PFICs & Foreign Investments
A foreign mutual fund, a non-U.S. ETF or a family investment company abroad is often a passive foreign investment company. The U.S. tax on it is designed to be punitive.
We identify PFICs in a portfolio, choose the elections that limit the damage, prepare Form 8621 and clean up years where the investments were never reported.
The default PFIC regime taxes gains at the highest rate plus interest.
A foreign corporation is a PFIC if 75 percent or more of its income is passive, or 50 percent or more of its assets produce passive income. Most foreign funds meet the test.
Under the default rules, gains and large distributions are spread over the holding period, taxed at the highest ordinary rate for each year and charged interest. Losses do not offset.
Elections can change this: a qualified electing fund election taxes income currently at normal rates; a mark-to-market election taxes annual appreciation as ordinary income. Both require timely action and the right information.
The PFIC rules in numbers.
From the Instructions for Form 8621.
The filing exception is narrow and does not apply where there is an excess distribution or an election in effect. Most PFIC holders should expect to file. Sources: IRS, Instructions for Form 8621.
What we do with PFICs.
PFIC identification
Portfolio review to determine which holdings are PFICs, including funds held through foreign brokers and pensions.
QEF and mark-to-market elections
Choosing and making the election that fits each holding, and obtaining the information the QEF election requires.
Excess distribution calculations
The default-regime computation, year by year, with the interest charge.
Form 8621
Annual filing for each PFIC, coordinated with your accountant and the return.
Unreported years
Streamlined and voluntary disclosure submissions covering PFIC holdings that were never reported.
Portfolio restructuring
Moving to holdings that avoid the regime, including U.S.-registered funds and direct holdings.
How a PFIC engagement runs.
Inventory first; the elections depend on it.
Inventory
Every foreign fund, holding company and investment account reviewed.
Classify
PFIC status determined for each holding and for each year held.
Elect or compute
Elections made where available; default computations prepared where not.
File and restructure
Form 8621 filed, prior years addressed, portfolio adjusted.
Lawyers who plan the structure and defend it.
Structure before the move, the investment or the sale.
Residency timing, entity choice, trusts and elections are decided together, with the home-country result in view. We coordinate with your accountants and counsel abroad so the plan works in both places.
Compliance and controversy in the same hands.
Foreign asset reporting, penalty exposure, streamlined and voluntary disclosures and IRS examinations. The firm also litigates and arbitrates, so a plan is written knowing how it will be tested.
The interest charge grows every year the holding goes unreported.
Elections are easiest in the first year of ownership.
- Ask your foreign broker or bank for the fund prospectuses and annual statements
- Review foreign pension and insurance wrappers for underlying PFICs
- Make elections in the first year a holding is acquired where possible
- Address unreported years before selling
- Assume a foreign ETF is treated like a U.S. ETF
- Sell a PFIC without computing the default-regime tax first
- Rely on the $25,000 exception without checking its conditions
- Ignore PFICs held inside a foreign company you own
From the firm’s writing.
CFC vs PFIC: Complete Guide to Foreign Corp Reporting
Which regime applies and what it requires.
Read the articleFBAR and FATCA Risks for U.S. Expats
Account reporting that usually travels with PFIC issues.
Read the articleIRS Voluntary Disclosure for Foreign Assets and Crypto
Bringing unreported holdings into compliance.
Read the articleFrequently asked.
A passive foreign investment company: a foreign corporation whose gross income is 75 percent or more passive, or whose assets are 50 percent or more passive by value. Foreign mutual funds, ETFs and many holding companies qualify.
The default regime treats gains and large distributions as earned evenly over the holding period, taxes each year’s share at the highest ordinary rate and adds interest. It was designed to remove the benefit of deferral in foreign funds.
A qualified electing fund election taxes you each year on your share of the fund’s ordinary income and capital gains at normal rates. It requires an annual information statement from the fund, which many foreign funds do not provide.
An election, available for PFIC shares that are regularly traded, to include each year’s increase in value as ordinary income. It avoids the interest charge. Losses are allowed only to the extent of prior inclusions.
The approach depends on the number of years, the amounts and whether the failure was non-willful. Streamlined procedures are often available. Each year’s Form 8621 and tax computation is prepared as part of the submission.
Other areas of the practice.
Inbound and outbound services, from pre-immigration planning to offshore compliance. Back to the overview.
Foreign funds or investment companies in your portfolio?
A confidential consultation. We will tell you which holdings are PFICs, what they cost and how to limit it.