Regulated Investment Company (RIC)

What Is a Regulated Investment Company (RIC)

A regulated investment company (RIC) can be any of several investment substances. For instance, it might appear as a mutual fund or exchange-traded fund (ETF), a real estate investment trust (REIT), or a unit investment trust (UIT). Whichever form the RIC expects, the structure must be considered eligible by the Internal Revenue Service (IRS) to pass through taxes for capital gains, dividends, or interest earned to the individual investors.

A regulated investment company is qualified to pass-through income under Regulation M of the IRS, with the specific regulations for qualifying as a RIC outlined in U.S. code, title 26, sections 851 through 855, 860, and 4982.

Regulated Investment Company (RIC) Basics

The purpose of using pass-through or flow-through income is to stay away from a twofold taxation scenario as would be the case on the off chance that both the investment company and its investors paid tax on company created income and profits. The concept of pass-through income is likewise alluded to as the conduit theory, as the investment company is working as a conduit for passing on capital gains, dividends and interest to individual shareholders.

Regulated investment companies don't pay taxes on their earnings.

Without the regulated investment company allowance, both the investment company and its investors would need to pay taxes on the company's capital gains or earnings. With pass-through income, the company isn't required to pay corporate income taxes on profits passed through to the shareholders. The main income tax forced is on individual shareholders.

Requirements to Qualify as a RIC

To qualify as a regulated investment company the business needs to meet specific edges.

1. Exist as a corporation, or other entity, which would customarily have taxes assessed as a corporation.
2. Be registered as an investment company with the Securities and Exchange Commission (SEC).
3. Choose to be considered as a RIC by the Investment Company Act of 1940 for however long its income source and diversification of assets meets determined requirements.

Moreover, a RIC must determine at least 90% of its income from capital gains, interest or dividends earned on investments. Further, a RIC must disperse at least 90% of its net investment income as interest, dividends or capital gains to its shareholders. Should the RIC not disseminate this share of income, it very well might be subject to a excise tax by the IRS.

At last, to qualify as a regulated investment company, no less than half of a company's total assets must be as cash, cash equivalents or securities. Something like 25% of the company's total assets might be invested in securities of a single issuer except if the investments are government securities or the securities of other RICs.

Real World Example

President Obama marked the Regulated Investment Company Modernization Act of 2010 into law Dec. 22, 2010. It made changes to the rules administering the tax treatment of regulated investment companies (RICs), including open-end mutual funds, closed-end funds, and most exchange-traded funds. The last update to the rules overseeing RICs was the Tax Reform Act of 1986.

The primary justification for the 2010 RIC Modernization Act was due to tremendous changes in the mutual fund industry in the 25 years somewhere in the range of 1986 and 2010. Further, large numbers of the tax rules applicable to RICs became obsolete, made administrative weights or caused vulnerability.

Features

• A regulated investment company can be any type of investment entity including mutual funds, ETFs, and REITS.
• To qualify, no less than half of a company's total assets must be as cash, cash equivalents, or securities.
• President Obama marked the Regulated Investment Company Modernization Act of 2010 into law Dec. 22, 2010.
• A RIC must infer at least 90% of its income from capital gains, interest, or dividends earned on investments.