Articles · Advanced · International Tax and Global Mobility
PFIC Rules for U.S. Investors
A passive foreign investment company (PFIC) regime penalizes U.S. investors who hold foreign pooled investments. Foreign mutual funds are the most common surprise, especially for people returning from abroad.
The tests
A foreign corporation is a PFIC if at least 75% of its gross income is passive, or at least 50% of its assets by value produce passive income. Once a holding is a PFIC, it can generally stay tainted for that investor, under the rule known as once a PFIC, always a PFIC.
The default Section 1291 regime
Without an election, gains and excess distributions are spread across the holding period. Amounts allocated to prior years are taxed at the highest rate in effect, with an interest charge. Gains cannot use capital gain rates, and losses are not simply usable.
Elections and reporting
A qualified electing fund election taxes the investor on their share of earnings each year, but requires an annual information statement from the fund, and many foreign funds do not provide one. A mark-to-market election may apply to marketable stock, taxing annual changes in value as ordinary income.
Form 8621 is generally filed for each PFIC, with exceptions for small holdings. Failing to file can keep the statute of limitations open for a return, so investors should identify holdings early.
Key takeaways
- Income and asset tests define a PFIC.
- The default regime is punitive.
- Elections work best when made early.
For general education only, not tax advice. Tax law changes often, so confirm current rules and amounts with primary sources.