TECHNICAL DEFINITION · IRC §1297 · MAY 2026

What Is a PFIC? Income Test and Asset Test Explained

Understand the technical criteria that classify a foreign corporation as a Passive Foreign Investment Company (PFIC) under U.S. tax law.

75%Income Test
50%Asset Test
Form 8621Required
Technical Concept
📅 May 10, 2026 ⏱️ 8 min read 📂 Form 8621 Guide
Hans, PFIC Expert
By Hans PFIC Calculation Specialist · Creator of 8621calculator.com

A Passive Foreign Investment Company (PFIC) is defined under IRC §1297(a). A foreign corporation is a PFIC for a taxable year if it meets either the 75% passive income test or the 50% passive asset test.

Quick Answer
A PFIC (Passive Foreign Investment Company) is a foreign corporation that meets either the Income Test (75%+ passive income) or the Asset Test (50%+ passive assets). Most common PFICs are foreign mutual funds, ETFs, or pension accounts held by U.S. taxpayers.
The Income Test
75% or more of its gross income for the taxable year is passive income.
The Asset Test
50% or more of its average assets during the taxable year produce passive income, or are held for the production of passive income.
Only one test is required. Meeting either test is enough to classify a foreign corporation as a PFIC.

Passive income is defined under IRC §1297(b), generally by reference to foreign personal holding company income under IRC §954(c), including dividends, interest, rents, royalties, annuities, and certain gains.

Technical infographic explaining what is a PFIC (Passive Foreign Investment Company) under IRC Section 1297, detailing the 75% Passive Income Test and the 50% Passive Asset Test for foreign corporations and investment funds.
PFIC Definition Roadmap: A foreign corporation is classified as a PFIC if it meets either the 75% income test or the 50% asset test under IRC §1297.

Practical Takeaway

Most PFIC problems for U.S. persons abroad come from ordinary foreign funds, not exotic offshore schemes. Foreign mutual funds, ETFs, managed funds, and pooled investment products commonly hold passive assets and earn passive income, so they often fall within the PFIC definition.

Common examples include Irish-domiciled UCITS ETFs (e.g., VWRA, IWDA), holdings within Japan NISA and iDeCo accounts, and local Indian mutual funds and ELSS schemes.

Is an ISA, TFSA, or KiwiSaver Classified as a PFIC?

A common source of U.S. tax confusion is whether foreign tax-advantaged accounts, such as a UK ISA (Individual Savings Account), a Canadian TFSA (Tax-Free Savings Account), or a New Zealand KiwiSaver, are classified as PFICs.

Technically, the account wrapper itself is not a PFIC. However, the assets held inside them often are. Because these wrappers do not receive tax deferral treatment under U.S. tax treaties (unlike registered pension accounts like a UK SIPP or a Canadian RRSP), the IRS looks through the wrapper to the underlying investments:

  • UK Stocks & Shares ISA: Any non-U.S. mutual funds, unit trusts, or ETFs held within a Stocks & Shares ISA are classified as PFICs.
  • Canadian TFSA: Canadian mutual funds, ETFs (like VFV or XEQT), and bank managed portfolios held inside a TFSA are PFICs and require Form 8621 reporting.
  • New Zealand KiwiSaver: KiwiSaver schemes are typically structured as Portfolio Investment Entities (PIEs), which are classified as PFICs for U.S. tax purposes.

If you hold passive investments inside these tax-advantaged accounts, you must prepare Form 8621 and report them on your U.S. tax return annually.

FAQ: What is a PFIC, Income & Asset Tests and Tax Implications

What is a PFIC (Passive Foreign Investment Company)?

A PFIC is a foreign corporation that triggers U.S. tax reporting obligations (Form 8621) by meeting either the 75% income test (75% or more gross income is passive) or the 50% asset test (50% or more assets produce passive income).

What is the 75% income test for PFICs?

The income test is met if 75% or more of the foreign corporation's gross income for the tax year is passive income. Passive income includes dividends, interest, royalties, annuities, and capital gains from selling passive assets.

What is the 50% asset test for PFICs?

The asset test is met if 50% or more of the foreign corporation's assets (by average value) produce passive income, or are held for the production of passive income. This is the test that typically traps foreign mutual funds and ETFs, as their entire asset pool consists of investment securities.

Are foreign mutual funds and ETFs considered PFICs?

Yes. Almost all foreign-domiciled mutual funds, ETFs, unit trusts, and pooled investment funds are classified as PFICs by the IRS, even if they are traded on public exchanges outside the United States. This includes popular products like Canadian ETFs and European UCITS ETFs.

How is a PFIC taxed under U.S. tax law?

By default, PFICs are taxed under the punitive Section 1291 excess distribution rules, which allocate income over the holding period, tax it at the highest ordinary income tax rates, and apply compounded interest. Taxpayers can sometimes elect Mark-to-Market (MTM) or Qualified Electing Fund (QEF) treatment to reduce the tax burden.

Internal Resources

Disclaimer: This site provides global PFIC compliance guides, cross-border risk analysis, and the algorithmic architecture powering our calculation engines. We engineer tax compliance technology; we do not prepare tax returns. All content is strictly for technical reference and does not constitute official tax advice. Verify all tax positions independently.
Current as of May 2026 · Based on Form 8621 (Rev. 12/2025)