Foreign Mutual Funds And PFICs – A Guide For Expats

Many Americans living abroad open investment accounts with local banks or brokers, not realizing these accounts often contain “PFICs” — Passive Foreign Investment Companies.

The problem? PFICs are taxed harshly by the IRS and can easily turn profitable investments into unexpected tax liabilities.

The US tax code discourages owning non-US investment funds by imposing complex and punitive tax rules. Most foreign mutual funds and ETFs held through non-US brokers are treated as PFICs, which means higher tax rates, heavy reporting, and possible penalties for non-compliance.

If you’re an American expat investing abroad, understanding PFIC rules before you buy foreign funds can save you both money and stress later.

What is a PFIC?

A PFIC, or Passive Foreign Investment Company, is any non-US corporation that meets one of two IRS tests:

• Income Test: At least 75% of its gross income is passive, for example, dividends, interest, rents, or capital gains.
• Asset Test: At least 50% of its assets produce (or are held to produce) passive income.

This typically occurs with foreign mutual funds not held by a US investment firm. Mutual funds with non-US investments held by a US broker are not a PFIC. For example, a Europe-focused fund or ETF held with Vanguard is not a PFIC. However, any fund or ETF held with a UK bank or broker is a PFIC.

There are other non-US investments besides mutual funds that are treated as a PFIC. Foreign life insurance for example might meet the IRS PFIC definition. In this article we focus on non-US mutual funds.

The PFIC designation is made on the investment level, not for the foreign account as a whole.

In most cases, the foreign account(s) are wrappers that hold various types of investments, funds, bonds, etc. Each investment must be reviewed individually. This is because not all investments are considered PFICs, e.g., active companies don’t meet either PFIC test.

For each PFIC, you must file a separate Form 8621. We discuss the filing requirements in more detail later.

How to Identify a PFIC Before You Invest

Many Americans abroad unknowingly buy PFICs through their local bank or broker. Fortunately, there are simple ways to check before you invest.

Start with the fund’s registration.
If the fund is registered in the US and regulated by the SEC, it’s not a PFIC.
But if it’s registered in Ireland, Luxembourg, the UK, Singapore, or another foreign jurisdiction, it likely qualifies as one.

Look at the ISIN.
Every fund has an International Securities Identification Number.
If the ISIN begins with “US,” it’s a US fund. If it starts with another country code, such as “IE” for Ireland or “LU” for Luxembourg, it’s foreign—and likely a PFIC.

Ask your broker or fund provider directly.
If they cannot provide a QEF statement that meets US tax requirements, assume the fund is a PFIC. When in doubt, use a US brokerage.

Owning international ETFs or mutual funds through a US platform (like Vanguard or Fidelity) gives you global exposure without triggering PFIC rules.

How are PFICs taxed?

There are three types of tax treatments for PFICs:

1. Excess Distribution (section 1291 Fund) – default treatment
2. Mark-to-Market Election (MTM)
3. Qualified Electing Fund (QEF)

The taxpayer can elect the tax treatment that makes the most sense for them. They do this on Form 8621, which we explain in a moment. But note that you can make the election only during the first year that you own the PFIC or the year the PFIC holding period begins. Otherwise, the default treatment typically applies.

If this sounds overwhelming, consult with an experienced expat tax accountant.

Excess Distribution (Section 1291 Fund)

Under this default tax treatment of PFICs, US taxes can be deferred until earnings are distributed or the PFIC is sold. The IRS taxes these earnings as ordinary income.

The excess distribution tax is calculated based on the increase in tax each year during your holding period. The highest tax rate for each applicable year applies to the excess distribution. The amount calculated per year is based on the total taxable amount prorated based on the total number of days each year over the total number of days during the holding periods.

You also pay interest based on the net increase in tax.

This means that you could face a high tax bill plus interest charges later.

The calculation can get complex since covers multiple years, tax rates, interest rates, etc. It’s best to use an accounting firm that can compute on your behalf.

Mark-to-Market (MTM)

When you elect the mark-to-market tax treatment, the annual gain or the allowed loss in the PFIC’s fair market value at the end of the tax year is taxed as ordinary gain or loss. This is not a realized gain or loss but the change in value. It is treated as if you sold the funds at the end of the year and repurchased them the next day.

Of course, if you sell PFICs during the year, then you pay tax on the actual gain or loss.

The advantage of the mark-to-market tax treatment of PFICs over the default method is that you avoid interest payments, potentially the highest income tax rate, and spread out your tax bill. The calculation is also easier as it only covers one year.

Qualified Electing Fund (QEF)

With the QEF election, the PFIC is taxed on its pro-rata share of undistributed earnings for both ordinary income and long-term capital gain. This requires a QEF investor statement that complies with US GAAP financials.

Many foreign brokerages don’t comply with this documentation requirement. Therefore, not many taxpayers use the QEF election for PFICs.

How to select the best PFIC tax treatment?

A number of factors affect which tax treatment is more beneficial.

• Are you a U.S. Citizen/GC holder? How long do you plan on living in the US if you are neither? Are you planning on applying for citizenship or permanent residency?
• What amount(s) are you planning on investing and what is the expected growth of all foreign funds held?
• Does the fund pay dividends or offer dividend reinvestments?
• Do you anticipate holding the investments for short or long-term periods?

An experienced tax accountant can guide you through the scenarios and help you decide if the Section 1291 default method or the mark-to-market method is better for you.

