PFIC Rules Explained (2026): Form 8621, Excess Distributions, QEF vs. Mark-to-Market, and How to Avoid Interest Charges

1) PFICs: What are they and why do they exist?

FAQ 1.1 — What is a PFIC, in plain English?

A PFIC is generally a foreign corporation (a non-U.S. company) that earns too much passive investment income (like dividends and interest) or holds too many passive investment assets (like stocks and bonds). (IRC §1297(a).)</p>

FAQ 1.2 — Why did Congress create PFIC rules?

PFIC rules exist because U.S. persons could invest through foreign mutual funds / offshore investment companies and defer U.S. tax for many years, which Congress viewed as unfair compared to investing in the same passive assets directly. Congress imposed an interest charge to remove the “time value of money” benefit taxpayers get from deferring U.S. residual tax.

Quick definition — “U.S. residual tax”

Think of this as the extra U.S. tax that can remain payable even after foreign tax is considered.

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2) Who is affected?

FAQ 2.1 — Who pays PFIC tax and interest charges?

Only U.S. persons who own stock in a PFIC face PFIC tax/interest consequences. A foreign corporation could meet the PFIC definition even with no U.S. owners, but if there are no U.S. persons holding the stock, there are no U.S. PFIC consequences for anyone.

FAQ 2.2 — Does PFIC status depend on who owns the company (like CFC rules)?

No. PFIC status does not depend on ownership.

The PFIC definition is company-level and applies if the corporation meets the passive income test or passive asset test for the year. (IRC §1297(a).)

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3) The PFIC definition (the two tests)

FAQ 3.1 — What are the two PFIC tests?

A foreign corporation is a PFIC if it meets either of these tests for the taxable year: (IRC §1297(a).)

  • Passive income test: 75% or more of the corporation’s gross income is passive income. (IRC §1297(a)(1).)
  • Passive asset test: The average percentage of assets the corporation holds that produce passive income (or are held to produce passive income) is at least 50%. (IRC §1297(a)(2).)

Quick definition — “gross income”

“Gross income” here is the corporation’s total income before expenses, as used in these threshold tests.

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4) “Once a PFIC, always a PFIC” (the taint rule)

FAQ 4.1 — What does “Once a PFIC, always a PFIC” mean?

If a foreign corporation is a PFIC at any time during your holding period, your shares can stay treated as PFIC stock, even if the company later stops meeting the tests. (IRC §1298(b)(1).)

FAQ 4.2 — Why does this matter?

It means PFIC status can linger and still affect you later when you receive distributions or sell the stock—even if the company looks “active” in later years. (IRC §1298(b)(1).)</p>

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5) What counts as passive income?

FAQ 5.1 — What is “passive income” for PFIC purposes?

Passive income includes things like dividends, interest, annuities, and nonbusiness rents and royalties, plus net gains from disposing of investment-type assets such as stocks, bonds, commodities, currencies, and other investment assets.

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6) Exceptions: income that is not passive (even if it looks passive)

FAQ 6.1 — Are there exceptions where income is not treated as passive?

Yes. The PFIC rules carve out certain items from “passive income,” including: (IRC §1297(b)(2).)

  • Active banking business income by a qualifying institution. (IRC §1297(b)(2)(A).)
  • Active insurance business income by a qualifying insurance corporation. (IRC §1297(b)(2)(B).)
  • Related-person interest/dividends/rents/royalties (within the related-person meaning incorporated from §954(d)(3), with substitutions as stated) to the extent properly allocable to the related person’s non-passive income. (IRC §1297(b)(2)(C).)
  • Export trade income of an export trade corporation. (IRC §1297(b)(2)(D).)

Quick definition — “related person” (for this PFIC rule)

The statute points you to the related-person definition in §954(d)(3), applied by substituting “foreign corporation” for “controlled foreign corporation” as specified. (IRC §1297(b)(2)(C).)

FAQ 6.2 — What’s the practical meaning of the related-person exception?

Sometimes an item that looks passive (like rent) can be treated as active if it is received from a related person and is allocable to that related person’s non-passive business income. (IRC §1297(b)(2)(C).)

