Personal holding company

A Personal Holding Company (PHC) is a corporation in which one or a few taxpayers hold a predominant ownership of shares, and the company is primarily established to receive and accumulate the taxpayer’s investment income. It is often subject to special tax rules to prevent individuals from using corporations to avoid or defer personal income tax. Key Features of a Personal Holding Company Predominant Ownership More than 50% of the company’s stock is owned, directly or indirectly, by five or fewer individuals. Primary Income Source Majority of the income comes from passive investments, such as: Dividends Interest Rents Royalties Purpose Often used to hold and manage personal investments in a corporate form. PHC rules prevent tax deferral by requiring the corporation to pay taxes on accumulated investment income. Tax Implications PHCs may be subject to additional taxes on undistributed personal holding company income. Designed to discourage avoidance of individual income tax through corporate entities. Example An individual owns 80% of a corporation that primarily earns dividends and interest from investments. The corporation qualifies as a personal holding company and may be taxed on undistributed investment income under PHC tax rules.