income, or
are held for the production of passive income.
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Only one test is required. Meeting either test is enough to classify a foreign
corporation as a PFIC.
Passive income is defined under IRC §1297(b), generally by reference to foreign personal holding company income under IRC §954(c), including dividends, interest, rents, royalties, annuities, and certain gains.
Practical Takeaway
Most PFIC problems for U.S. persons abroad come from ordinary foreign funds, not exotic offshore schemes. Foreign mutual funds, ETFs, managed funds, and pooled investment products commonly hold passive assets and earn passive income, so they often fall within the PFIC definition.