2026-02-21

How to Invest as a US Expat (PFIC Rules Explained)

If you are a US citizen or green card holder living abroad, the Passive Foreign Investment Company (PFIC) rules are one of the most consequential tax traps you can walk into. They can turn a perfectly reasonable investment — a European index fund, an Irish-domiciled ETF, a local mutual fund in your country of residence — into a tax nightmare that takes years and thousands of dollars in professional fees to unwind.

This guide explains what PFICs are, why the rules exist, which investments trigger them, and how to structure a compliant portfolio as a US expat.

What Is a PFIC?

A Passive Foreign Investment Company is any foreign corporation that meets either of two tests, as defined by the IRS under Internal Revenue Code Section 1297:

  1. Income test: 75% or more of its gross income is passive income (dividends, interest, rents, royalties, capital gains)
  2. Asset test: 50% or more of its assets produce or are held to produce passive income

If a foreign entity meets either test, it is a PFIC for US tax purposes.

In plain terms: almost every non-US mutual fund and non-US ETF is a PFIC. This includes the popular Irish-domiciled ETFs (like Vanguard FTSE All-World UCITS ETF or iShares Core MSCI World UCITS ETF) that European investors use as their default index fund strategy.

The critical word is “foreign.” A foreign corporation is any corporation not organized under US law. An ETF domiciled in Ireland is a foreign corporation, even if it holds US stocks. A mutual fund registered in Luxembourg is a foreign corporation. A unit trust in Singapore is a foreign corporation.

Why the PFIC Rules Exist

The PFIC regime was created by the Tax Reform Act of 1986 to prevent US taxpayers from deferring income by parking money in passive foreign entities. Before these rules, a US person could invest in a foreign fund that accumulated gains and interest without distributing them, then sell years later and pay long-term capital gains rates on what was effectively deferred ordinary income.

Congress decided this was an abuse, and the PFIC rules were the solution. Whether the rules are proportionate to the problem is debatable, but they are the law, and the penalties for noncompliance are severe.

The Three Taxation Methods

When you own a PFIC, you must choose one of three methods for reporting the income. Each has different consequences.

1. The Default “Excess Distribution” Method (Section 1291)

If you do nothing — no elections, no special filings — this is what the IRS applies. It is also the most punitive.

Under the default method:

The interest charge compounds. For a PFIC held for 10 years with significant gains, the effective tax rate can exceed 50-60% of the total gain. This is not a typo. The default PFIC method is designed to be punitive enough that taxpayers are motivated to either make an election or avoid PFICs entirely.

2. Qualified Electing Fund (QEF) Election

A QEF election requires the foreign fund to provide you with an annual statement of its ordinary earnings and net capital gains — a “PFIC Annual Information Statement.” You then include your share of those earnings in your US income each year, whether or not the fund actually distributed anything.

The advantage: you pay tax at regular rates (ordinary income rates on the fund’s ordinary earnings, capital gains rates on the fund’s capital gains). No interest charge, no excess distribution calculation.

The problem: almost no non-US fund provides the PFIC Annual Information Statement. Vanguard UK will not generate it. iShares Europe will not generate it. The compliance burden of providing PFIC statements to US investors is high, and since US expats are a small fraction of their customer base, most non-US fund managers simply do not bother.

This makes the QEF election theoretically available but practically useless for the vast majority of non-US funds.

3. Mark-to-Market Election (Section 1296)

Under mark-to-market, you recognize gain or loss on the PFIC at the end of each tax year, as if you sold and repurchased the investment on December 31.

The advantage: it eliminates the punitive excess distribution regime and the interest charge. The disadvantage: all gains are ordinary income (taxed at up to 37%), never capital gains (taxed at up to 20%). For long-term investors, losing access to capital gains rates is a significant cost.

The mark-to-market election is only available for PFICs that trade on a “qualified exchange.” Most major European exchanges qualify, so widely-traded Irish and Luxembourg ETFs are eligible. But it must be actively elected on Form 8621.

Form 8621: The Compliance Cost

Every US taxpayer who owns a PFIC must file Form 8621 — “Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.”

You file one Form 8621 per PFIC, per year. If you own three non-US ETFs, that is three Form 8621s with your tax return, each requiring detailed calculations.

The form itself is 4 pages, and the instructions are 12 pages. Most US expats cannot complete it without professional help. Tax preparers who specialize in expat returns typically charge USD 200-500 per Form 8621, per year, on top of their base fees for preparing the return.

For context: owning three non-US ETFs for five years means 15 Form 8621 filings. At USD 300 per form, that is USD 4,500 in compliance costs alone — before any penalties or interest charges if you did not file in prior years.

The IRS has repeatedly emphasized in its guidance that failure to file Form 8621 can extend the statute of limitations indefinitely for the relevant tax year. See the Form 8621 instructions for full details.

Which Investments Are PFICs?

Here is a practical decision tree:

Almost certainly a PFIC: - Any non-US mutual fund - Any non-US ETF (Irish-domiciled, Luxembourg-domiciled, UK-domiciled, etc.) - Any non-US money market fund - Foreign unit trusts, OEICs, and SICAVs

Not a PFIC: - US-domiciled ETFs (VTI, VOO, QQQ, etc.) — even if they hold international stocks - US-domiciled mutual funds - Individual foreign stocks — a single company stock is not a PFIC unless it meets the income or asset test on its own (rare for operating companies) - US Treasury bonds and other direct debt instruments

Gray area: - Foreign holding companies with significant passive income - Foreign REITs (some qualify, some do not, depending on their passive income percentage)

The safest approach: if it is a pooled investment vehicle and it is not domiciled in the US, assume it is a PFIC until proven otherwise.

