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 — Election changing PFIC taxation of gains
- Form 8621 — IRS form reporting PFIC holdings
- US Person — Defines who is subject to PFIC rules
- Accidental American — Often hold foreign funds unknowingly caught
Related guides
- Global tax reform and US digital nomads — US nomad tax exposure context
- US expat tax reform debate — Debate on expat tax rules including investments
Sources
Last verified: 2026-10-09. This entry is general information, not tax or legal advice; rules vary by country and change over time.
