What is PFIC?

What is a PFIC?

PFIC stands for Passive Foreign Investment Company. In simple terms, it is a foreign corporation that mainly earns passive income, such as dividends, interest or capital gains, or mainly holds assets that produce passive income.

For U.S. tax purposes, a foreign corporation can be treated as a PFIC if it meets either of two tests: at least 75% of its gross income is passive income, or at least 50% of its assets produce, or are held to produce, passive income.

For Americans living abroad, PFIC rules often become relevant through ordinary local investment products, such as non-U.S. mutual funds, ETFs, index trackers or certain insurance-based investment products.

This can come as a surprise. An investment that looks normal in the Netherlands, Germany, France, Spain or another country may be treated very differently on a U.S. tax return.

• What is the problem with a PFIC for a US person?

Why do PFIC rules matter for Americans abroad?

The PFIC rules matter because they can create two main issues.

The first issue is additional U.S. tax complexity. PFICs are subject to specific U.S. tax rules. Depending on the situation, gains and distributions may be taxed under special rules, and interest charges may apply. The result can be more complex than simply reporting dividends or capital gains from a regular investment account.

The second issue is additional reporting. A U.S. person who is a direct or indirect shareholder of a PFIC may need to file Form 8621 with the IRS. The IRS describes Form 8621 as the information return used by shareholders of a Passive Foreign Investment Company or Qualified Electing Fund.

This form can be difficult to complete, especially when the foreign fund or investment provider does not supply information in a format that fits U.S. reporting requirements.

Common examples of possible PFICs

PFIC classification depends on the specific investment. However, common examples may include:

• non-U.S. mutual funds;
• non-U.S. ETFs;
• foreign index trackers;
• certain foreign investment funds;
• some insurance-based investment products;
• certain foreign pension or retirement investment structures;
• some foreign holding companies or investment vehicles.

Not every foreign account is automatically a PFIC. A bank account, for example, is not the same as a fund investment. But if your local account holds non-U.S. funds or ETFs, the PFIC question becomes more relevant.

Why this often affects U.S. expats

Many Americans abroad build their financial life locally. They may have a local investment account, a pension product, a savings plan or an investment portfolio recommended by a local bank or adviser.

The local adviser may be thinking from a domestic tax perspective. That is understandable, but it can create a problem if the person is also a U.S. citizen, Green Card holder or otherwise considered a U.S. person for tax purposes.

For U.S. tax purposes, the question is not only where you live. The United States generally taxes U.S. citizens and certain other U.S. persons on worldwide income. That means foreign investments may still need to be reviewed for U.S. reporting.

How do I know if I have a PFIC?

It is not always obvious from the name of the product. A few warning signs are:

• you hold a fund or ETF that is not based in the United States;
• your investment account is with a local European or non-U.S. bank;
• your portfolio contains index trackers, mutual funds or pooled investment products;
• your adviser selected products for local tax reasons only;
• the provider cannot give U.S.-style annual tax reporting;
• you have never reviewed your investments from a U.S. tax perspective.

If one or more of these apply, it does not automatically mean there is a problem. It does mean the portfolio should be checked carefully.

What should I do if I already own a PFIC?

First: do not make quick decisions without advice. Selling a PFIC can itself have U.S. tax consequences. Keeping it may also create ongoing reporting requirements.

The right next step depends on several factors, including:

• the type of investment;
• how long you have held it;
• whether you received distributions;
• whether there are unrealized gains;
• how previous U.S. tax returns were filed;
• whether Form 8621 was filed in previous years.

In some cases, it may be possible to make an election, such as a Qualified Electing Fund election or a mark-to-market election. In other cases, the default PFIC rules may apply. These choices are technical and should be reviewed by someone familiar with U.S. taxation of foreign investments.

Are there alternatives to PFICs?

Often, yes. Americans abroad may still be able to invest, but the structure matters.

Possible alternatives may include:

• individual shares;
• individual bonds;
• certain U.S.-compliant funds;
• direct equity holdings;
• investment structures reviewed in advance for U.S. tax compatibility.

The key point is not that Americans abroad cannot invest. The key point is that investment choices should be made with both local and U.S. tax rules in mind.

PFIC, FBAR and FATCA: what is the difference?

PFIC reporting is not the same as FBAR or FATCA reporting.

FBAR generally concerns foreign financial accounts and whether their combined value exceeds the reporting threshold.

FATCA can require reporting of certain foreign financial assets.

PFIC rules look at what you own inside the account, such as foreign funds or ETFs.

This means one investment account can raise several different U.S. reporting questions at the same time.

When should you seek help?

It is wise to seek specialist guidance if:

• you hold non-U.S. funds, ETFs or investment products;
• you are not sure whether your pension or investment account includes PFICs;
• you have filed U.S. tax returns but never reported Form 8621;
• you recently discovered that you are a U.S. person;
• you are considering selling foreign fund investments;
• you want to invest locally but avoid unnecessary U.S. tax complications.

PFIC rules are one of the areas where early review can prevent unnecessary complexity later.

Clarify your situation before it becomes a tax problem

PFIC problems often start before anyone realizes there is a tax issue.

A local investment fund. A European ETF. A portfolio set up by a bank adviser. A pension-linked investment product. Or a fund that looks perfectly ordinary in your country of residence, but is treated differently by the United States.

For Americans abroad, the issue is often not the investment itself. The issue is that the investment was selected without checking how it would be reported on a U.S. tax return.

Americans Overseas is not a CPA firm, not an investment adviser and not a local accounting firm. We do not provide personal tax or investment advice.

What we do: we help you clarify your situation, explain which U.S. tax topics may require attention and, where necessary, connect you with a U.S. tax advisor, CPA or specialist from our network.

A first conversation with the Americans Overseas team is free and without obligation.

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