Key Takeaways A PFIC is a foreign corporation meeting either the income test (75% passive income) or asset test (50% passive assets) The default Section 1291 regime imposes punitive taxation through excess distribution rules and interest charges QEF election and mark-to-market election can dramatically reduce tax impact but must be made timely Form 8621 must be filed by US shareholders of PFICs to report their interests and applicable elections Foreign mutual funds, ETFs, and pooled investment vehicles are commonly classified as PFICs Consult Neil Jesani Tax Resolution for expert PFIC compliance guidance and defense Overview of the PFIC Tax Regime The Passive Foreign Investment Company (PFIC) rules represent one of the most complex and punitive areas of US tax law. Enacted in 1986 to prevent US taxpayers from deferring tax on passive income earned through foreign corporations, the PFIC regime imposes an interest charge and above-market tax rates that can dramatically increase the effective tax rate on foreign investment income. Understanding these rules is critical for any US taxpayer holding investments in foreign corporations, mutual funds, or other pooled investment vehicles. What Is a PFIC? A Passive Foreign Investment Company (PFIC) is a foreign corporation that meets either of two tests under IRC Section 1297: The Income Test A foreign corporation is a PFIC if 75% or more of its gross income is passive income. Passive income generally includes dividends, interest, rents, royalties, annuities, and gains from the disposition of property that produces passive income. The income test is applied annually, meaning a foreign corporation may be a PFIC in some years and not others. The Asset Test A foreign corporation is a PFIC if 50% or more of the average value of its assets (determined quarterly) consists of assets that produce or are held for the production of passive...