Investment Company Definition: Understanding IRS Requirements & Types

The IRS has an investment company definition that is straightforward. According to the IRS, an investment company is any company with greater than 50% of its assets as investments. This definition, however, is quite general. There are subcategories of investment companies that are more specific.

Passive Investment Companies

Companies that have most of their assets in passive investments are known as passive investment companies or PICs. These companies earn their income and make their profits largely from one or more of the following methods: dividend payments, capital gains or interest.

Direct Investment Companies

These companies are in contrast to direct investment companies, or DICs. These companies make their income by selling a product or service. They invest money directly into buildings are goods and largely avoid dealing with investment vehicles.

Foreign Investment Companies

The IRS recognizes foreign investment companies as well. There are both passive and direct foreign investment companies, with largely the same definition and operation as the domestic investment companies. The difference is simply the ownership of the company being located in a country outside the U.S.

This definition of an investment company can be for companies that are both foreign and domestic. Foreign investment companies are defined in essentially the same way with the addition of foreign ownership, but the IRS treats these companies significantly differently on tax returns of individual investors. For that reason, familiarizing yourself with specific types of investment companies beyond the basic definition of an investment company is a good idea.