Regulated Investment Companies (RICs): Definition, Taxes & Examples

What is a Regulated Investment Company (RIC)?

A Regulated Investment Company (RIC) is an investment fund that meets specific IRS and SEC criteria so it can pass income directly to shareholders without paying corporate income tax on those amounts. This pass-through, often called the conduit theory, lets shareholders — not the fund — pay tax on dividends, interest, and capital gains distributed by the fund.

Key takeaways

• RICs avoid corporate-level tax by distributing most of their investment income to shareholders.
• Common examples include mutual funds, exchange-traded funds (ETFs), closed-end funds, and unit investment trusts that meet RIC rules.
• To qualify, a fund must meet income, distribution, and asset diversification tests under federal law.
• The Regulated Investment Company Modernization Act of 2010 updated many RIC tax rules to reflect industry changes since 1986.

How the pass-through (conduit) treatment works

RICs generally do not pay tax on earnings that are passed to shareholders. Instead:
* The fund distributes interest, dividends, and capital gains to shareholders.
* Shareholders report and pay tax on the income they receive.
This avoids double taxation — once at the fund level and again at the shareholder level.

Qualification requirements

To be treated as an RIC, a fund must meet several tests:

Entity and registration
* Be organized in a form that would typically be taxed as a corporation.
Be registered as an investment company with the Securities and Exchange Commission (SEC).
Elect RIC status under applicable law.

Income tests
* At least 90% of the fund’s gross income must come from dividends, interest, payments with respect to securities loans, and gains from the sale or disposition of securities.

Distribution requirement
* The fund generally must distribute at least 90% of its net investment income (interest, dividends, and net short-term capital gains) to shareholders.
* Failure to meet distribution requirements can trigger excise taxes or other IRS consequences; retained capital gains typically must be reported to shareholders on IRS Form 2439.

Asset diversification tests
* At least 50% of the fund’s assets must be cash, cash equivalents, or securities.
* No more than 25% of the fund’s assets can be invested in securities of any one issuer (exceptions apply for government securities and securities of other RICs).

Tax treatment and consequences

• Income distributed to shareholders is taxable to them according to the character of the income (qualified dividends, ordinary dividends, capital gains, etc.).
• The RIC itself generally pays no federal corporate income tax on amounts it properly distributes.
• If the fund retains taxable income or violates qualification rules, it may face excise taxes, corporate taxation, or reporting obligations to shareholders.

Regulatory update: RIC Modernization Act of 2010

The Regulated Investment Company Modernization Act of 2010 revised RIC rules to address industry changes since the Tax Reform Act of 1986. The 2010 changes reduced administrative burdens and clarified tax treatment for modern fund structures, including many ETFs and other pooled investment vehicles.

Examples of entities that commonly qualify as RICs

• Open-end mutual funds
• Exchange-traded funds (ETFs)
• Closed-end funds
• Unit investment trusts

Bottom line

RIC status provides a tax-efficient structure for pooled investment vehicles by permitting them to pass income through to investors without paying corporate-level tax on distributed amounts. Funds that qualify must meet strict income, distribution, and asset diversification tests; failure to comply can lead to taxes and reporting obligations. Understanding how RIC rules work helps investors interpret fund taxation and distributions.