United States: Understanding The Filing Requirements For PFICs And CFCs

U.S. persons (U.S. citizens or green card holders) living in Canada or abroad who have investments outside the U.S. should be aware of the potentially onerous tax filing requirements imposed by the IRS, and how those rules will apply to their investments. IRS rules can be particularly complex when investments in foreign companies or funds earning passive income are involved.

This article expands upon the discussion in the companion piece, " U.S. tax pain: Canadian mutual funds and ETFs," in this U.S. Tax Alert. This article digs deeper into the intricacies of the definitions and the filing requirements for PFICs and CFCs.

Passive foreign investment companies

A passive foreign investment company (PFIC) is a foreign-based corporation that earns at least 75 per cent of its gross income from passive activities, or that sees at least 50 per cent of its assets produce passive income. Passive income includes interest, dividends, royalties, rent, annuities and most capital gains. Common investments generally qualifying as PFICs include mutual funds, exchange-traded funds (ETFs), real estate investment trusts (REITs), and income trusts. Investments in private corporations earning primarily investment or rental income are also considered PFICs. Indirect ownership in PFICs through trusts or corporations may also be caught. Investments held in certain Canadian registered accounts, such as RRSPs and RRIFs, are not subject to the PFIC rules.

Taxation of PFICs

Shareholders receiving distributions of earnings and profits from PFICs are required to report the income in the year it is received. If the distributions for any year are greater than 125 per cent of the average distributions received in the previous three years, the excess amount is taxed under the excess distribution provisions. An excess distribution is allocated pro-rated to each day that the PFIC is held, with any amounts allocated to prior years subject to tax at the highest marginal rate for the prior year, plus an interest charge on the resulting taxes.

Example: Assume a taxpayer has owned shares in a foreign corporation since June 30, 2012, and that the foreign corporation is considered a PFIC. The company did not pay a distribution or dividend for any previous year and in 2017 it pays the taxpayer $90,000.

Under the excess distribution regime, there are no tax implications to the taxpayer for the 2012 through 2016 taxation years as no distributions were made. However, the distribution in 2017 is subject to the excess distribution rules:

Taxation year

Number of days

Income Allocated ($)

Tax rate

Tax ($)

Interest charge ($)





































The distribution apportioned to 2017 would not be subject to the excess distribution provisions but would be taxed as ordinary income in the year.

Finally, the disposition of a PFIC subject to the excess distribution regime is denied the normal treatment as a capital gain, with the gain instead being treated as an excess distribution.

Alternatives to excess distribution  

Fortunately, there are alternatives to the punitive excess distribution rules. The taxpayer may choose to elect to have the PFIC taxed under the qualified electing fund (QEF) rules or the mark-to-market provisions.

QEF election

The most common option is to elect for the PFIC to be treated as a QEF. The taxpayer must annually include their pro-rated share of income and net capital gains from the PFIC, regardless of whether the income was distributed. 

A QEF election must be made on the later of the date on which the investment becomes a PFIC or that it's acquired in a timely filed income tax return for that year. Additionally, the PFIC must supply the investor with an Annual Information Statement.

Mark-to-market election

Alternatively, a mark-to-market election is available if the PFIC does not provide an Annual Information Statement or if it is otherwise difficult to determine the pro-rated share of income from the PFIC. In most cases, this election must be made on the later of the date on which the investment becomes a PFIC or that it's acquired. The PFIC shares must be regularly traded on a securities exchange. 

If this election is made, the taxpayer includes the increase in market value of the PFIC in its annual income. The fair market value at the end of the year would then become the cost basis for the following year. Deductions for losses are only allowed to the extent that mark-to-market gains have been recorded in prior years.

Late-filed elections

If an election is not made in a timely manner, a taxpayer will have the option of continuing to be subject to the excess distribution rules as outlined or making a deemed sale election, treated as having sold the PFIC at the commencement of the current taxation year. If certain conditions are met, a deemed dividend election may be made where the accumulated deferred income is taxed in the current year. Both elections are subject to the excess distribution rules. The PFIC would then be eligible to make the QEF election or the mark-to-market election for future years.

PFIC reporting requirements

A separate Form 8621 must be filed for any PFIC for which a U.S. person:

  1. has received a direct or indirect distribution;
  2. has disposed of a PFIC stock;
  3. is reporting QEF or mark-to-market information; or
  4. is making certain elections, some of which were discussed above.

Controlled foreign corporations

A controlled foreign corporation (CFC) is any corporation organized outside the United States that is more than 50 per cent owned by U.S. shareholders. For the purposes of the CFC rules, a U.S. shareholder is defined as a U.S. person who owns 10 per cent or more of the voting stock of the company. 

It is a common misconception that an individual taxpayer (or a related group) must have control of the company for it to be a CFC; in fact, this is not necessary. For example, if five unrelated shareholders are all U.S. persons, and each owns 11 per cent of the company, the company would be considered a CFC.

Taxation of CFCs

A U.S. shareholder of a CFC must include "Subpart F income" in their income for the taxation year regardless of whether the company makes a distribution in the year, subject to certain limitations. Foreign source passive income is a component of Subpart F income. Look for a deeper discussion of Subpart F income in a future U.S. Tax Alert.  

PFIC/CFC overlap

A CFC earning Subpart F income generally will meet the criteria to be considered a PFIC as well. To avoid double taxation, there is an exception for shareholders of stocks that meet both definitions. When a U.S. shareholder of a CFC includes in income their pro-rated share of Subpart F income, they generally will not be subject to the PFIC provisions, including the filing of Form 8621.

Should a taxpayer hold shares of a PFIC for which neither the QEF nor mark-to-market elections were made, and in a later year the criteria to be treated as a CFC are met, other actions may be required before the PFIC exception above could be applied. The PFIC likely will have accumulated deferred income that will need to be cleared by a deemed sale election or deemed dividend election. The shareholder would be subject to the excess distribution rules, but the shares would then be eligible for the PFIC exception going forward.

Additional reporting requirements

Form 5471 may be required if the taxpayer is:

  1. a U.S. person who is an officer or director of a foreign corporation in which any U.S. person has acquired at least 10 per cent of the value of the corporation's stock or at least 10 per cent of the voting rights;
  2. a U.S. person who:
    1. acquires stock in a foreign corporation and holds at least 10 per cent stock ownership either before or after the transaction, or
    2. disposes of sufficient stock to drop below 10 per cent ownership, or
    3. becomes a U.S. person in the year they're meeting the 10 per cent stock ownership requirement;
  3. a U.S. person who had control (over 50 per cent of the total voting power or total value of all stock issued) of a foreign corporation for at least 30 consecutive days during the corporation's tax year; or
  4. a U.S. person who owns at least 10 per cent stock in a foreign corporation that is a CFC for at least 30 consecutive days during the corporation's tax year, and who owned the stock on the last day of the fiscal year.

Each of the IRS forms mentioned above has its own set of complex rules that vary depending on the specific situation. If you have questions regarding the U.S. filing requirements of your foreign investments, please contact your local Collins Barrow U.S. tax advisor for more information.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.