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Your fund may be an ordinary investment fund formed outside the United States, and it can still be a PFIC if it meets the income or asset test. What you pay depends on the treatment available, and the election window can be narrow.
Do nothing and you get the default. Your gain is spread over the holding period, and the prior PFIC year slices are taxed at the top rate for those years plus interest.
A QEF election keeps capital gain as capital gain, but the fund has to give you a PFIC Annual Information Statement, which some funds do not produce.
Both elections are close to permanent. Revoking one requires IRS consent.
Which holdings meet the tests, checked fund by fund
QEF, mark to market, or the default, priced before you pick
The throwback calculation run on the real holding period
Canadian, UK, Indian and Australian holdings handled regularly
A foreign corporation is a PFIC if it meets either of two tests in section 1297(a). Either one is enough, and an ordinary retail fund meets both.
Two tests, and either one is enough:
A fund holding shares and bonds and paying dividends and interest is passive on both counts.
Foreign formation alone does not make a fund a PFIC. The fund’s income and assets determine that.
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If you hold one of these, assume it is a PFIC until someone checks.
Canadian mutual funds, held by US residents with Canadian accounts.
UK unit trusts and funds inside an ISA. The wrapper has no effect under the US rules.
Irish and Luxembourg domiciled ETFs. A UCITS fund tracking a US index can still meet the tests.
Indian mutual funds and systematic investment plans.
Australian managed funds and some superannuation, where no treaty relief exists.
Foreign insurance wrappers and offshore bonds sold as tax deferred products.
Foreign pensions where no treaty article addresses the plan.
Shares in a foreign company that holds cash and does little trading, which can meet the asset test.
A TFSA or an RESP holding Canadian funds has no treaty deferral, so the funds inside are treated like any other holding. An RRSP can qualify for treaty deferral.
Three treatments, one per fund. Anyone who does nothing gets the default, and it is the expensive one.
The choice is made per fund, so a household can run a QEF election on one holding and the default on another. If you make the election late, you may owe section 1291 tax on the earlier period.
You choose once, per fund, and it is hard to undo.
A fund with no election is a section 1291 fund. This mechanic is what makes it expensive.
A payout is a PFIC excess distribution to the extent it tops 125 percent of the average of the previous three years. Under section 1291(a) gain on a sale is treated the same way, in full.
That amount is spread ratably across each day you held the fund, and each slice is taxed by the year it belongs to:
Two consequences. Long term capital gain treatment is gone. This year’s deductions and capital losses do not offset the earlier slices, because those slices are charged as an addition to tax and do not enter income. Foreign taxes withheld on the distribution can still reduce the section 1291 tax under section 1291(g).
How the throwback splits one payout
The payout is spread over every day you held the fund.
A QEF election is the one treatment that keeps the character of your income intact. You pick up your share of the fund’s ordinary earnings as ordinary income and its net capital gain as long term capital gain, whether or not the fund distributes anything.
Your basis in the shares rises by each amount you include and falls by distributions of amounts already taxed, which come out untaxed under section 1293(c) and (d). So a QEF election does not tax the same earnings twice.
The blocker is documentation. Treas. Reg. 1.1295-1(g) requires the fund itself to give you a PFIC Annual Information Statement, signed by the fund, setting out your pro rata shares and the distributions for the year. A fund with few US investors has little reason to produce one, and you cannot write the statement yourself.
Timing is the second constraint. A first year QEF election gives clean treatment. Made later, it is normally unpedigreed unless you purge the prior period with a deemed sale or, if eligible, a deemed dividend election.
A retroactive QEF election is available only through Treas. Reg. 1.1295-3, never under section 301.9100. That regulation sets out three routes, and the one to ask about is special consent from the Internal Revenue Service where you relied on a tax professional who missed it. It has to be requested before an examiner raises the fund’s PFIC status.
Send one fund and we will show you what the three treatments cost side by side on your actual numbers, before anything is filed. Confidential, and handled by a CPA or an EA.
Under a mark to market election under section 1296 you include the year’s rise in value in income whether or not the fund paid anything out. It is simpler to run than a QEF election because it requires nothing from the fund.
Two limits:
Your basis moves with each inclusion or deduction under section 1296(b), so the eventual sale is taxed on the difference from the marked value.
The cost is character. Income under the election is ordinary throughout, including the gain on the eventual sale, so a holding you expect to appreciate over decades gives up capital gain treatment permanently.
Four exceptions can limit the PFIC rules or the reporting, and each is narrow.
One rule works against you. Once the corporation was a PFIC during your holding period, your shares remain tainted after it stops meeting the tests, unless you purge them.
Priced on what has to be calculated. What we quote against:
These are the factors, not a quote. You get a fixed figure before any work starts.
If you have a tax question, whatever the least appealing answer would be, that’s probably the right answer.
Great tax experience given I had Canadian and US complications. Very easy to deal with and would use again for my tax needs!
Our team includes CPAs and Enrolled Agents who work on individual returns, business taxes and tax planning. Tell us what you need help with when you get in touch.
Doing nothing is a choice, and it is the costly one. If you hold a foreign fund and no one has checked it, send us the statement and we will.
General information only, not advice for your circumstances. Because the answer turns on the facts of each fund, speak to a CPA before making an election.
