Yesterday I was talking to an accountant about the intricacies of PFICs, ISAs, and the entirely plausible strategy of giving up a green card to get away from the Borg that is the IRS.

She asked the entirely reasonable question, “Where can I find out more about this stuff?” Sadly, unless you are willing to delve into the Code, Regulations, and a few hard-core tax treatises, the answer is “Nowhere.”

This website is my attempt to get some answers out there into the real world about the arcane international tax stuff I live with every day. And this blog post is one of many I will be doing over the next few weeks on various topics related to PFICs. We know these things all too well, and Elena and Debra in our firm have been bugging me to start blogging about PFICs. David navigates through PFIC-land with awe-inspiring ease. So here goes.

What is a PFIC?

What is a Passive Foreign Investment Company? People who participated for the 2009 Voluntary Disclosure Program know this from first-hand painful experience. Those of you who intend to throw yourself under the 2011 OVDI bus will find out soon, in the form of massive accounting fees and startling tax bills.

Tax lawyers pronounce this as “PEE-fick.” (Yes, I know. You studied at the University of South Park, too.) (But I digress….)

The technical definition

The technical definition, according to U.S. tax law, is a foreign corporation that meets either the “income test” or the “asset test.”

The “income test” looks at the income of that foreign corporation and if 75% or more is passive income (interest, dividends, rent, capital gain), you pass the test.

The “asset test” looks at the assets of that foreign corporation and if more than 50% of the assets are the kind of assets that could produce passive income.

Foreign mutual funds are PFICs

It is a near certainty that mutual funds outside the United States are organized as corporations. Foreign corporations. This means that if you are the proud owner of a foreign mutual fund, you have a PFIC. You have to look, however, to be sure. If the fund is a partnership or trust, then it won’t be a PFIC.

Exchange-traded funds are PFICs

Exchange-traded funds are almost certainly PFICs. They’re usually corporate entities whose shares trade on the stock market just like a regular company’s shares. The assets of an ETF? Stock. Passive assets. Meets the “asset test.” Again, your only salvation is to find out if possibly that ETF is formed as an entity other than a foreign corporation.

So what?

Look through your portfolio of investments outside the United States. If you have any PFICs, you face a punishing tax return preparation exercise. Form 8621 is where everything is reported. I’ll talk more about the consequences of owning PFICs, but in a nutshell:

  • Your tax return preparer faces a hard job. (Translation: expensive for you if they know what they’re doing. Disaster-time if they’re learning on your tax return).
  • Your tax return is likely to be bounced by the IRS if you don’t do it right. There seems to be little tolerance for “close enough is good enough.”

If you are in the 2009 or 2011 voluntary disclosure programs, this goes double for you. Ave Commissioner, morituri te salutant.


More? Look at Internal Revenue Code Section 1297. There’s a quiz later.