Glossary
Passive Foreign Investment Company (PFIC)
Definition
A PFIC is a non-U.S. corporation that meets an income test (at least 75% passive income) or an asset test (at least 50% passive assets). Most foreign mutual funds and ETFs are PFICs, and U.S. taxpayers who own them face special tax and reporting rules.
What makes a company a PFIC
A foreign corporation is a PFIC if, for the year, at least 75% of its gross income is passive or at least 50% of its assets produce or are held to produce passive income. Many foreign funds meet this by their nature, regardless of how they are marketed locally.
Why the rules are harsh
By default, gains and certain distributions are allocated over the holding period and taxed at the highest rates with an interest charge. Alternatives, such as a qualified electing fund or mark-to-market election, may be available but depend on the facts and timely action.
Reporting
U.S. persons who own PFIC shares generally report them on Form 8621, subject to exceptions. A person who becomes a U.S. resident while owning foreign funds should review them early.
Practical example
For example, suppose Valeria moves from Brazil to the United States and holds a Brazilian investment fund. The fund may be a PFIC, so selling it at a gain could be taxed under the default PFIC rules and require Form 8621.
General information, not tax advice
This page provides general educational information about U.S. federal tax rules. It is not individualized tax, legal or accounting advice, and it does not create a client relationship. Results depend on each taxpayer's specific facts.
Written by Roger I. Chirino, founder of Chirino USA Accountants & Advisors P.A.
Supported by licensed CPAs, IRS Enrolled Agents (EAs), and experienced U.S. tax professionals focused on cross-border compliance and planning.
Related questions
Related IRS forms
Related articles
Related tax cases
New U.S. Resident Owned Foreign Mutual Funds and Didn't Know About PFIC Rules
H-1B Visa Holder With Foreign Bank Accounts and Investments: What Must Be Reported?
EB-5 Investor Moving to the U.S.: Why Tax Planning Before Residency Matters
Received a U.S. Green Card? What Happens to Your Foreign Income, Companies and Investments?