TECHNICAL DEFINITION · IRC §1297 · UPDATED AUGUST 14, 2026
What Is a PFIC? Definition, Income Test and Asset Test
A Passive Foreign Investment Company (PFIC) is a foreign corporation that meets the 75% passive income test or the 50% passive asset test. Learn the PFIC meaning, classification rules, and common foreign mutual fund and ETF examples.
75%Income Test
50%Asset Test
Foreign FundsCommon PFIC Examples
Technical Concept
📅 Updated August 14, 2026⏱️ 8 min read📂 Form 8621 Guide
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 encountered by U.S. taxpayers are foreign corporate mutual funds and ETFs, whether held directly in taxable brokerages or indirectly inside foreign wrappers and non-treaty pension structures.
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.
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.
PFIC Examples: Foreign Mutual Funds, ETFs and Pooled Investments
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.
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: Non-U.S. mutual funds, unit trusts, or ETFs held within the wrapper may meet the PFIC tests.
Canadian TFSA: Canadian mutual funds, ETFs such as VFV or XEQT, and managed portfolios may contain foreign corporations that meet the PFIC definition.
New Zealand KiwiSaver: KiwiSaver investments commonly use pooled fund structures that require PFIC classification analysis.
The account wrapper does not answer the classification question. Review each underlying foreign corporation under the income and asset tests, then use the separate Form 8621 filing guide to determine whether a reporting obligation applies.
FAQ: PFIC Meaning, Definition, Income Test and Asset Test
What is a PFIC (Passive Foreign Investment Company)?
A PFIC is a Passive Foreign Investment Company: a foreign corporation that meets either the 75% income test (75% or more of gross income is passive) or the 50% asset test (50% or more of average assets produce, or are held to 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?
Many foreign-domiciled mutual funds, ETFs, unit trusts, and pooled investment funds meet the PFIC income or asset test because their income and assets are predominantly passive. Classification depends on the fund and relevant tax year, even when the product trades on a public exchange outside the United States.
What Investments Are Common PFIC Examples?
Common PFIC examples include foreign-domiciled mutual funds, ETFs, unit trusts, managed funds, and other pooled investment companies whose income or assets are predominantly passive. Classification depends on the foreign corporation and the relevant tax year, not merely the account wrapper or product label.
Disclaimer: This site provides global PFIC compliance guides, cross-border tax analysis, and the technical architecture supporting our calculation tools. It is intended for educational and technical reference purposes and does not provide individualized tax, legal, or investment advice. If you require professional U.S. tax return preparation or Form 8621 filing services, please visit ustaxpilot.com ↗. Tax treatment depends on individual facts and circumstances; users should independently verify any tax position before filing.
Content reflects Form 8621 (Rev. 12/2025), applicable Treasury Regulations, IRS guidance, and other authorities cited on this page.
