Without the PFIC rules, a US investor could park money in an offshore fund, let it compound tax-free, and pay low capital gains rates decades later. So any foreign company that fails either test — 75% or more of gross income is passive, or 50% or more of its assets produce passive income — is a PFIC, whatever its size, and with no minimum ownership.
The default regime is nasty: gains and big distributions are spread back over the holding period, taxed at the top ordinary rate for each year, plus an interest charge. The escape routes are a QEF election (include your share of income every year, keep capital gain character — needs the company to provide a PFIC Annual Information Statement) or mark-to-market for listed stock (how the two elections compare). Offshore credit funds, feeders and holding companies are the usual suspects.
Worked example
A US LP owns shares in a Cayman holding company that only holds loans. It has no QEF election. After five years the LP sells at a $500k gain. Instead of 20% capital gains tax, the gain is spread over five years, taxed at the top ordinary rate for each year, and an interest charge is added — the total can far exceed $100k. With a timely QEF election, the LP would have paid tax year by year at normal character.
Where you'll see it: PFIC Annual Information Statements sent to US investors, Form 8621, and offering-memorandum tax sections.
Full explainer: Form 8621 and the three PFIC regimes →
See all 53 terms in the glossary
This glossary is general information, simplified for learning. It is not tax, legal or investment advice, and real structures turn on facts and documents not shown here.