Form 8621 PFIC reporting

You must report foreign mutual funds on Form 8621 as part of your individual tax return. Form 8621 is called Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.

You must file Form 8621 if you:

• Hold more than $25,000 in all PFICs combined, or
• Receive a distribution from a PFIC, or
• Have a gain from your PFIC, or
• Make a QEF or MTM election.

You must typically file a Form 8621 for each investment separately, not one for the entire foreign account(s).

So, if you hold three mutual funds and two ETFs in your Spanish brokerage account, you’d have to file five Forms 8621 each tax year. Some accounts in a brokerage account are not PFICs, for example individual stock. This is why you may not have to report the brokerage account as a whole.

And don’t forget to report your foreign accounts on FinCEN 114 (FBAR) and on Form 8938 if you meet the reporting thresholds.

Exceptions to filing Form 8621

You don’t have to report your foreign mutual funds to the IRS if the total value of all your PFICs combined is:

• less than $25,000 ($50,000 if filing a joint return) on the last day of the year, and
• there are no excess distributions or gains on the sale or dispositions of stock sales.

However, remember that you can make the MTM election only in the first year of owning the PFIC. If your PFICs are below the filing requirement in the first year but exceed the threshold in the second year, you can’t take the election retroactively.

If you don’t want to use the default tax treatment down the road, you should file Form 8621 even if your PFICs are below the threshold.

Late PFIC Filings and Catch-Up Options

If you’ve recently learned about PFICs, you’re not alone. Many expats discover the issue years after opening a foreign brokerage account.

Missing Form 8621 filings can be fixed, but only with care. You may need to amend prior-year returns and calculate the PFIC tax retroactively. This can be complex, especially under the default “excess distribution” method.

For taxpayers living abroad who were unaware of the rules, the Streamlined Foreign Offshore Procedures can often bring you into compliance without penalties. This IRS program is designed for non-willful omissions and includes late Form 8621 filings.

If you suspect you missed prior years, don’t ignore it. The IRS now cross-checks PFIC ownership through FATCA and global data-sharing agreements.

A qualified expat tax professional can help you decide whether to amend returns, file streamlined submissions, or disclose through another method.

Filing deadlines and penalties

Form 8621 is filed together with your individual tax return, so the due date is the same. For an overview of tax deadlines for expats, check out our tax calendar.

Not filing or filing late can result in numerous penalties (late filing, late payment, interest).

IRS Enforcement and Reporting Trends

The IRS has increased its focus on foreign investments and PFIC reporting in recent years. 

Through the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS), foreign financial institutions now automatically share account data with the IRS.

This means that unreported PFICs can be detected even if you’ve never mentioned them on your tax return.In many cases, PFIC issues surface during FBAR or FATCA reviews, not because of an audit request.

The IRS has also expanded its use of data analytics and cross-border information matching to identify taxpayers showing signs of foreign passive income without corresponding Form 8621 filings.

The takeaway: compliance is no longer optional. Voluntarily correcting PFIC reporting issues is almost always safer, and less costly, than waiting for the IRS to contact you first.

PFIC-Free Alternatives for Expats

If you want to invest abroad without PFIC complications, there are safer paths available.

Use US-based brokers.
Platforms such as Charles Schwab, Fidelity, or Interactive Brokers allow expats to hold international ETFs and mutual funds that are registered in the US and exempt from PFIC rules.

Choose US-domiciled funds with global exposure.
You can invest in international markets through US ETFs, such as an S&P Global or MSCI World fund, without triggering foreign reporting.

Consider direct investments.
Owning shares of non-passive foreign companies (for example, a business you help operate) usually avoids PFIC classification.

Avoid insurance-wrapped investments and foreign savings schemes.
Products like offshore life insurance, foreign pensions, and non-US managed portfolios often contain PFICs, even when marketed as “tax-efficient.”

For most expats, sticking with US-registered investment products provides the easiest balance between global diversification and peace of mind.

FAQs for Expats: PFICs & Foreign Mutual Funds

What exactly is a PFIC?

A PFIC (Passive Foreign Investment Company) is a non-US corporation where ≥ 75% of its income is passive or ≥ 50% of its assets produce passive income, as defined by the IRS. 

Do all foreign mutual funds qualify as PFICs?

Not all, but most. A foreign mutual fund held through a non-US broker is often a PFIC. A similar fund held through a US-registered broker typically is not. Your broker and fund’s registration status matter.

When do I need to file Form 8621?

You must file Form 8621 if you hold a PFIC, receive a distribution, sell PFIC shares, or make a PFIC election. Even without income it may be required if your holdings exceed thresholds

What are the tax treatment options for PFICs?

You typically have three methods: the default “excess distribution” regime (punitive), the mark-to-market (MTM) election, or the Qualified Electing Fund (QEF) election. Each has its own rules and implications.

What happens if I miss a PFIC filing or election?

You may face higher taxes, interest charges, and may lose access to favorable election options. Incorrect or missing filings can lead to long-term IRS scrutiny. 

Can I avoid PFIC rules by investing in foreign mutual funds?

It’s possible to avoid PFIC classification, but you need to use US-registered investment vehicles or ensure your foreign investment doesn’t meet PFIC tests. Always check the fund’s structure and registration.

Should expats invest in foreign mutual funds and ETFs?

As you can see, holding mutual funds or ETFs through a foreign bank or broker can have significant US tax implications. Before you make such an investment abroad, consult with a knowledgeable expat tax accountant.