A regulated investment company (RIC) is a domestic corporation that meets several requirements under the Internal Revenue Code (IRC) and the Investment Company Act of 1940.
First, the corporation must meet one of the following under IRC Section 851(a):
- The corporation is registered with the Securities and Exchange Commission (SEC) as a management company or unit investment trust under the Investment Company Act of 1940;
- The corporation has elected to be treated as a business development company; or
- The corporation is excluded from the definition of an investment company under section 3(c)(3) of the Investment Company Act of 1940.
Second, the RIC must meet both the gross income and asset diversification tests.
The RIC must derive at least 90% of its gross income from portfolio income, which includes dividends, interest, options, futures, forwards, and gains from the sale of stock, other securities, or foreign currencies.1
At the end of each quarter, at least 50% of the RIC’s assets must consist of investments in cash, cash equivalents, government securities, securities of other RICs, and other securities. In addition, at the end of each quarter, no more than 25% of the RIC’s assets can be invested in a single issuer, securities of two or more issuers that the RIC controls, or the securities of a publicly traded partnership (PTP).2
Tax Treatment of RICs
A RIC is a corporation for federal tax purposes. Unlike a regular corporation, a RIC is not subject to corporate income taxes if it meets the minimum distribution requirements, which require it to distribute at least 90% of its net income to shareholders.
Shareholders ultimately report the dividend distributions and pay the taxes at the shareholder level, making the RIC a pass-through entity for federal tax purposes.
The RIC must file an annual Form 1120-RIC to maintain compliance with the IRS.