What is a PFIC (Passive Foreign Investment Company)?
“PFIC” stands for passive foreign investment company. It is the label the U.S. tax law gives to many foreign investment funds. If you own one and you are a U.S. person, you usually have a yearly reporting duty (Form 8621) and special tax rules that can be much harsher than the rules for a U.S. mutual fund.
The two tests
A foreign corporation is a PFIC if either test is met for the year:
- Income test: 75% or more of its gross income for the year is passive income (such as dividends, interest and gains from investments).
- Asset test: at least half of its assets, measured as an average over the year, produce passive income or are held to produce it.
These are the tests in the IRS Instructions for Form 8621 and in Internal Revenue Code section 1297. A fund that mostly holds shares, bonds or cash is passive on both tests.
What usually is, and is not, a PFIC
| Holding | Usually a PFIC? |
|---|---|
| Foreign mutual fund or foreign ETF organized as a corporation (for example a UCITS fund or an Indian mutual fund scheme) | Usually yes. Confirm each fund; a familiar brand does not change the answer. |
| A U.S. mutual fund or U.S. ETF | No. A U.S. fund is not a foreign corporation. |
| Shares of a foreign operating company (a business that makes and sells things) | Usually no, because its income and assets are mostly active. Test it. |
| A foreign holding company or investment company | Often yes, because its income and assets are passive. |
| Units held inside an IRA, 401(k) or similar U.S. tax-favored account | Not reported by you on Form 8621; see who must file. |
| A foreign pension or provident arrangement | Special rules and exceptions apply. Review each one. |
Once a PFIC, always a PFIC
Stock is treated as PFIC stock for your whole holding period if the company was a PFIC at any time while you held it, unless you had a qualified electing fund (QEF) election in place. You can end that treatment by making a “purging” election that recognizes gain as if you had sold the stock on the last day of the company’s last PFIC year (IRC section 1298(b)(1)). A fund that stops being a PFIC in a later year can still be a PFIC for you.
Indirect ownership
You can be a PFIC shareholder without holding the fund yourself. Stock owned by a partnership, estate or trust is treated as owned proportionately by its partners or beneficiaries, and a person who owns 50% or more of a corporation is treated as owning a proportionate share of the stock the corporation owns. The Form 8621 instructions describe these indirect shareholders and when each must file.
Indian mutual funds
Indian mutual fund schemes are the most common source of PFIC reporting for U.S. taxpayers with ties to India. They are treated as foreign investment funds that are passive on both tests. Read the Indian mutual funds guide.
General educational information. PFIC treatment, elections and reporting depend on individual facts and change over time. Confirm the rules on irs.gov and consult a qualified professional before filing Form 8621 or making any election. This site is an independent guide and is not affiliated with the IRS.