Example: If a foreign subsidiary receives rent from its parent, whether that rent is passive depends on whether the parent’s rental expense relates to the parent’s active business; if so, the subsidiary’s rent can be treated as active for PFIC testing. (IRC §1297(b)(2)(C).)

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7) What counts as passive assets?

FAQ 7.1 — What is a “passive asset” for PFIC testing?

Passive assets include:

  • Property that produces passive income (e.g., a manufacturer holding stocks and bonds). (IRC §1297(a)(2).)
  • Property held for the production of passive income in the reasonably foreseeable future (e.g., CDs held to fund an expansion later). (IRC §1297(a)(2); Notice 88-22, 1988-1 C.B. 489.)

Quick definition — “held for the production of passive income”

This includes assets you may be holding now (like cash equivalents) intending to use later, but which currently generate passive income. (IRC §1297(a)(2); Notice 88-22, 1988-1 C.B. 489.)

FAQ 7.2 — What is the threshold for the passive asset test?

If the average percentage of passive assets is 50% or more, the company meets the passive asset test and is a PFIC—even if the passive income test is not met. (IRC §1297(a)(2).)

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8) How do you measure assets for the passive asset test?

FAQ 8.1 — Is it measured using “value” or “tax basis”?

  • Publicly traded foreign corporations use the value of assets.
  • Nonpublicly traded CFCs use earnings and profits (E&P) adjusted bases of assets. (IRC §1297(f).)
  • All other foreign corporations use value unless they elect to use adjusted bases. (IRC §1297(f).)

Quick definition — “adjusted basis”

A tax concept roughly tracking cost plus/minus certain adjustments

Quick definition — “E&P” (earnings and profits)

A tax measure of a corporation’s economic ability to pay dividends.

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9) Why active businesses can still become PFICs (the “simplistic but dangerous” point)

FAQ 9.1 — Can a real operating company become a PFIC?

Yes. Even companies with legitimate business operations can become PFICs because the tests are mechanical and based on annual percentages of passive income/assets, ignoring ownership and business purpose. (IRC §1297(a).)

FAQ 9.2 — Why are certain companies especially vulnerable?

Companies that can trip PFIC status include

  • Service or internet-based firms with few tangible business assets;
  • Firms with temporarily low active income (bad year, high expenses);
  • Companies that raise lots of capital for future growth (cash sits in passive investments);
  • Companies that sell a big equity stake and have large passive gains. ________________________________________

10) Example: PFIC status even when the U.S. investor owns less than 10%

FAQ 10.1 — How can a company be a PFIC if the U.S. person owns a small “portfolio” stake?

Because PFIC status is determined by the company’s income/assets, not by U.S. ownership percentage. (IRC §1297(a).)

Example:

Foreign persons own 95% of STOLEWAY Ltd. A U.S. person, KASEY, owns 5%. The company is not a CFC. But PFIC status can still apply

Income and assets:

  • Gross income: Passive = 20,000,000; Active = 12,000,000 → Total = 32,000,000
  • Average assets: Passive = 250,000,000; Active = 150,000,000 → Total = 500,000,000

Step 1 — Passive income test (75% threshold):

Passive % = 20,000,000 ÷ 32,000,000 = 0.625… = 62.5%

Result: Below 75%, so it does not meet the passive income test. (IRC §1297(a)(1).)

Step 2 — Passive asset test (50% threshold):

Passive % = 250,000,000 ÷ 400,000,000 = 0.625 = 62.5%

Result: At least 50%, so it meets the passive asset test and is a PFIC. (IRC §1297(a)(2).)

Bottom line: STOLEWAY is a PFIC, and the PFIC consequences fall on KASEY (the U.S. shareholder), not on the foreign shareholders.

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11) Two special exceptions: start-up years and changing-business years

Even if a company meets the passive income/asset tests, there are two relief rules where the company can avoid PFIC status in specific circumstances.

11A) Start-up year exception

FAQ 11.1 — Can a company avoid PFIC status in its start-up year?

