PFIC (10-Step Guide to Evaluating Passive Foreign Investments) - Golding & Golding, Board-Certified Tax Specialist

PFIC (10-Step Guide to Evaluating Passive Foreign Investments) – Golding & Golding, Board-Certified Tax Specialist

PFIC:  The IRS has developed special rules for PFIC, such as Foreign Mutual Funds. PFIC refers to a Passive Foreign Investment Company. PFICs are generally reported on Form 8621 and FBAR. The income generated from a PFIC is taxed in two main stages:

The PFIC excess distribution calculations are very complex. They require a sophisticated tax analysis. Unfortunately most tax practitioners do not handle PFIC (we do) and commercial software such TurboTax does not even provide the form.


The PFIC tax is part of the anti-deferral regime. The IRS has developed various anti-deferral rules. The purpose of these rules is to avoid the deferral of income, and associated U.S. tax on the income.

Passive Foreign Investment Company (PFIC) rules are complex, and involve reporting rules, filing requirements, elections, tax treatment, excess distributions, and much more.

We will summarize the basics for you:

What is a PFIC?

A PFIC is a type of “foreign passive investment.” When a U.S. shareholder invests into a foreign company, and meets either the income or asset test, the tax rules become infinitely more complicated. Specifically, if at least 75% of the foreign company’s gross income is passive or at least 50% of the income generating assets are passive, the PFIC rules will apply.

Here is how the acronym breaks down:


By passive, the rules are referring to investment income (such as dividends) vs. earned income (such as employment)


Foreign refers to the fact that the company is “foreign-based.”


By investment, it means the foreign company must operates as an investment company, such as a BVI holding company.


The ownership must be an entity in order to qualify as a PFIC.

26 U.S.C. § 1297 (Passive Foreign Investment Company)

(a) In general For purposes of this part, except as otherwise provided in this subpart, the term “passive foreign investment company” means any foreign corporation if—

(1) 75 percent or more of the gross income of such corporation for the taxable year is passive income, or

(2) the average percentage of assets (as determined in accordance with subsection (e)) held by such corporation during the taxable year which produce passive income or which are held for the production of passive income is at least 50 percent.

(b) Passive income: For purposes of this section—

(1) In general Except as provided in paragraph (2), the term “passive income” means any income which is of a kind which would be foreign personal holding company income as defined in section 954(c).

(2) Exceptions Except as provided in regulations, the term “passive income” does not include any income—

(A) derived in the active conduct of a banking business by an institution licensed to do business as a bank in the United States (or, to the extent provided in regulations, by any other corporation)

(B) derived in the active conduct of an insurance business by a qualifying insurance corporation (as defined in subsection (f)),

(C) which is interest, a dividend, or a rent or royalty, which is received or accrued from a related person (within the meaning of section 954(d)(3)) to the extent such amount is properly allocable (under regulations prescribed by the Secretary) to income of such related person which is not passive income, or

(D) which is export trade income of an export trade corporation (as defined in section 971). For purposes of subparagraph (C), the term “related person” has the meaning given such term by section 954(d)(3) determined by substituting “foreign corporation” for “controlled foreign corporation” each place it appears in section 954(d)(3).

Tax Treatment (Example)

The PFIC regime is incredibly complex. In order to try to boil it down to its barest form, we have prepared a simple example (noting, this example is for conceptual purposes only.)

Example: David has a moving box, and in the box is a mutual fund. 

While the investment grows within the box, it is not taxed.

  • Once the investment is taken out of the box, it becomes taxable.
  • The first distribution is the worst, because it is an excess distribution (unless within the 1st year of investment)
  • The excess distribution is taxed as the highest tax rate available (including interest).
  • The next year, an excess distribution calculation is performed to allocate excess vs. non-excess
  • Excess is taxed at the maximum tax rate, except the current year, which is taxed at the progressive tax rate.
  • Non-excess distribution is (generally) taxed under non-PFIC rules.

Filing Requirements

The PFIC Filing Requirements are determined by the aggregate value of all PFIC in a reportable year and by the total income generated by the PFICs.


PFIC reporting primarily involves filing an annual IRS Form 8621. Taxpayer files an 8621 form in any year in which the taxpayer either meets the threshold filing requirements (based on the value of the PFICs) or has an excess distribution.


QEF Election

Due to the fact that the PFIC tax amounts to a “penalty” tax, oftentimes a taxpayer may seek to limit the tax exposure by making an election. There are two main elections: MTM and QEF.

The QEF election is the Qualified Electing Fund election. It requires some cooperation with the foreign institution — which tends to make the election difficult to make, even if the U.S. Taxpayer wants to make the election.

MTM Election

Another type of election is the MTM, which is the “Mark-to-Market” election. As with the QEF election, by making the election, a taxpayer may limit or reduce their tax liability.  But, the MTM election also tends to require cooperation from the FFI (Foreign Financial Institution) — which may be difficult to achieve.Reporting a PFIC to the IRS

A PFIC is typically reported on Form 8621. There are some exceptions, exclusions, and limitations — but the 8621 is a staple in the PFIC reporting process. There may be additional 8938 and 5471 reporting as well.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.

Each case is led by a Board-Certified Tax Law Specialist with 20 years of experience, and the entire matter (tax and legal) is handled by our team, in-house.

*Please beware of copycat tax and law firms misleading the public about their credentials and experience.

How to Hire Experienced PFIC Counsel?

Generally, experienced attorneys in this field will have the following credentials/experience:

  • Board Certified Tax Law Specialist credential
  • Master’s of Tax Law (LL.M.)
  • Dually Licensed as an EA (Enrolled Agent) or CPA
  • 20-years experience as a practicing attorney
  • Extensive litigation, high-stakes audit and trial experience

How to Hire Experienced Streamlined Counsel?Interested in Learning More about Golding & Golding?

No matter where in the world you reside, our international tax team can get you IRS offshore compliant. 

Golding & Golding specializes in Streamlined Domestic Offshore Procedures. Contact our firm today for assistance with getting compliant.