Form 8621 - Shareholder of a Passive Foreign Investment Company
Form 8621 and PFIC Reporting for U.S. Expats
For many U.S. citizens living abroad, one of the more unexpected tax complexities involves owning foreign mutual funds or similar investments—often held in overseas brokerage accounts or in tax-advantaged accounts like a Stocks and Shares ISA in the UK. If you own such investments, you may unknowingly be holding what's classified under U.S. tax law as a Passive Foreign Investment Company (PFIC).
If this applies to you, Form 8621 may be required—and understanding what it is, when to file it, and how to choose the right election is crucial to staying compliant with the IRS.
What Is a Passive Foreign Investment Company (PFIC)?
A PFIC is defined by the IRS as any foreign corporation that meets either of the following two tests during a tax year:
Income Test: 75% or more of the corporation’s gross income is considered passive income (e.g., interest, dividends, royalties, or capital gains),
Asset Test: At least 50% of the company's assets produce, or are held for the production of, passive income.
Common PFIC examples include foreign mutual funds, ETFs, investment trusts, and certain insurance products. U.S. taxpayers, including expats, are often surprised to learn that these widely-used investment vehicles may come with burdensome U.S. tax reporting obligations—even if the investment is tax-free or tax-deferred in the country of residence.
Why PFIC Classification Matter
PFICs come with complex and often punitive U.S. tax rules. The IRS requires that U.S. taxpayers report their interest in a PFIC using Form 8621, and in doing so, the taxpayer must generally choose one of three tax treatment elections:
Qualified Electing Fund (QEF) Election
Mark-to-Market Election
Section 1291 Default Treatment (applied automatically if no election is made)
Each of these options has different implications for how the investment is taxed, both currently and in the future.
Tax Treatment Options on Form 8621
1. Qualified Electing Fund (QEF) Election
Choosing the QEF election is often the most favorable long-term option, though it requires that the foreign fund provides detailed annual information to shareholders—something many funds outside the U.S. do not.
Under the QEF election:
You include your pro-rata share of the fund’s ordinary earnings as income each year.
You also report your share of the fund’s net capital gains as long-term capital gains, even if they have not been distributed.
You may defer tax on undistributed earnings through a further election, but interest may apply.
This election effectively allows you to treat the PFIC similarly to a U.S. mutual fund, avoiding the punitive tax regime of default PFIC treatment. However, gathering the required information from the foreign fund can be challenging.
2. Mark-to-Market (MTM) Election
If the QEF route is unavailable or impractical, another option is the Mark-to-Market election, available for PFICs whose shares are publicly traded.
This approach means you:
Report annual unrealized gains as income based on the increase in fair market value over your adjusted basis.
Conversely, if the value of the PFIC stock drops, you may be allowed a deduction (subject to limitations) for the unrealized loss.
While this election avoids the more severe tax consequences of the default method, it can still lead to taxation of gains that have not actually been realized through a sale.
3. Section 1291 Fund (Default Method)
If you do not make a QEF or MTM election, the PFIC is treated as a Section 1291 Fund, which invokes some of the most punitive tax rules under U.S. law.
When you receive an excess distribution—defined as a distribution in the current year that exceeds 125% of the average annual distribution over the past three years—it is subject to harsh treatment:
The excess is allocated over prior years and taxed at the highest rate for each applicable year.
Interest charges are then added as if you had underpaid tax in each of those years.
This method can result in a substantial tax liability, even for modest distributions, especially if the investment has been held for several years without being reported.
When and How to File Form 8621
As a U.S. expat, your standard deadline to file a federal tax return is June 15, with automatic extensions available until October 15. For years like 2020, this deadline was temporarily extended further.
Form 8621 must be filed as an attachment to your main federal tax return (Form 1040), not on its own. If you own multiple PFICs, you may need to file a separate Form 8621 for each one.
Keep in mind that you must file Form 8621 even if no income was distributed from the PFIC in a given year—simply holding the investment may trigger a reporting obligation.
Navigating PFICs: Next Steps for Expats
Dealing with PFIC rules can be especially confusing for Americans living abroad, where non-U.S. funds are often the default investment option. But failing to properly report these investments can lead to penalties and potentially years of back taxes.
If you think you may own a PFIC—or are unsure which election to make on Form 8621—it’s highly recommended that you consult a tax professional with expertise in U.S. expat taxation and foreign investment reporting.
Our team of U.S. tax advisors for expats is here to help you determine:
Whether your investment qualifies as a PFIC,
Which election is most appropriate for your situation,
And how to remain compliant going forward.
Avoid costly surprises and stay on the right side of IRS rules—reach out today for support with Form 8621 or any of your U.S. tax filing needs.
