A Passive Foreign Investment Company is a non-U.S. corporation that meets either the 75% passive income test or the 50% passive asset test for the tax year.

The income test looks at the percentage of passive income (interest, dividends, certain rents/royalties). The asset test looks at the average value of assets that produce—or are held to produce—passive income. Look-through and anti-abuse rules can apply.

Often yes. Many non-U.S. funds/ETFs qualify as PFICs for U.S. tax purposes unless a specific exception applies.

U.S. persons (citizens, residents, and certain domestic entities) that directly or indirectly own PFIC stock are subject to the rules and may have annual filing obligations.

Distributions above a small baseline and all gains on sale are allocated over your holding period, taxed at the highest rates for prior years, and subject to an interest charge as if the tax had been deferred.

Generally, the portion of distributions in a year that exceeds 125% of the average of the prior three years’ distributions (or 0 if none), plus all gain on disposition of PFIC stock.

A QEF election generally includes annually your share of the PFIC’s ordinary earnings and net capital gains. You typically need a PFIC Annual Information Statement from the fund to compute and support the inclusion.

For marketable PFIC stock, you may elect MTM to include annual unrealized gains as ordinary income (and recognize limited ordinary losses up to prior inclusions). Availability depends on marketability requirements.

Switching from the default regime to QEF or MTM often requires a “purging” election—typically a deemed sale (or deemed dividend in some cases)—to eliminate prior built-in deferral before the new method applies.

A QEF election made after the first PFIC year (without a purging step) can create an “unpedigreed QEF” where prior 1291 rules can still apply in part. Purging fixes the pedigree so only QEF rules apply going forward.

Common triggers include owning PFIC stock and (i) receiving a distribution, (ii) recognizing gain on disposition, or (iii) making or maintaining an election (QEF/MTM). QEF shareholders generally file annually to report inclusions.

There are limited exceptions where aggregate PFIC holdings below certain value thresholds and with no income/events may avoid filing for that year. Once you have distributions, gains, or elections, filing is typically required.

For certain 10% U.S. shareholders of a CFC, the PFIC regime may be “turned off” for the overlapping period (overlap rule). Other U.S. investors in the same company may still be fully subject to PFIC rules.

Yes, they can. Indirect ownership (e.g., a foreign fund investing in other foreign funds) and certain wrappers/insurance products may result in PFIC stock ownership for U.S. purposes.

PFICs held by certain U.S. tax-deferred retirement accounts are generally owned by the plan/custodian, not the individual, and often do not trigger Form 8621 for the individual. Confirm with your plan and advisor.

Under 1291, losses generally do not offset excess-distribution inclusions. MTM allows ordinary losses to the extent of prior MTM inclusions; QEF has its own basis/E&P mechanics for gains and losses.

States differ. Some follow federal treatment; others diverge on character, timing, or creditability. Review the rules of your state of residence.

Yes. PFIC rules apply to U.S. persons, including U.S. residents under immigration status (e.g., green card holders), regardless of where they live.

Maintain trade confirmations, annual statements, PFIC information statements (for QEF), and documentation of elections and basis—long enough to support returns and any carryforwards.

Our cross-border team identifies PFIC exposure, models QEF/MTM vs. default 1291, prepares Form 8621, and aligns foreign tax credits and state issues. See our U.S. Tax Return Service or contact us.