Yes. A corporation is not treated as a PFIC for its first taxable year with gross income (the “start-up year”) if all requirements are met: (IRC §1298(b)(2).)

  • No predecessor was a PFIC. (IRC §1298(b)(2)(A).)
  • It is established to the Secretary’s satisfaction it will not be a PFIC for either of the first two years following the start-up year. (IRC §1298(b)(2)(B).)
  • It is in fact not a PFIC for either of those two following years. (IRC §1298(b)(2)(C).)

11B) Changing businesses exception (selling off an active business)

FAQ 11.2 — What if passive income spikes because the company sold a business?

A corporation is not treated as a PFIC for a taxable year if (among other requirements) substantially all of its passive income is attributable to proceeds from disposing of one or more active trades or businesses, and it will not be a PFIC for the following two years (and then actually is not). (IRC §1298(b)(3).)

The statute’s required elements include: (IRC §1298(b)(3).)

  • Neither the corporation nor a predecessor was a PFIC in any prior year. (IRC §1298(b)(3)(A).)
  • Substantially all passive income for the year is attributable to proceeds from disposition of active trades/businesses, and it’s established it will not be a PFIC for the following two years. (IRC §1298(b)(3)(B)(i)–(ii).)
  • It is not a PFIC for the following two years. (IRC §1298(b)(3)(C).)

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12) The 25% look-through rule (subsidiaries)

FAQ 12.1 — What is the 25% look-through rule?

If a foreign corporation owns at least 25% (by value) of another corporation, then when testing PFIC status it is treated as if it: (IRC §1297(c).)

  • Held its proportionate share of the subsidiary’s assets, and (IRC §1297(c)(1).)
  • Received directly its proportionate share of the subsidiary’s income. (IRC §1297(c)(2).)

This can reduce a parent’s passive percentages because you “look through” into the subsidiary’s active business assets/income instead of treating dividends and subsidiary stock as passive by default. (IRC §1297(c).)

FAQ 12.2 — Example: how look-through can “save” PFIC status

Facts:

STOLEWAY (parent) owns 45% of META (subsidiary) which translates to a $10,000,000 holding in META stock . During the year, STOLEWAY received $1,000,000 dividend from META. META is all-active

STOLEWAY (parent)

  • Gross income: Passive 30,000,000; Active 10,000,000
  • Average assets: Passive 150,000,000; Active 100,000,000

META (subsidiary)

  • Gross income: Passive 0; Active 20,000,000
  • Average assets: Passive 0; Active 150,000,000

Step 1 — Without look-through, STOLEWAY looks like a PFIC

Passive income % = 30,000,000 ÷ (30,000,000 + 10,000,000) = 30 ÷ 40 = 75% → PFIC under passive income test. (IRC §1297(a)(1).)

Passive assets % = 150,000,000 ÷ (150,000,000 + 100,000,000) = 150 ÷ 250 = 60% → PFIC under passive asset test. (IRC §1297(a)(2).)

Step 2 — Apply the look-through mechanics

  • A $1,000,000 dividend from META (treated as passive unless looked through), and
  • A $10,000,000 holding in META stock (treated as passive unless looked through).

Then STOLEWAY removes those items and replaces them with its 45% share of META’s underlying income/assets. (IRC §1297(c).)

Passive income test result:

(30,000,000-1,000,000)/(30,000,000+10,000,000-1,000,000+0.45(20,000,000))=60.4%

So passive income drops below 75%, avoiding the passive income test. (IRC §1297(c); IRC §1297(a)(1).)

Passive asset test result:

(150,000,000-10,000,000)/(150,000,000+100,000,000-10,000,000+0.45(80,000,000))=49.1%

So passive assets drop below 50%, avoiding the passive asset test. (IRC §1297(c); IRC §1297(a)(2).)

NOTE: Sometimes a foreign corporation holding less than 25% of an active subsidiary can reduce PFIC risk by increasing ownership to at least 25% so the look-through rule applies. (IRC §1297(c).)

PFIC Tax Consequences + Excess Distributions + Deferred Tax + Sales/Pledges + FTC

13) When do PFIC taxes and interest charges actually hit you?

