Many U.S. expats have been told that owning any non-U.S. mutual fund or exchange-traded fund automatically means filing a separate Form 8621 every year. That is not always correct.
The PFIC reporting rules are broad, but Treasury Regulation Section 1.1298-1(c)(2) contains a de minimis annual-reporting exemption for certain smaller holdings. When every condition is met, a U.S. person may not need to file Form 8621 for an ordinary section 1291 fund for that year.
The exemption is useful, but it is also easy to misunderstand. The $25,000 threshold is not applied separately to every mutual fund, the $5,000 rule is not a general threshold for TFSAs or other foreign accounts, and a low year-end balance does not protect someone who sold a PFIC at a gain during the year.
This article explains when the PFIC exemption applies, how the thresholds work, how to treat funds held in TFSAs and ISAs, and when Form 8621 is still required.
Quick answer: When is Form 8621 not required?
Form 8621 may not be required under the section 1298(f) annual-reporting rule for a particular section 1291 fund when the taxpayer’s aggregate counted PFIC holdings are $25,000 or less at year-end, or $50,000 or less for spouses filing jointly, and no distribution, disposition gain, election, or other filing trigger requires the form.
The threshold applies to the taxpayer’s combined counted PFIC holdings, not separately to each fund, account, country, or investment wrapper.
Important: This is a reporting exemption, not a PFIC tax exemption. The investment remains a PFIC. A future excess distribution or sale at a gain can still trigger Form 8621 and the unfavorable section 1291 tax-and-interest regime.
What is a PFIC?
A passive foreign investment company, or PFIC, is generally a non-U.S. corporation that meets either of two tests:
- Income test: At least 75% of its gross income is passive income.
- Asset test: At least 50% of its assets produce passive income or are held to produce passive income.
Foreign mutual funds, non-U.S. ETFs, UCITS funds, foreign money-market funds, and many other pooled investments commonly fall within the PFIC rules. Individual shares in an active foreign operating company are not automatically PFICs, and neither are cash, ordinary bank deposits, directly held bonds, or cryptocurrency.
For a fuller explanation of the classification and tax consequences, read our guide to the PFIC rules.
What is Form 8621?
Form 8621 is the information return used by a direct or indirect PFIC shareholder. A U.S. person may have to file it when the person:
- receives certain direct or indirect PFIC distributions;
- recognizes gain on a direct or indirect disposition of PFIC stock;
- reports a qualified electing fund, or QEF, inclusion;
- reports a section 1296 mark-to-market inclusion or deduction;
- makes an election reported on Form 8621; or
- must file the annual report required by section 1298(f).
The de minimis PFIC exemption discussed here removes only the section 1298(f) annual-reporting trigger in qualifying cases. It does not cancel any of the other filing triggers.
The $25,000, $50,000, and $5,000 thresholds
| Situation | Threshold | How the test is applied |
| Individual taxpayer | $25,000 or less | Aggregate year-end value of all counted PFIC holdings |
| Married filing jointly | $50,000 or less | Combined aggregate year-end value of both spouses’ counted PFIC holdings |
| Specific lower-tier section 1291 fund held through another PFIC | $5,000 or less | Taxpayer’s proportionate interest in that particular lower-tier PFIC |
The words or less matter. An aggregate value of exactly $25,000 can satisfy the individual threshold; $25,001 does not. The same principle applies to the $50,000 joint-return threshold and the narrow $5,000 lower-tier rule.
The test uses year-end value, not the highest balance
For a calendar-year taxpayer, the general test looks at the value of the relevant PFIC stock on December 31. It is not based on:
- the highest value during the year;
- the original purchase price;
- the total value of the brokerage account, including cash and non-PFIC investments; or
- the value on the day the tax return is prepared.
The regulations allow a shareholder to rely on account statements provided at least annually unless the shareholder knows, or has reason to know, that the statement is not a reasonable estimate. Foreign-currency values must be converted to U.S. dollars using a reasonable, consistently applied exchange rate.
Is the $25,000 PFIC exemption per mutual fund or for all funds?
It is an aggregate test covering all counted PFIC holdings.
Assume a single taxpayer owns five different foreign mutual funds worth $6,000 each on December 31. No individual fund is worth more than $25,000, but the combined value is $30,000. The taxpayer does not qualify for the general de minimis exemption.
This creates two different rules that must not be confused:
- Testing the exemption: Combine the year-end value of all counted PFIC holdings.
- Preparing the forms: If filing is required, the taxpayer generally files one Form 8621 for each distinct PFIC.
Five separate foreign funds can therefore mean five Forms 8621 when the exemption fails. By contrast, the same legal fund held in two different accounts is generally one PFIC. Its values are combined, and if a form is required, it is generally reported on one Form 8621 rather than one form per account.
Different legal funds or sub-funds can be separate PFICs even if they are offered by the same provider. The legal identity of each investment must be checked before counting forms.
What conditions must be met?
