Tax

What is a PFIC — and why should US investors avoid foreign ETFs?

A PFIC — passive foreign investment company — is a foreign corporation that mostly earns passive income or mostly holds passive assets. For a US taxpayer, almost every fund or ETF registered outside the United States is a PFIC, including the European UCITS ETFs you see on exchanges in London, Frankfurt, Dublin or Amsterdam. By default, gains and larger distributions from a PFIC are taxed at the highest ordinary income rate for each year you held it, plus an interest charge, and losses give little relief. You generally file Form 8621 for each PFIC every year. This is the single biggest reason US investors buy US-registered funds.

Tax is national. This page describes the federal rules in the United States for tax year 2026. Most states add their own income tax on top, so there is never one single US rate. If you live and pay tax in another country, the rules are different — see the flags below.

Each dot is a stock. You buy the whole basket in one trade.

How it works

The test. A foreign company is a PFIC if 75 % or more of its income is passive (dividends, interest, gains) or 50 % or more of its assets produce passive income. Every investment fund passes that test by design.
The default regime is punitive. An "excess distribution" — a sale gain, or a distribution more than 125 % of the average of the previous three years — is spread over your holding period and taxed at the top ordinary rate for each year, with interest as if the tax had been due back then. No 0/15/20 % rates.
Two elections soften it. A QEF election (needs yearly statements from the fund, which most European ETFs do not provide) or a mark-to-market election (pay ordinary income tax on the yearly rise, whether or not you sold). Both mean paperwork every year.
Form 8621. One per PFIC, every year, in most cases. A small exception: if all your PFICs together are worth $25,000 or less ($50,000 married filing jointly) at year-end and you had no distributions or sales, the form can be skipped that year.
US-registered funds are not PFICs, even when they invest abroad. A US-listed ETF holding European stocks is fine; a European-listed ETF holding US stocks is a PFIC.
Americans living in Europe are the classic victims: the local bank sells them a UCITS fund, and the IRS treats it as a PFIC.

The worked example

You buy $10,000 of a European-listed world ETF and sell it four years later for $16,000. Under the default rules the $6,000 gain is allocated over the four years, taxed at the top rate (37 %) for each earlier year with interest added, and at ordinary rates for the current year — easily $2,500 or more, versus $900 at 15 % for the same gain in a US-registered ETF. Plus Form 8621 four times.

Figures for 2026 from irs.gov (Rev. Proc. 2025-32 and IR-2025-111), checked September 2026. Your state may tax the same income again. Kiggo does not calculate your tax — your broker reports to you on Form 1099, and the IRS, your state and a tax professional decide.

Kiggo says: PFIC is the IRS's way of saying: buy your basket at home. The same companies in a US-listed ETF cost you a fraction of the tax and none of the forms.

The typical beginner's mistake

An American in Copenhagen or Berlin buying the bank's "cheap global index fund" — a UCITS ETF — and discovering three years later that every dollar of gain is taxed at 37 % plus interest, and that four years of Form 8621 are missing.

How you see it in Kiggo

Kiggo shows a red warning on ETFs listed outside the US when your country is set to the US. It cannot tell whether a particular fund is a PFIC for you — that depends on the fund's structure and your status — and it does not calculate your tax.

Frequently asked questions

Is every foreign ETF a PFIC?

Nearly all funds organised as foreign corporations or trusts are, including UCITS ETFs. Individual foreign operating companies (Nestlé, Toyota) are normally not PFICs. When in doubt, ask the fund or a tax professional.

Do I have to file Form 8621 if I have a small holding?

Not for a year in which your total PFIC holdings are $25,000 or less ($50,000 married filing jointly) at year-end and you received no excess distribution and sold nothing. You still owe the tax when you eventually sell.

Can I hold a foreign ETF inside my IRA?

The PFIC rules generally do not apply to holdings inside a tax-exempt account such as an IRA, but many US brokers will not let you buy foreign-listed ETFs at all. Check with the broker and a professional.

Kiggo explains — Kiggo does not advise. We never tell you what to buy or sell, and key figures can only be compared between companies in the same industry. The decision is yours. Last updated 2026-09-22.

Written by Claus Frisch, founder of Kiggo. Not an adviser, not a bank — Kiggo explains, you decide.