FAQ 13.1 — If PFICs are about stopping deferral, why can I still defer tax for years?

Unlike the CFC rules, PFIC rules generally do not force annual “constructive dividend” inclusions as the main mechanism. U.S. persons can still defer U.S. residual tax for years, but PFIC rules later “recapture” the present-value benefit of deferral through an interest charge when certain events occur.

FAQ 13.2 — What events trigger PFIC tax/interest under the default PFIC regime?

Two big triggers:

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14) Distributions: what is an “excess distribution”?

Quick definition — “distribution”

A payment you receive from the PFIC with respect to your shares (often like a dividend).

Quick definition — “excess distribution”

A distribution that is “too large” compared to your recent distribution history, computed under the statutory 125% rule. (IRC §1291(b)(2)(A).)

FAQ 14.1 — How do I compute the “total excess distribution” for the year?

You compute:

Total Excess Distribution =

Current-year total distributions − (125% × average distributions included in gross income over the preceding 3 years). (IRC §1291(b)(2)(A).)

Important detail: when computing the 3-year average, you only count prior-year excess distributions to the extent they were included in gross income under the PFIC rules. (IRC §1291(b)(2)(A).)

FAQ 14.2 — Is there a special rule in my first year owning PFIC stock?

Yes. In the first year your holding period begins, your total excess distribution is deemed zero. (IRC §1291(b)(2)(B).)

This prevents the base from being zero (which would otherwise make all first-year distributions “excess”). (IRC §1291(b)(2)(B).)

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15) Once I have a total excess distribution, what happens next?

FAQ 15.1 — Do I treat the whole year’s distribution as “excess”?

No. The PFIC rules split the year’s distributions into:

  • Nonexcess portion (up to the base) → included in gross income as ordinary income in the current year.
    • >Excess portion → handled under the special PFIC allocation rules. (IRC §1291(a)(1).)

FAQ 15.2 — How is an excess distribution allocated?

An excess distribution is allocated ratably to each day in your holding period for the stock. (IRC §1291(a)(1)(A).)

Then the law separates the allocation into:

  • Amount allocated to the current year (and certain other periods) → included in current-year gross income as ordinary income. (IRC §1291(a)(1)(B).)
  • Amount allocated to other post-1986 PFIC years (prior years while the company was a PFIC) → creates a deferred tax amount (tax + interest). (IRC §1291(a)(1)(C); IRC §1291(c)(1).)

Quick definition — “holding period”

The time from when you acquired the stock to when you disposed of it (or to the distribution date, for distribution allocations).

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16) What gets included in current-year income vs. what becomes “deferred tax amount”?

FAQ 16.1 — Which allocated amounts go into current-year gross income?

Your current-year gross income includes (as ordinary income) the portions of the excess distribution allocated to: (IRC §1291(a)(1)(B).)

  • The current year, and (IRC §1291(a)(1)(B)(i).)
  • Any part of your holding period:
  • before the first PFIC year after December 31, 1986, and for which it was a PFIC (this is the “pre-1987 PFIC regime” carve-out described), and (IRC §1291(a)(1)(B)(ii).)
  • Any days before the company became a PFIC (allocations to pre-PFIC years remain taxable as current income rather than deferred-tax years under the PFIC regime’s retroactive recapture structure). (IRC §1291(a)(1).)

NOTE: not every prior year creates deferred tax; only certain post-1986 PFIC years do. (IRC §1291(a)(1)(B).)

FAQ 16.2 — Which allocated amounts trigger the “deferred tax amount”?

Any portion of the excess distribution allocated to post-1986 PFIC years (other than the current year and the carve-out periods described above) creates a deferred tax amount. (IRC §1291(a)(1)(C); IRC §1291(c)(1).)

Quick definition — “deferred tax amount”

A PFIC term that is actually (1) back-year tax plus (2) interest on that tax. (IRC §1291(c)(1).)

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17) The deferred tax amount: how the back-year tax and interest are computed

FAQ 17.1 — What are the two parts of the deferred tax amount?

