How it works
U.S. shareholders of a passive foreign investment company file Form 8621 annually for each PFIC, reporting distributions, dispositions, and any election. Most foreign mutual funds and ETFs are PFICs. Under the default excess distribution rules, gains and large distributions are taxed at the highest ordinary rate with an interest charge; a qualified electing fund or mark-to-market election, made on this form, avoids that. There is no fixed dollar penalty for a missing 8621, but the statute of limitations on the return stays open.
Why it matters
An ordinary foreign brokerage account holding index funds can require a dozen forms a year, and the default tax treatment is punitive.
Related: PFIC. Read more: Form 8621 and PFIC rules.
