Passive Foreign Investment Companies (PFIC) are foreign-based companies that derive 75% of their gross income from passive sources or utilize 50% of their assets to generate passive income. Passive income refers to earnings unrelated to the company’s core business operations and commonly includes interest, rents, royalties, capital gains, currency gains, and dividends. Investors generally aim to steer clear of PFICs due to the IRS imposing ordinary income tax rates on gains from these investments instead of the more favorable capital gains tax rate.