The deferred tax amount is the sum of: (IRC §1291(c)(1).)

Also, the portion of your current-year tax increase attributable to the interest component is treated as interest paid under §6601 on the current year due date. (IRC §1291(c)(1).)

FAQ 17.2 — How do I compute the “aggregate increases in taxes”?

For each amount allocated to a prior taxable year that creates deferred tax (i.e., not the carve-out periods), you multiply that allocated amount by the highest rate of tax in effect for that year (individual §1 rate or corporate §11 rate, as applicable). (IRC §1291(c)(2).)

Key consequences:

  • The highest statutory rate applies even if your actual marginal rate was lower. (IRC §1291(c)(2).)
  • Net operating losses generally can’t offset these back-year allocations.

FAQ 17.3 — How do I compute the interest on those tax increases?

Interest is computed for each back-year tax increase for the period: (IRC §1291(c)(3)(A).)

  • Beginning on the due date of the return for the relevant prior year, and (IRC §1291(c)(3)(A)(i).)
  • Ending on the due date of the return for the year in which the distribution/disposition occurs, (IRC §1291(c)(3)(A)(ii).)

using the rates and method applicable under §6621 for underpayments. (IRC §1291(c)(3)(A).)

Quick definition — “underpayment interest rate”

The IRS interest rate used for tax underpayments, determined under §6621. (IRC §1291(c)(3)(A).)

FAQ 17.4 — Can I deduct PFIC interest charges?

  • Corporate taxpayers can often deduct interest charges.
  • Individuals may be limited because personal interest is generally nondeductible. (IRC §163(h).)

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18) Worked example: excess distribution + allocation + deferred tax amount (step-by-step)

Facts

KASEY (U.S. citizen) buys PFIC stock on January 1, 2020. STOLEWAY is a PFIC for 2022–2026. Distributions:

  • 12/31/2022: 100,000
  • 12/31/2023: 100,000
  • 12/31/2024: 100,000
  • 12/31/2025: 100,000
  • 12/31/2026: 850,000

No excess distributions in 2022–2025.

Step 1 — Compute the 2026 base (125% rule)

Average of prior 3 years’ distributions included in gross income = average of 2023–2025 = 200,000. (IRC §1291(b)(2)(A).)

125% of that average = 1.25 × 200,000 = 125,000. (IRC §1291(b)(2)(A).)

Step 2 — Compute total excess distribution for 2026

Total distributions in 2026 = 850,000.

Total excess distribution = 850,000 − 150,000 = 700,000. (IRC §1291(b)(2)(A).)

Nonexcess portion = 150,000.

Step 3 — Allocate the excess distribution across the holding period (daily-ratable concept)

Holding period: 2020–2026 inclusive = 7 years.

700,000 ÷ 7 = 100,000 allocated to each year. (IRC §1291(a)(1)(A).)

  • 2020: 100,000 (assume pre-PFIC year -startup year)
  • 2021: 100,000 (assume pre-PFIC year – startup year)
  • 2022–2025: 100,000 each (PFIC years → deferred tax amount years)
  • 2026: 100,000 (current year)

Step 4 — Determine what is included in 2026 gross income (ordinary)

KASEY includes in 2026 gross income: (IRC §1291(a)(1)(B).)

  • Nonexcess portion: 150,000 (ordinary)
  • Excess allocable to 2026: 100,000 (ordinary)
  • Excess allocable to pre-PFIC years 2020 and 2021: 200,000 (ordinary) (IRC §1291(a)(1).)

Total 2026 gross income = 150,000 + 100,000 + 200,000 = 450,000. (IRC §1291(a)(1)(B).)

Step 5 — Compute deferred tax amount for 2022–2025 allocations

Each year 2022–2025 has 100,000 allocated → back-year tax computed at highest rate (IRC §1291(c)(2).)

Tax increases:

  • 2022: 100,000 × 37% = 37,000
  • 2023: 100,000 × 37% = 37,000
  • 2024: 100,000 × 37% = 37,000
  • 2025: 100,000 × 37% = 37,000

Aggregate increases in tax = 148,000. (IRC §1291(c)(2).)

