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International Tax & Cross-Border Wealth · Free Tool

Is your foreign mutual fund a PFIC?

Most non-US mutual funds, ETFs, and pooled investments are PFICs to a US person. Default tax treatment (§1291) is brutal — the excess-distribution regime plus an interest charge can push effective tax above 50%. Two elections rescue the position: MTM (§1296) and QEF (§1295). Run your numbers; see which regime delivers the lowest tax.

Hold Setup
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Your tax rates
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Eligibility
Optimal regime
MTM
Recommended treatment based on your inputs
Final value after holding period$0
Built-in gain$0
§1291 default (worst)$0
MTM (§1296)$0
QEF (§1295)$0
Savings vs default
$0 saved
Electing the optimal regime over the default §1291 treatment.
The PFIC trap

Most non-US funds are PFICs — and most US persons holding them don't know.

The Passive Foreign Investment Company regime catches any non-US corporation where ≥75% of gross income is passive OR ≥50% of assets produce (or are held to produce) passive income. Result: most non-US mutual funds, ETFs, and pooled funds qualify. The default tax treatment under §1291 spreads gain pro-rata across the holding period at top ordinary rates, plus an interest charge from the first year of accrual. Effective rate frequently exceeds 50%.

Two elections rescue the position. Mark-to-market (§1296) is available for marketable PFICs and produces annual ordinary-income inclusion on the year's appreciation. QEF (§1295) requires the fund to issue a PFIC Annual Information Statement and produces pass-through-like treatment (the fund's ordinary income flows as ordinary; capital gain flows as capital gain). Both elections must be timely — for QEF, by the due date of the return for the first year of QEF treatment.

What triggers PFIC

A non-US corporation where 75%+ of gross income is passive OR 50%+ of assets produce passive income. Most non-US mutual funds, ETFs, hedge funds, and PE funds satisfy. UK ISAs, European UCITS, Cayman funds, Irish ETFs — all PFICs.

What rescues the position

MTM if marketable; QEF if the fund provides the AIS. Otherwise, the default §1291 regime applies, and the longer you hold the worse it gets. Purging election (deemed sale or deemed dividend) cleans up prior-year §1291 exposure before electing MTM or QEF.

This is Chapter 6 of International Tax & Cross-Border Wealth.

The PFIC chapter is the strongest in the guide. The §1291 / §1296 / §1293 trade-off explained with practitioner-level clarity. Plus a purging-election playbook for prior-year PFIC holds and an Excel comparator workbook. Get the chapter and the launch notice.

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Educational orientation only — not tax or legal advice. Throwback computation here is a simplified approximation; the actual §1291 calculation allocates the excess distribution pro-rata across all holding-period years and applies the interest charge year-by-year at §6621 underpayment rates. Use this comparator for first-pass screening only; recalculate with actual fund returns and §6621 rate history for any consequential decision. QEF income mix is approximated as 50/50 ordinary/LTCG. Confirm with qualified US international tax counsel before electing.
Educational references and tools — not legal, tax, accounting, or investment advice, and not a recommendation to buy or sell any security. Consult a qualified professional about your specific situation. © 2026 The Baratelli Institute.