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PFICs and VIEs

The United States has the most complicated tax system of any country. A major reason for this is that Congress has added so many provisions in efforts to combat tax evasion; unfortunately, the complexity just creates an opportunity for bright tax planners to find new loopholes, and for the unwary to fall into a trap. I fear that many of the US listed Chinese companies have a tax trap for the unwary.

One of the loophole closing efforts was rules related to passive foreign investment companies. The loophole was that a group of US shareholders could put money in a foreign corporation, earn interest and dividends on the investment, and they pay tax at capital gains rates when they dispose of the stock. Other rules shut down the technique for closely held companies, but the PFIC rules bring in foreign public companies. 

A company is a PFIC if 50% of its assets generate passive income (interest, dividends, rents, royalties, etc.) or 75% of its revenue is passive. US shareholders in a PFIC are subject to special tax rules. These rules basically make sure that any gains are taxed at the highest US tax rates and charge interest on any gains deferred. US investors are wise to avoid PFIC investments, due to the complexity and the adverse tax consequences. Foreign investors are not subject to the rules. 

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