Interest (example assumes a flat 10% rate and counts years to 2026 due date):

  • 2022 tax: 37,000 × 10% × 4 years = 14,800
  • 2023 tax: 37,000 × 10% × 3 years = 11,100
  • 2024 tax: 37,000 × 10% × 2 years = 7,400
  • 2025 tax: 37,000 × 10% × 1 year = 3,700

Aggregate interest = 37,000. (IRC §1291(c)(3)(A) (method/rate framework tied to §6621); example uses a simplified constant rate assumption.)

Deferred tax amount = 148,000 + 37,000 = 185,000. (IRC §1291(c)(1).)

Bottom line:

KASEY receives 850,000 in 2026, includes 450,000 in income, and pays a 185,000 deferred tax amount (tax + interest). (IRC §1291(c)(1).)

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19) Sales and other “dispositions”: gains are treated like excess distributions

FAQ 19.1 — What happens if I sell PFIC stock for a gain?

If you dispose of PFIC stock, any gain recognized is treated as an excess distribution and the distribution rules apply. (IRC §1291(a)(2).)

FAQ 19.2 — Does this mean capital gain rates can apply?

Under the default PFIC regime, the gain is not treated as capital gain in the normal way; the rules cause the gain to be treated like an excess distribution and allocated, producing ordinary income components and deferred tax/interest components. (IRC §1291(a)(2); IRC §1291(a)(1).)

FAQ 19.3 — Is pledging PFIC shares as collateral treated as a disposition?

Yes. If you use PFIC stock as security for a loan, you are treated as having disposed of the stock (IRC §1298(b)(6).)</p>

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20) Example: disposition gain (step-by-step)

Facts:

A U.S. corporation, STOLEWAY, buys PFIC stock on 1/1/2023 for 60,000 and sells on 12/31/2026 for 100,000 → gain = 40,000. (IRC §1291(a)(2).)

We allocates gain evenly over 4 years: 40,000 ÷ 4 = 10,000 per year. (IRC §1291(a)(1)(A) (allocation concept applied via §1291(a)(2)).)

Assume tax rate 21% and constant interest 8% for illustration.

Back-year tax increases (highest rate concept):

  • 2023: 10,000 × 21% = 2,100
  • 2024: 10,000 × 21% = 2,100
  • 2025: 10,000 × 21% = 2,100

Aggregate increases in tax = 6,300. (IRC §1291(c)(2).)

Interest (simplified constant 8% for illustration; statutory method tied to §6621):

  • 2023 tax interest: 2,100 × 8% × 3 years = 504
  • 2024 tax interest: 2,100 × 8% × 2 years = 336
  • 2025 tax interest: 2,100 × 8% × 1 year = 168

Aggregate interest = 1,008. (IRC §1291(c)(3)(A).)

Deferred tax amount = 6,300 + 1,008 = 7,308. (IRC §1291(c)(1).)

Current-year tax on the current-year allocated amount (10,000 × 21%) = 2,100. (IRC §1291(a)(1)(B); applied via IRC §1291(a)(2).)

Total PFIC-related liability in the example (ignoring FTC) = 7,308 + 2,100 = 9,408. (IRC §1291(c)(1).)

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21) Foreign tax credits (FTC): how they coordinate with PFIC tax

FAQ 21.1 — Can foreign taxes reduce PFIC tax?

The rules may allow foreign tax credits, and the PFIC regime includes coordination rules that tell you where the foreign taxes are applied. (IRC §1291(g).)</p>

FAQ 21.2 — How does the PFIC FTC coordination work?

Creditable foreign taxes with respect to a PFIC distribution are handled as follows: (IRC §1291(g)(1).)

  • To the extent excess distribution taxes are allocated to periods that are included in current-year income under the carve-out rule (the years described in §1291(a)(1)(B)), those taxes are taken into account under §901 for the current year. (IRC §1291(g)(1)(C)(i).)
  • To the extent excess distribution taxes are allocated to other years (years that create a deferred tax amount), those taxes reduce (subject to §904(d) principles, and not below zero) the increase in tax for the year to which they are allocable—but they are not taken into account under §901. (IRC §1291(g)(1)(C)(ii).)

