What Is A PFIC?
A foreign corporation is a passive foreign investment company (PFIC) if it meets either of the following two tests:
- 75% or more of its gross income for the taxable year is passive income (generally investment income such as interest, dividends, royalties, rents and annuities), or
- At least 50% of its assets are held to produce passive income.
This definition describes most foreign mutual funds, since mutual funds outside the United States tend to be organized as corporations (or organizations deemed corporations under US tax law). PFICs can also be ETFs, bond funds, currency tracking funds, precious metal funds, investment trusts, hedge funds, private equity funds, startups and more. Many expats own PFICs, either directly or indirectly, without understanding their toxic treatment under US tax law. Here is a look at Form 8621 and here are the Instructions. But really, forget about the instructions. You are not going to want to try this on your own.