A foreign corporation whose income or assets are mostly passive, which includes nearly every non-US mutual fund and ETF. US owners face punitive default taxation and a separate annual filing per fund.
Expats who buy local index funds discover PFIC rules at filing time. Under the default rules, distributions and gains are taxed at the highest ordinary rate with an interest charge; a qualified electing fund or mark-to-market election, made in the first year, avoids the worst of it.
Hold US-domiciled funds, or make a mark-to-market or qualified electing fund election on Form 8621 in the first year you own the fund. After the first year, the options narrow.
Source: IRC 1291 to 1298; Form 8621 instructions
Last reviewed September 17, 2026. Tax rules change; confirm current law before acting.
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