Escape Hatches, Elections & Planning (MTM, QEF, Deemed Sale, §1294 Extension, Decision Tree)

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22) “Escape hatches”: how can I avoid PFIC interest charges?

Under the default PFIC regime, interest charges can be severe. Congress therefore provided three principal ways out, each with trade-offs:

  • Mark-to-Market (MTM) election — annual taxation based on market value (IRC §1296).
  • Qualified Electing Fund (QEF) election — annual flow-through of PFIC income (IRC §1295; §1293).
  • Deemed sale election (to “purge” prior PFIC years) — used with a QEF election when PFIC taint already exists (IRC §1291(d)(2); Reg. §1.1291-10).

A fourth tool helps with cash-flow, not classification:

4) §1294 election — defers payment of tax on undistributed QEF income (with interest and possible bond).

Each is explained below, step-by-step, with citations kept exactly where the rules come from.

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PART A — MARK-TO-MARKET (MTM) ELECTION (IRC §1296)

FAQ 22.1 — What is the MTM election, in plain English?

If your PFIC stock has a readily determinable market value, you may elect to pretend you sold it at fair market value every year and pay tax annually on the increase (or deduct certain decreases). This eliminates deferred tax and PFIC interest charges going forward. (IRC §1296(a).)

Quick definition — “mark-to-market”

Treating an asset as if it were sold at market value at year-end, even though you still own it.

FAQ 22.2 — Who is eligible to make an MTM election?

Only U.S. persons owning “marketable stock.” (IRC §1296(e)(1)(A).)

“Marketable stock” means stock that is regularly traded on:

If your PFIC stock is not publicly traded or does not have a clearly established market value, MTM is not available. (IRC §1296(e).)

FAQ 22.3 — What income do I recognize each year under MTM?

At the close of each taxable year: (IRC §1296(a).)

  • If FMV > adjusted basis → include the excess in gross income. (IRC §1296(a)(1).)</li>
  • If adjusted basis > FMV → deduct the lesser of:
  • The excess, or
  • Your unreversed inclusions from prior MTM years. (IRC §1296(a)(2).)

Quick definition — “unreversed inclusions”

Prior MTM gains you included in income that haven’t yet been offset by MTM losses. (IRC §1296(a)(2).)

FAQ 22.4 — Is MTM income capital or ordinary?

All MTM gains and allowable losses are treated as ordinary, not capital. (IRC §1296(c)(1).)</p>

FAQ 22.5 — How does MTM affect my stock basis?

FAQ 22.6 — How long does the MTM election last?

The election applies to the year made and all later years unless: (IRC §1296(k).)

  • The stock ceases to be marketable, or
  • The IRS consents to revocation. (IRC §1296(k)(2).)

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PART B — QUALIFIED ELECTING FUND (QEF) ELECTION

FAQ 23.1 — What is a QEF election?

A QEF election lets you treat the PFIC like a flow-through entity for U.S. tax purposes. You include your pro rata share of income every year, which eliminates PFIC interest charges. (IRC §1295; IRC §1293.)</p>

Quick definition — “QEF”

A PFIC for which a U.S. shareholder elects annual inclusion of income, similar to foreign branch treatment (but without loss flow-through).

FAQ 23.2 — What income must I include each year under a QEF?

Each year you include in gross income: (IRC §1293(a)(1).)

If the PFIC is also a CFC, coordination rules prevent double taxation. (IRC §951(f); IRC §1293(g)(1).

FAQ 23.3 — What if the PFIC doesn’t distribute cash?

You still owe U.S. tax on the QEF inclusion even if no cash is distributed. This is the major downside of QEF elections.

FAQ 23.4 — How do QEF inclusions affect stock basis?

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PART C — HOW TO MAKE A QEF ELECTION (FORM 8621)

FAQ 24.1 — How do I elect QEF status?

You must: (Reg. §1.1295-1(f)(1).)

