In light of the significant decline in stock prices over the past year, many non-U.S. companies that would not otherwise be considered to be “passive foreign investment companies,” or “PFICs,” for U.S. federal income tax purposes may inadvertently be so characterized under the mechanical and often overreaching PFIC tax regime. The reduction in the price of the stock of many publicly traded companies has lowered the value of such companies’ goodwill which is typically calculated based on market capitalization. Consequently, active operating companies that rely heavily on goodwill to avoid PFIC classification may inadvertently become PFICs. PFIC characterization generally results in substantially adverse tax consequences for shareholders of a PFIC that are subject to taxation in the United States.
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