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# Passive Foreign Investment Company (PFIC)
- URL: https://university.heavnn.io/glossary/passive-foreign-investment-company/
- Published: 2026-10-12T07:50:00.000Z
- Updated: 2026-10-12T07:49:59.000Z
- Description: A Passive Foreign Investment Company (PFIC) is a US tax classification for a non-US corporation whose income or assets are predominantly passive under statutory tests.
- Author: Heavnn
- Tags: #glossary, #Import 2026-10-11 07:56

## What Is a Passive Foreign Investment Company (PFIC)?

A Passive Foreign Investment Company (PFIC) is a US tax classification for a non-US corporation whose income or assets are predominantly passive under statutory tests.

*Also known as: PFIC, Passive Foreign Investment Company.*

## How Passive Foreign Investment Company (PFIC) works

Passive Foreign Investment Company (PFIC) status applies to a non-US corporation when at least 75% of its gross income is passive or at least 50% of its average assets produce passive income, and US persons holding its shares then face a separate regime for distributions and gains. Without a qualified electing fund (QEF) or mark-to-market election, a default regime generally less favourable than ordinary capital gains treatment applies. Shareholders generally report holdings, distributions, dispositions and elections on Form 8621\. Non-US mutual funds and ETFs commonly meet the tests, which matters for US citizens and green card holders investing locally abroad.

## Passive Foreign Investment Company (PFIC) vs Controlled Foreign Corporation

Unlike a controlled foreign corporation, which depends on US shareholders holding a controlling stake, a Passive Foreign Investment Company classification depends only on passive income or assets, so even a small fund holding is covered.

## Example

Illustrative example: A US citizen living in Country A invests savings in a locally domiciled index fund. The fund earns almost entirely dividends and interest, so the fund meets the PFIC income test; the investor files Form 8621 and, without a QEF or mark-to-market election, faces the default regime when selling units.

## Common misconception

**Myth:** Foreign index funds are taxed in the US like domestic funds.

**Reality:** Most non-US pooled funds meet the Passive Foreign Investment Company tests, so US shareholders generally face separate Form 8621 reporting and a distinct regime for gains.

## Frequently asked questions

### What makes a company a PFIC?

A non-US corporation is a Passive Foreign Investment Company if at least 75% of its gross income is passive, or at least 50% of its average assets produce or are held to produce passive income, under 26 U.S.C. §1297.

### Who has to file Form 8621?

Form 8621 is filed by a US person who directly or indirectly holds Passive Foreign Investment Company shares, including on distributions, disposals, QEF or mark-to-market elections and the annual section 1298(f) report, subject to exceptions.

## Related terms

- [QEF Election](https://university.heavnn.io/glossary/qef-election/) — Election changing PFIC taxation of gains
- [Form 8621](https://university.heavnn.io/glossary/form-8621/) — IRS form reporting PFIC holdings
- [US Person](https://university.heavnn.io/glossary/us-person/) — Defines who is subject to PFIC rules
- [Accidental American](https://university.heavnn.io/glossary/accidental-american/) — Often hold foreign funds unknowingly caught

## Related guides

- [Global tax reform and US digital nomads](https://university.heavnn.io/global-tax-reform-why-u-s-digital-nomads-should-care/) — US nomad tax exposure context
- [US expat tax reform debate](https://university.heavnn.io/trumps-tax-agenda-reignites-debate-over-u-s-expat-tax-reform/) — Debate on expat tax rules including investments

## Sources

- [US Code (govinfo, 2024 ed.) – 26 U.S.C. §1297](https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleA-chap1-subchapP-partVI-subpartD-sec1297.htm?ref=university.heavnn.io)
- [IRS – About Form 8621](https://www.irs.gov/forms-pubs/about-form-8621?ref=university.heavnn.io)

*Last verified: 2026-10-09\. This entry is general information, not tax or legal advice; rules vary by country and change over time.*