What makes a company a PFIC
A foreign corporation is a PFIC for any year in which it fails either of two tests:
- Income test: 75% or more of its gross income is passive income, such as dividends, interest, rents and royalties from investments, and gains on investment assets.
- Asset test: on average, 50% or more of its assets produce passive income or are held to produce it.
Size and ownership do not matter. If the corporation owns at least 25% of another corporation by value, it is treated as holding its share of that company's assets and earning its share of its income, so an operating subsidiary can rescue a holding company. For the asset test, publicly traded companies measure assets at market value. A company that is not publicly traded and is a CFC uses adjusted tax basis, and other non-traded companies may elect to.
The usual suspects are foreign mutual funds, ETFs and other pooled funds organised as corporations; offshore hedge and credit funds; holding companies; and start-ups sitting on large cash balances, which can fail the asset test even with a real business.
The CFC overlap rule. If a foreign corporation is both a CFC and a PFIC, a US shareholder (10% or more) who includes its subpart F income is generally not subject to the PFIC rules for that stock. So a 10% owner of a CFC usually deals with Form 5471, not 8621. Smaller shareholders of the same company, and option holders, are not covered by this rule.
Who must file
A US person that is a direct or indirect shareholder of a PFIC generally files Form 8621 for any tax year in which they:
- receive certain distributions from the PFIC, directly or indirectly;
- recognise gain on a direct or indirect disposition of its stock;
- report income under a QEF or mark-to-market election;
- make one of the elections in Part II of the form; or
- must file the annual report required by §1298(f), which is Part I of the form.
A separate form is filed for each PFIC. If one PFIC owns another, the shareholder files for each PFIC in the chain.
Indirect shareholders
You can hold a PFIC without owning its shares directly. Under the instructions you are an indirect shareholder if you are:
- a 50% or more shareholder of a foreign corporation that is not itself a PFIC and owns PFIC stock;
- a shareholder of a PFIC that owns another PFIC, at any percentage; or
- an owner of a partnership, S corporation, trust or estate that holds PFIC stock.
A US partnership, S corporation, estate or non-grantor trust that holds a PFIC generally files Form 8621 itself. Its owners still have to file if the entity does not, or if they must recognise excess distribution income.
Holding a PFIC through a tax-exempt organisation, a qualified retirement plan, a 403(b) or 457(b) plan, an IRA, or a 529 or ABLE account does not make you a shareholder for these rules, so no Form 8621 is needed for those holdings.
The annual report and its exceptions
The annual report in Part I is filed by the first US person in the chain of ownership. There are several exceptions, but the two that matter most are value thresholds, and both apply only to section 1291 funds (PFICs with no QEF or mark-to-market election) and only in a year with no excess distribution and no gain:
- $25,000 exception: the total value of all PFIC stock you hold on the last day of your tax year is $25,000 or less ($50,000 on a joint return). All PFIC stock counts towards the total, including QEF and mark-to-market holdings, but not stock held through another US person or through another PFIC.
- $5,000 exception: for a PFIC held indirectly, your proportionate share of it is worth $5,000 or less.
A shareholder with a QEF or mark-to-market election still files every year, because the form is where the annual income is reported.
The three ways a PFIC is taxed
1. Excess distribution (section 1291): the default
If you make no election, the PFIC is a section 1291 fund and the default rules apply when you receive an excess distribution or sell.
An excess distribution is the part of this year's distributions that exceeds 125% of the average you received in the three preceding years (or your holding period, if shorter). Nothing received in the first year of your holding period counts. All gain on a sale is treated as an excess distribution.
The amount is spread evenly over every day you held the stock. The share allocated to the current year, and to any years before the company became a PFIC, is taxed as ordinary income. The share allocated to earlier PFIC years is taxed at the highest rate in effect for each of those years, plus an interest charge as if the tax had been paid late. Gains never get capital gains rates. It is reported in Part V.
2. Qualified electing fund (QEF, section 1295)
With a QEF election (Election A), you include your share of the PFIC's ordinary earnings as ordinary income and its net capital gain as long-term capital gain every year, whether or not anything is distributed. Your basis goes up for those inclusions and down when previously taxed amounts are paid out. It is reported in Part III.