Why Non-US ETFs Are Particularly Problematic

Many US expats open brokerage accounts in their country of residence because US brokerages either close their accounts or restrict services once they move abroad. They then buy local ETFs because those are what their new broker offers.

This creates a perfect storm:

  1. You open an account at a European brokerage (because Schwab restricted your account when you moved to Germany)
  2. You buy Irish-domiciled UCITS ETFs (because they are low-cost and broadly diversified)
  3. Each of those ETFs is a PFIC
  4. You now owe Form 8621 for each one, every year, for as long as you hold them
  5. If you did not know this and did not file, the default excess distribution method applies retroactively — with interest charges

The compounding cost of this mistake increases every year you hold the investments. The earlier you identify and address it, the less it costs.

Compliant Investment Strategies for US Expats

The practical solution is straightforward, even if it feels limiting: invest in US-domiciled funds.

Strategy 1: US-Domiciled ETFs Through a US Brokerage

The cleanest approach. Maintain a US brokerage account (Interactive Brokers, Schwab International, or Fidelity) and buy US-listed ETFs:

These are all US-domiciled. They hold international stocks but they are not PFICs because the fund entity is a US corporation.

The challenge: some US brokerages will not let you open a new account with a foreign address, and some restrict trading from certain countries. Interactive Brokers is generally the most expat-friendly option, accepting customers from most countries.

Strategy 2: Individual Stocks

Individual foreign stocks are generally not PFICs (unless the company itself is an investment company). You can buy individual UK, European, or Asian stocks without triggering PFIC rules.

The downside: you lose the diversification of a fund and take on single-stock risk. This approach works better for experienced investors who can build a diversified portfolio of individual positions.

Strategy 3: US Treasury Bonds and Direct Debt

Direct bonds (not bond funds) are not corporations and cannot be PFICs. US Treasury bonds in particular are exempt from state tax and carry no credit risk. They can form the fixed-income portion of an expat portfolio without PFIC complications.

FBAR and FATCA: The Reporting Overlay

PFIC rules apply to the taxation of your foreign investments. Separate reporting requirements apply to the existence of your foreign accounts.

FBAR (FinCEN Form 114): If the aggregate value of all your foreign financial accounts exceeds USD 10,000 at any point during the year, you must file an FBAR with FinCEN. This includes bank accounts, brokerage accounts, and any account where you have signature authority. The filing is done electronically through FinCEN’s BSA E-Filing System. Penalties for willful failure to file can reach USD 100,000 or 50% of the account balance, whichever is greater.

FATCA (Form 8938): The Foreign Account Tax Compliance Act requires reporting of specified foreign financial assets on Form 8938 if the aggregate value exceeds certain thresholds. For US persons living abroad, the thresholds are USD 200,000 at year-end or USD 300,000 at any point during the year (single filers). See IRS FATCA information for current thresholds.

These filings are separate from — and in addition to — your Form 8621 PFIC reporting. An expat with a European brokerage account holding PFIC ETFs may need to file Form 8621 (PFIC), Form 8938 (FATCA), and FinCEN Form 114 (FBAR) — three separate filings covering three separate compliance regimes.

What to Do If You Already Own PFICs

If you are reading this and realize you already hold non-US funds, do not panic, but do act.

  1. Identify your PFICs. List every non-US fund you own. If it is a mutual fund or ETF domiciled outside the US, it is almost certainly a PFIC.
  2. Determine your exposure. Calculate the unrealized gains and how long you have held each position.
  3. Consult an expat tax professional. The optimal approach (sell immediately, make a mark-to-market election, file retroactive 8621s) depends on your specific situation — gains, holding periods, and other income.
  4. Consider selling and reinvesting in US-domiciled equivalents. For most expats, the long-term compliance cost of holding PFICs exceeds the one-time cost of selling and switching.

The sooner you address it, the lower the cumulative interest charges under the default method. Waiting another year makes it worse.

Tracking Your Expat Portfolio

Whether you hold US-domiciled ETFs, individual foreign stocks, or a mix, tracking your portfolio across currencies and jurisdictions requires a tool that understands multi-currency positions.

Your 401(k) is in USD. Your UK savings account is in GBP. Your Singapore broker has positions in SGD. You need a single dashboard that converts everything to one currency and shows you the complete picture.

FlashFi tracks stocks, ETFs, crypto, cash, and debt across any currency. For US expats navigating PFIC rules, that means you can see your compliant US-domiciled ETFs alongside your foreign cash accounts and local-currency expenses — all in one place.

For country-specific portfolio tracking considerations, see our guides for the United States, the United Kingdom, Singapore, or any of the 25+ countries we cover.

Take Control of Your Expat Portfolio

PFIC rules are complex, but the solution is simple: invest through US-domiciled funds, track everything in one place, and stay on top of your reporting obligations.

Start tracking your expat portfolio with FlashFi and see all your investments across every currency in a single dashboard.

By David Brougham