  • Complete Form 8621 making the §1295 election.
  • Attach Form 8621 to your timely filed return (including extensions).
  • Receive and reflect a PFIC Annual Information Statement (or intermediary/combined statement) from the PFIC. (Reg. §1.1295-1(f)(1)(iii).)

FAQ 24.2 — When must the QEF election be made?

By the due date of your tax return (including extensions) for the year the election applies. (IRC §1295(b)(2).)

Late elections may be allowed if you reasonably believed the company was not a PFIC. (IRC §1295(b)(2); Reg. §1.1295-1(f).)

FAQ 24.3 — Do I have to file Form 8621 every year?

Yes. For each year the QEF election applies, you must file Form 8621 and retain the required PFIC statements. (Reg. §1.1295-1(f)(2).)

Failure to produce documentation can invalidate the election. (Reg. §1.1295-1(f)(2)(ii).)

FAQ 24.4 — What if I’m not sure whether the company is a PFIC?

Taxpayers may file protective QEF elections when PFIC status is uncertain. (Notice 88-22, 1988-1 C.B. 489.)

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PART D — PURGING PFIC TAINT: THE DEEMED SALE ELECTION

FAQ 25.1 — What if I make a QEF election after PFIC years already exist?

Then your PFIC is an unpedigreed QEF, meaning prior PFIC years remain subject to §1291 unless you purge them. (Reg. §1.1291-9(j)(2).)

FAQ 25.2 — How do I “purge” PFIC taint?

By making a deemed sale election in the first QEF year. (IRC §1291(d)(2); Reg. §1.1291-10.)

You are treated as if you sold the PFIC stock at fair market value on the qualification date (first day of the first QEF year). (Reg. §1.1291-10(a), (e).)

  • Gain is recognized and taxed under §1291 (as an excess distribution).
  • Loss is not recognized. (Reg. §1.1291-10(a).)

FAQ 25.3 — What is the benefit of the deemed sale election?

After the deemed sale:

  • The PFIC becomes a pedigreed QEF for you. (Reg. §1.1291-9(j)(2).)
  • Future years are governed only by QEF rules, avoiding future PFIC interest-charge surprises.

NOTE: Making the deemed sale election together with the QEF election avoids having to juggle both PFIC and QEF regimes later.

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PART E — CASH-FLOW RELIEF: §1294 EXTENSION ELECTION

FAQ 26.1 — What if QEF income creates tax but no cash?

You may elect to defer payment of U.S. tax on undistributed QEF earnings. (IRC §1294(a)(1).)

FAQ 26.2 — Is this tax forgiven?

No. Payment is deferred, not eliminated, and interest accrues. (IRC §1294(g); §6601.)

FAQ 26.3 — When does the deferral end?

The extension ends when: (IRC §1294(c).)

  • The PFIC makes a distribution attributable to the deferred earnings, or
  • Other termination events occur.

Distributions are treated as coming from most recently accumulated earnings. (IRC §1294(c)(1)(B).)</p>

FAQ 26.4 — Can the IRS require security?

Yes. The IRS may require a bond and may terminate the extension if revenue is at risk or elections are revoked. (IRC §1294(c), (e).)

PART F — PRACTICAL DECISION TREE (Putting It All Together)

Step 1 — Is the foreign corporation a PFIC?

Apply 75% income / 50% asset tests. (IRC §1297(a).)

Step 2 — Is PFIC status unavoidable?

Consider start-up, changing-business, or 25% look-through exceptions. (IRC §1298(b)(2)–(3); IRC §1297(c).)

Step 3 — If PFIC, what elections are available?

Step 4 — Already tainted by prior PFIC years?

Step 5 — Cash-flow problem under QEF?

  • Consider §1294 deferral election (with interest and possible bond). (IRC §1294.)li>

Final Takeaway

PFIC rules are intentionally punitive to remove tax-deferral benefits, but they are not traps with no exits.

With careful analysis and timely elections, U.S. investors can:

  • Avoid interest charges,
  • Preserve capital-gain character (via QEF), and
  • Prevent long-term “once-a-PFIC” surprises.