Tax and residency

Passive foreign investment company

Also called PFIC, section 1291 fund.

A passive foreign investment company is any foreign corporation for a year in which 75 percent or more of its gross income is passive or at least 50 percent of its assets produce passive income, a test that catches almost every foreign mutual fund, ETF or unit trust an investor holds before moving to the United States.

What it decides

The test is 26 U.S.C. 1297(a) and it is applied to the company, so a cautious fund fails it as easily as an aggressive one. The default consequence is section 1291, headed Interest on tax deferral. An excess distribution, meaning the part of a year's distributions above 125 percent of the average of the previous three years, and the whole of any gain on a sale, are allocated ratably to every day of the holding period. Amounts landing in earlier years are taxed at the highest rate in force for each of those years, with interest at the section 6621 underpayment rate running from each year's due date. Capital gain rates never apply, and 1(h)(11)(C)(iii) keeps PFIC dividends out of qualified dividend income. The escapes are a qualified electing fund election under 1295, which needs annual figures a foreign fund usually will not produce, and mark to market under 1296, open only to stock regularly traded on a qualified exchange and taxed as ordinary income. Because 1291 measures across the whole holding period and not the period of residence, selling before the residency starting date is the usual answer. Reporting is Form 8621 under 1298(f).

Governed by 26 U.S.C. 1297(a) for the 75 percent income test and the at least 50 percent asset test; 1291(a) for the ratable allocation over the holding period and for treating a whole disposition gain as an excess distribution; 1291(b)(2) for the 125 percent measure; 1291(c)(2) and (c)(3) for the highest rate under section 1 or 11 and the section 6621 underpayment interest; 1295 and 1296, including the marketable stock definition at 1296(e); 1298(f) for the annual report on Form 8621; 26 U.S.C. 1(h)(11)(C)(iii) for the loss of the qualified dividend rate. The pre-immigration point follows from the holding period rule in 1291(a)(1)(A) and (a)(3)(A); the finalised regulation at 26 CFR 1.1291-1 leaves most of section 1291 reserved, so it is not the place to look for it.

Where this is explained properly

Pages here that go into passive foreign investment company rather than mentioning it.

Related terms

Controlled foreign corporationA controlled foreign corporation is a foreign corporation in which US shareholders, each holding 10 percent or more of its vote or value, together own more than 50 percent of its vote or value on any day of its tax year, which taxes its undistributed earnings to them personally.
FATCA and Form 8938Form 8938 is the FATCA report of specified foreign financial assets, attached to the income tax return under 26 U.S.C. 6038D, and it is additional to the FBAR rather than a substitute for it. The same Act makes foreign banks report their US account holders to the IRS, which is how the two sides get matched.
Pre-immigration tax planningPre-immigration tax planning is the practitioner label for steps an intending immigrant takes before the residency starting date, after which the same steps are taxed as those of a United States resident.
Residency starting dateThe residency starting date is the day a foreign national becomes a United States resident for income tax purposes, so that worldwide income is taxed from that day on: the first day of presence as a lawful permanent resident under the green card test, the first day of presence in the year under the substantial presence test, or the earlier of the two where both tests are met.

Checked against primary sources on 10 August 2026. Back to the glossary