It is usually the best outcome, but it has two catches. The PFIC must give you the information to compute your share, normally a PFIC Annual Information Statement. And the election must be made by the due date, including extensions, of your return for the first year it is to apply. A late election is possible only if you filed a protective statement in time or get IRS consent. A QEF election made after the first year of your holding period leaves earlier years subject to section 1291 unless you also make a deemed sale (Election D) or deemed dividend (Election E) election to purge them.
You can also elect (Election B) to defer paying tax on undistributed QEF earnings, with interest, until the election ends.
3. Mark-to-market (section 1296)
If the PFIC stock is marketable, meaning regularly traded on an SEC-registered exchange, the national market system or a qualifying foreign exchange, you can elect (Election C) to mark it to market. Each year you include as ordinary income any increase in value over your adjusted basis. A decrease is deductible only up to the mark-to-market income you have included in earlier years. It is reported in Part IV.
If you make the election after your first year of holding the stock, section 1291 can still apply in the first year of the election.
| Regime | When it applies | How income is taxed | Form 8621 |
|---|---|---|---|
| Excess distribution (§1291) | No election, or a QEF election made too late without a purge | Big distributions and all gains spread over the holding period; earlier PFIC years taxed at the top rate plus interest | Part V |
| QEF (§1295) | Timely Election A, and the PFIC provides an Annual Information Statement | Each year: share of ordinary earnings (ordinary income) and net capital gain (long-term capital gain), distributed or not | Part III |
| Mark-to-market (§1296) | Election C, marketable stock only | Each year: increase in value as ordinary income; decreases deductible only up to past inclusions | Part IV |
Once a PFIC, always a PFIC. If you held the stock while the company was a PFIC with no QEF election, it generally stays tainted for you even after the company stops being one, unless you make a purging election (Elections F and H on the form are the deemed sale and deemed dividend options for a former PFIC).
Worked examples
- A US citizen living in London holds a UK-domiciled index fund worth about $60,000 in an ordinary brokerage account. The fund is a PFIC. Its value is over $25,000, so they file Part I every year, even with no distributions. If the fund publishes a PFIC Annual Information Statement, a QEF election from year one is usually the better choice; if its shares are listed, mark-to-market is available.
- A US investor puts $200,000 into a Cayman fund organised as a corporation, makes no election, and sells six years later for $350,000. The $150,000 gain is an excess distribution. It is spread across the six years: the current-year share is ordinary income, and each earlier year's share is taxed at that year's top rate with interest added. A QEF election in year one would have taxed the fund's income as it was earned, with capital gains keeping their character.
- A US 15% shareholder in a German company that is a CFC and also fails the asset test. Because they include subpart F income as a US shareholder of the CFC, the overlap rule generally takes them out of the PFIC regime for that stock. They file Form 5471 rather than 8621. A US investor holding 2% of the same company is not covered by the overlap rule and has a PFIC.
Penalties and the open statute
There is no standalone dollar penalty for a missing Form 8621. The cost comes from the statute of limitations. Under §6501(c)(8), which names both QEF elections under §1295(b) and the annual report under §1298(f), the IRS's time to assess tax on the whole return does not expire until three years after the missing information is filed. If the failure was due to reasonable cause and not wilful neglect, the extension is limited to the items related to it.
Missing the form in the first year has a second cost: it usually means missing the timely QEF election, which locks the shareholder into the default excess distribution rules.
Sources
- Instructions for Form 8621 (12/2025), IRS
- 26 U.S. Code § 1291, Cornell LII
- 26 U.S. Code § 1297, Cornell LII
- 26 U.S. Code § 6501, Cornell LII
Related reading
- QEF Election vs Mark-to-Market: How to Neutralise the Harsh PFIC Tax
- Form 5471 Filer Categories Explained
- Form 8865 Filer Categories Explained
- Glossary: PFIC (passive foreign investment company)
This explainer is analysis and general information, not tax, legal or investment advice.