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

## What Is a Regulated Investment Company (RIC)?

A Regulated Investment Company (RIC) functions as a mutual fund, real estate investment trust (REIT), or unit investment trust that can pass income through to investors, avoiding double taxation under IRS Regulation M. This tax-efficient structure allows investors to directly receive capital gains, dividends, and interest. An RIC must meet specific requirements, including deriving at least 90% of its income from valid investments, maintaining substantial asset diversification, and distributing most of its net income to qualify for this status.

### Key Takeaways

*   A Regulated Investment Company (RIC) is a type of investment fund that passes income tax obligations to its investors.
*   RICs can include entities like mutual funds, ETFs, and REITs that qualify under IRS regulations to avoid double taxation.
*   To qualify as an RIC, a business must generate at least 90% of its income from dividends, interest, or capital gains.
*   The Regulated Investment Company Modernization Act of 2010 introduced significant changes to the tax rules governing RICs.

## Understanding the Basics of a Regulated Investment Company (RIC)

Pass-through income helps avoid double taxation, where both the company and investors would pay tax on the same income. The concept of pass-through income is also referred to as the [conduit theory](https://www.investopedia.com/terms/c/conduittheory.asp), as the investment company functions as a conduit for passing on capital gains, dividends, and interest to individual shareholders.

> **Fast Fact**
>
> Regulated investment companies do not pay taxes on their earnings.

Without the RIC allowance, both the company and investors would pay taxes on the company's gains or earnings. Pass-through income allows the company to avoid paying corporate income taxes on profits passed through to its shareholders. The only income tax imposed is on individual shareholders.

## How to Qualify as a Regulated Investment Company (RIC)

To qualify as a regulated investment company, the business has to meet specific criteria.

1.  Exist as a corporation, or other entity, which would ordinarily have taxes assessed as a corporation.
2.  Be registered as an investment company with the Securities and Exchange Commission (SEC).
3.  Elect to be deemed as an RIC by the [Investment Company Act of 1940](https://www.investopedia.com/terms/i/investmentcompanyact.asp) as long as its income source and diversification of assets meet specified requirements.

An RIC must earn at least 90% of its income from capital gains, interest, or dividends from investments. Further, an RIC must distribute a minimum of 90% of its [net investment income](https://www.investopedia.com/terms/u/uit.asp) in the form of interest, dividends, or capital gains to its shareholders.

Should the RIC not distribute this share of income, it may be subject to an [excise tax](https://www.investopedia.com/terms/i/investmentcompany.asp) by the IRS. The RIC would also have to issue an IRS [Form 2439 to shareholders](https://www.investopedia.com/terms/f/form-2439.asp) stating that the capital gains are being retained.

To qualify as an RIC, at least 50% of the company's assets must be in cash, cash equivalents, or securities. No more than 25% of the company's assets can be in a single issuer's securities, except for government or other RIC securities.

## Regulated Investment Company (RIC) in the Real World

President Obama signed the [Regulated Investment Company Modernization Act of 2010](https://www.congress.gov/bill/111th-congress/house-bill/4337) into law on Dec. 22, 2010. It made changes to the rules governing 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 governing RICs was the Tax Reform Act of 1986.

The primary reason for the 2010 RIC Modernization Act was due to vast changes in the mutual fund industry in the 25 years between 1986 and 2010. Furthermore, many of the tax rules applicable to RICs have become obsolete, created administrative burdens, or caused uncertainty.

## The Bottom Line

A Regulated Investment Company (RIC) offers investors a tax-efficient structure by passing income directly to shareholders, thus avoiding double taxation. RICs can include mutual funds, ETFs, and REITs, all of which must meet specific criteria under IRS regulations, such as deriving at least 90% of their income from capital gains, interest, or dividends, and distributing a similar percentage of net investment income to shareholders. This framework allows investors to benefit from the earnings generated by these entities without the company itself incurring a corporate tax burden. Understanding these mechanics allows investors to make more informed decisions about participating in these investment opportunities.