Form 8621 Basics

A U.S. taxpayer who owns an interest in a foreign company, which is classified as a Passive Foreign Investment Company (“PFIC”), is required to attach Form 8621 each year to his or her U.S. tax return.

Technically, a PFIC is a foreign corporation that has one of the following attributes: (i) At least 75% of its income is considered “passive” (e.g., interest, dividends, royalties), or (ii) At least 50% of its assets are passive-income producing assets.  In practice, a number of foreign investment products are classified as PFICs for U.S. federal tax purposes.

Most foreign mutual funds fall within the definition of a PFIC.  This can be the case even if such funds are held through a tax-deferred savings account.

PFIC investment income is generally subject to highly punitive U.S. federal tax rates.  A non-deductible penalty interest charge can also compound regularly while holding an interest in a PFIC.  Several elections are available to mitigate the more onerous aspects of PFIC taxation (e.g., a so-called “QEF election” or “mark-to-market” election).