QUESTION: One of the stocks I am researching is WNS holdings (Ticker :
WNS). The company's risk statement says that they may be deemed as a
PFIC (Passive Foreign Investment Company). Why aren't they sure about
whether they are a PFIC? If the company is a PFIC, does it mean that
the shareholder will be liable to all the retained earnings applicable
to his shares?

REPLY: A shareholder is only liable for U.S. taxes on his or her
share of the income of the corporation for the period of time the
shares were owned. Earnings accumulated by a PFIC in years before a
U.S. investor acquires any shares are not subject to tax by that
shareholder. A U.S. shareholder of shares of a PFIC could pay an
income tax on (1) distributions of previously undistributed earnings
... OR (2) on the investor's share of the current earnings (whether or
not distributed) of the PFIC ... OR (3) any gain in the market value
of a publicly held PFIC.

A foreign corporation can become a PFIC if (1) more than 75% of its
gross income is derived from passive investment sources such as
interest, dividends, rents, royalties and capital gains, or (2) more
than 50% of its average assets are held to produce passive investment
income. Sometimes a corporation that is going through a transition
from one kind of business to another may have converted a lot of
assets into cash, which may be in an account earning interest until
the funds are needed for an acquisition or prior to distribution to
shareholders. Or a company could have a large capital gain in a year
when it only has a limited amount of income from business operations.
In either case, the company could meet the definition of a PFIC for
U.S. tax purposes, but the company might not be sure how the IRS would
interpret the specific facts of their company.

For more information about PFICs, see
http://www.offshorepress.com/offshoretax/otpfic.htm

There are a number of ways in which the rules for PFICs overlap the
rules for controlled foreign corporations and I will be covering some
of those issues at our seminar on the U.S. tax rules for U.S. owners
of Controlled Foreign Corporations in Las Vegas on Dec. 7th. For
current information on the seminar see
http://www.offshorepress.com/cfcworkshop.htm

Vern

The preceding comments are not intended as personal advice and are an
extremely brief explanation of a few of the rules that apply to
passive foreign investment company shares held by U.S. persons and
can't be relied upon as a "Covered opinion". For more on that subject
see http://www.offshorepress.com/vkjcpa/disclosurerules.htm