PFIC — Passive Foreign Investment Company.
A non-US company earning mostly passive income or holding mostly passive assets — which describes most UK funds, OEICs, unit trusts and ETFs. For US persons, holding one can trigger the most punitive tax regime in the code.
Figures on this page are stated for tax year 2025/26 UK · 2025 US. Thresholds change annually.
Why your ISA is on this page
The test is mechanical: 75% passive income or 50% passive assets makes a foreign company a PFIC, and pooled investment funds usually pass it by construction. The default 'excess distribution' treatment spreads gains over your holding period, taxes each slice at that year's top rate, and adds an interest charge, which can take a large share of the gain.
QEF and mark-to-market elections can rationalise the treatment where available; where they aren't, the arithmetic often favours selling and rebuilding in US-domiciled investments.
- Form 8621 generally due for each PFIC each year, with a de minimis exception up to $25,000 ($50,000 joint)
- ISA and SIPP wrappers do not stop a fund being a PFIC
- Treatment is fixable — but only prospectively, so timing matters
Three regimes, very different results
Which regime applies depends on elections made, and on whether the fund provides what the election needs. A QEF election needs an annual information statement from the fund, which most UK funds do not produce. Mark-to-market needs marketable stock, such as a listed ETF.
Individual shares are not automatically safe either. A foreign company that is itself mostly passive, such as an investment trust or a cash-rich holding company, can be a PFIC too.
| Regime | When it applies | How gains are taxed |
|---|---|---|
| Excess distribution (default) | No election made | Spread over the holding period, top rate for each year, plus interest |
| QEF election | Fund provides an annual information statement | Your share of the fund's income and gains included each year |
| Mark-to-market | Stock is marketable | Annual increase in value taxed as ordinary income |
What the filing requires
Form 8621 is filed with your return for each PFIC. The Form 8621 instructions give an exception where the total value of your PFIC stock on the last day of the year is $25,000 or less ($50,000 on a joint return), provided you received no excess distribution and recognised no gain on the stock. Indirect holdings use a separate $5,000 figure.
There is no stand-alone monetary penalty for a missed Form 8621. The practical risk is different: the default regime applies to gains, and elections that would have helped are usually only available prospectively.
Questions we get about this
The ISA itself is not, but the funds inside it usually are. American law ignores the ISA wrapper, so each non-US fund held inside it is tested on its own. Most pooled UK funds meet the passive income or passive asset test.
Not always. The instructions exempt holders whose total PFIC stock is worth $25,000 or less at year end ($50,000 on a joint return), if there was no excess distribution and no gain recognised. Above that, or on a sale, the form is generally required for each fund.
Often it is the cleanest answer, but not always, and never without working out the tax on the sale first. A sale under the default regime can itself be expensive, and British capital gains tax applies too. Model both countries before deciding.
Many are, because an investment trust is a company whose income and assets are largely passive. Treat them as likely PFICs unless the numbers show otherwise, and check the specific trust rather than relying on the label.
Related pages
- Glossary
FEIE: definition
The Foreign Earned Income Exclusion — Form 2555 and the choice against foreign tax credits.
- Service
PFIC reporting
PFIC analysis and Form 8621 preparation for UK funds, ISAs and platform holdings: the election decided per fund, and the reporting cost cut where it can be.
- Service
Form 8621 (PFICs)
Form 8621 PFIC reporting: which UK funds qualify, excess distribution treatment, QEF and mark-to-market elections, and annual filing requirements.
- Free tool
PFIC checker
Work out whether your fund is a PFIC, what Form 8621 then requires each year, and which elections make the treatment survivable for a UK-based investor.
- Pillar guide
Tax specialists for US and UK
What US and UK tax specialists handle that a general accountant does not: residence tests, treaty relief, FBAR, PFICs, pensions, property and catch-up filings.
- Glossary
FBAR: definition
The Foreign Bank Account Report — FinCEN Form 114 — and its $10,000 aggregate trigger.
Further reading
- Form 8621: who files it, when, and for how many funds
One form per fund, attached to your return, with a small-holdings exception most people have never heard of. Here is how the filing side actually works.
- The form your British company hands the IRS
Incorporating in Britain is easy. The American paperwork that follows is not, and the penalty for skipping it starts at five figures before any tax is due.
- Is my fund a PFIC? How to check before you buy
Nothing on a fund factsheet says PFIC. The status comes from American law applied to a foreign company, so you have to work it out yourself.
Last reviewed · Figures stated for tax year 2025/26 UK · 2025 US. Thresholds and rates change annually — check figures against the current tax year before relying on them.
Think you're holding PFICs?
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