To determine whether an investment fund is classified as a PFIC, it is necessary to examine the fund’s underlying investments. Most mutual funds and index funds based in the US are not considered to be PFICs, even if they include foreign investments. This is because these investments are registered and regulated under US law, whereas a PFIC is not. An asset can be classified as a passive foreign investment company if and only if it meets at least one of the following criteria:
- Income Test: 75% of gross income comes from passive income
- Asset Test: 50% or more of assets produce passive income
These tests must be applied every taxable year, so it is possible that a particular investment would not qualify as a PFIC one year but would the next.
Examples of PFICs
The income and asset tests are the primary criteria by which a PFIC can be identified. Here are some common examples of PFICs that you may encounter:
- ETFs listed on a foreign stock exchange
- Foreign real estate companies and real estate investment trusts (REITs)
- Foreign mutual fund trusts
Learn more about PFIC filing here: What Is a PFIC, and How Does It Affect My Taxes?