The exemption is not based on value alone. Before concluding that Form 8621 is unnecessary, review every condition below.
1. The investment must be an eligible section 1291 fund
The exemption is designed for an ordinary section 1291 fund – generally a PFIC for which no effective QEF or section 1296 mark-to-market election applies.
If a QEF or mark-to-market election is in effect, Form 8621 is generally still required annually even if the fund is worth less than $25,000. The value of the elected PFIC is nevertheless included when testing whether another ordinary section 1291 fund falls within the aggregate threshold.
2. The aggregate year-end value must remain within the threshold
Combine all counted PFIC holdings across accounts, countries, and local tax wrappers. On a joint return, combine the PFIC holdings of both spouses.
3. There must be no excess distribution from the fund
An excess distribution prevents the exemption from applying to that fund. Under the default PFIC regime, an excess distribution is generally the portion of current-year distributions exceeding 125% of the average distributions received during the preceding three years, or the shorter prior holding period.
For more detail, see our guide to PFIC excess distribution rules.
4. There must be no gain on a sale or other disposition
Gain recognized on the disposition of section 1291 fund stock is treated as an excess distribution. A taxpayer who sells a PFIC at a gain during the year cannot rely on a zero year-end balance to avoid Form 8621.
A loss is not taken into account under section 1291, although it may be recognized under another provision of the tax code. If the only disposition was at a loss and no other filing trigger applies, Form 8621 may not be required, but the complete facts still need to be reviewed.
5. No other Form 8621 filing trigger may apply
The exemption does not remove a form required to report a QEF inclusion, mark-to-market amount, election, prior section 1294 election, or another transaction covered by the Form 8621 instructions.
Distributions deserve particular care. The regulation expressly denies the exemption when there is an excess distribution, but the Form 8621 instructions can require reporting of certain other distributions as well. For example, a distribution received in the first year of the holding period is not an excess distribution, yet the instructions direct the shareholder to report it in Part V. Do not assume that a payment is harmless merely because it is described as an ordinary dividend.
Do PFICs inside a TFSA or ISA count toward the threshold?
Usually, yes. A local tax-advantaged wrapper does not itself create a U.S. PFIC exemption.
UK Stocks and Shares ISA
A UK ISA is generally treated more like a custodial brokerage account than a separate trust. The U.S. owner ordinarily owns the underlying mutual funds or ETFs directly, and their year-end values are included in the $25,000 or $50,000 aggregate test.
A Cash ISA containing only cash or bank deposits does not create a PFIC merely because it is an ISA. A Stocks and Shares ISA holding UK or other non-U.S. funds can create PFIC exposure. Read our detailed guide to the U.S. taxation of UK ISA accounts.
Canadian TFSA
A TFSA can be structured as a deposit account, annuity arrangement, or trust under Canadian law. Its precise U.S. classification depends on its legal terms.
If the holder owns the underlying investments directly, foreign mutual funds inside the TFSA are directly held PFIC interests. If a particular arrangement is treated as a foreign grantor trust, the holder may technically own the investments indirectly through the trust. Either way, an ordinary foreign mutual fund inside the TFSA is generally included in the $25,000 or $50,000 aggregate test.
The TFSA does not receive a separate $25,000 allowance, and its funds do not fall under the $5,000 rule merely because the account may be a trust.
Canadian RESP and other foreign wrappers
The same principle generally applies to foreign wrappers such as a Canadian RESP, Swedish ISK, French PEA, German depot account, or Polish IKE/IKZE. Local tax exemption or deferral does not automatically change the U.S. PFIC analysis. Identify the underlying investments and determine how the U.S. ownership rules apply.
Our article on U.S. tax rules for Canadian RESPs explains how PFIC, FBAR, FATCA, and income-reporting rules can overlap in an RESP.
Foreign pensions require a separate treaty and plan analysis. Certain treaty-qualified foreign pension arrangements have their own Form 8621 reporting exception. For Canadian retirement accounts, see our guide to U.S. taxation of RRSPs and RRIFs. For pensions more generally, read Are Foreign Pensions Taxable in the U.S.?.
What does the $5,000 indirect PFIC rule actually cover?
The separate $5,000 rule is narrow. It applies to a specific lower-tier section 1291 fund owned indirectly through another PFIC under the ownership rules cited in the regulation.
A common example is a foreign fund-of-funds. The taxpayer directly owns a foreign fund that is itself a PFIC, and that top-tier PFIC owns another PFIC. If the taxpayer’s proportionate interest in the lower-tier section 1291 fund is $5,000 or less at year-end, and the other conditions are satisfied, the taxpayer may qualify for the separate lower-tier exception for that fund.
The $5,000 threshold is not a general rule for investments held through:
- a TFSA;
- an ISA;
- a foreign trust;
- a partnership;
- a pension; or
- an ordinary foreign brokerage account.
Those structures may involve direct or indirect ownership, but that alone does not convert the general $25,000 threshold into a $5,000 threshold.
