PFIC rules when moving to the US with foreign funds or ETFs

What happens to foreign funds and ETFs when you move to the US?

The US PFIC rules apply to US persons, so they reach a foreign fund from your US residency starting date. A fund sold before that date is generally outside US tax. A fund you still own from that date is usually stock in a passive foreign investment company (PFIC): each one may need its own Form 8621, and a later sale is taxed under the default excess-distribution rules unless you make a qualified electing fund (QEF) or mark-to-market election, each explained below (IRS: Form 8621 instructions). What a PFIC is, in general, is covered in Foreign funds and ETFs on a US return.

The decisions cluster around two dates. Before your residency starting date: whether to sell or keep each fund, and whether each fund you keep issues a PFIC annual statement. By the due date of your first US return: whether to make a first-year election. A case is not simple when:

• you made an earlier US trip in the arrival year, which can move your starting date;
• you hold many funds or many purchase lots;
• you want an election, which runs for later years too and can be hard to undo;
• you hold a green card, or you are resident in two countries at once.

Gather the items in the last section before you move; some are hard to get afterwards.

Which of your investments become a US filing issue?

Foreign-registered funds and ETFs are the usual problem; deposits, bonds and US funds are not PFICs. The test is the legal form of what you own, not where you bought it (IRS: Form 8621 instructions).

Whatever its PFIC status, the foreign bank, brokerage or fund account that holds an investment is a foreign financial account: once you are resident it can need an FBAR and Form 8938, separate from Form 8621; see Foreign account reporting.

A tax treaty generally does not stop the US taxing its own residents on these funds, because of its saving clause (IRS: Publication 519). Moving from Canada with an RRSP, TFSA or Canadian account is covered in RRSP and TFSA after leaving Canada.

Which date starts the PFIC rules for you?

Your residency starting date starts them. Under the substantial presence test it is generally the first day you are present in the US in the calendar year you meet the test, ignoring up to 10 days if you had a closer connection and tax home abroad on those days and file a signed statement with your return. Under the green card test it is the first day you are present as a lawful permanent resident; if you meet both tests, the earlier date applies (IRS: Publication 519).

The test takes 183 days of weighted presence. If you arrive on a work visa late in the year and fall short, you are a nonresident for that whole year, and your starting date falls in the next year. A green card, or the first-year choice, can start your residency in the arrival year instead.

Three traps move the date:

• An earlier trip. A house-hunting visit in the same calendar year can become your starting date. Up to 10 days can be left out only with the closer connection, tax home abroad and signed statement above; without the statement your first US day is the starting date, and a visit of more than 10 days cannot be left out at all.
• Residence in the previous year. If you were a US resident for any part of the previous year and are resident again this year, you are resident from the start of this year.
• The first-year choice. Choosing to be treated as resident for part of an earlier year moves your starting date back into that year.

For the year your residency starts you usually file a dual-status return, and the PFIC rules apply from your starting date. The residency tests, the 10-day exclusion and the first-year choice are explained in First year as a US tax resident.

If you sell a fund before you become a US resident, does the US tax the gain?

Generally no. For the nonresident part of the year, income from outside the US that is not connected with a US business is not taxable, and gain on a sale of personal property such as fund units generally has a foreign source if your tax home is abroad (IRS: Publication 519).

That holds only if the sale is complete before your real starting date, so check the trips above first. Your home country may tax the sale; that is outside this page.

If you sell after you arrive, how much of the earlier gain can the US reach?

Under the default rules, generally all of it. Your sale basis stays your original cost; arriving does not reset it. The whole gain is treated as an excess distribution and spread evenly over every day you held the fund, including the years before you arrived (26 U.S.C. 1291; IRS: Form 8621 instructions, Part V).

How the pre-arrival share is taxed is not settled:

A regulation says a fund is not treated as a PFIC for days when the shareholder was not a US person, but that definition sits in the QEF and purging rules (26 CFR 1.1291-9(j)(1)). The statute itself sets the ordinary-income period by the years the company was a PFIC and spreads the gain over your whole holding period (26 U.S.C. 1291(a)(1)), and Form 8621's instructions follow it. No final rule of general reach applies the US-person rule to the default calculation. With a large built-in gain, this choice of method needs professional judgment. Either way, the default rules do not give long-term capital gain rates.

If you elect mark-to-market in your first US year, what is your starting value?

The starting value is the greater of the fund's market value or your cost on the first day of the tax year in which you become a US person: January 1 for a calendar-year filer, not your arrival date. You then include the rise to year-end as ordinary income (26 CFR 1.1296-1(d)(5)).

• The arrival date plays no part. Any rise or fall between January 1 and the day you arrive is inside your first-year figure.
• The stepped-up value is only for mark-to-market. For other purposes your basis is still your cost. In the regulation's own example, the gain from before the first US year was taxed as long-term capital gain on a later sale, and the gain after January 1 as ordinary income.
• The fund must be marketable stock, generally regularly traded on a qualified exchange, or a fund that meets special conditions (26 CFR 1.1296-2).
• The deadline is your first US return's due date, including extensions, on Form 8621. The election then carries into later years.

A coordination rule taxes the first mark-to-market year under the default rules instead, but only if the fund was already a PFIC for an earlier tax year in your holding period and no QEF election covered it (26 CFR 1.1296-1(i)). The regulation's own example applies the ordinary first-year rule to a person who bought the fund as a nonresident, but it does not say why the coordination rule is passed over, so have the first-year computation checked. After the first year, see QEF and mark-to-market elections.

Can you make a QEF election in your first US year for a fund you bought years ago?

Yes, if the fund gives you the information. For the QEF rules, the days before you were a US person do not count as PFIC days, so a QEF election effective for your first US year can cover your whole PFIC history (26 CFR 1.1291-9(j); 26 CFR 1.1295-1).

• The fund must issue a PFIC Annual Information Statement, or an intermediary statement, every year the election applies. Without it there is no QEF election. Ask the fund before you arrive.
• You are taxed each year on your share of the fund's ordinary earnings and net capital gain, even when nothing is paid out.
• The deadline is the due date, including extensions, of the return for the first year the election applies.
• Revoking needs IRS consent; later-year rules are in QEF and mark-to-market elections.

(IRS: Form 8621 instructions, Election A)

Sell, keep or elect: what does the US tax on each path?

These are the tax effects of each path, not a recommendation; the right one depends on the fund, its documents and your plans.

What changes if you give fund shares to family before or after you arrive?

Before you become a US resident, a gift of fund shares is generally outside US gift tax, because a nonresident who is not a citizen is not taxed on gifts of intangible property, apart from an exception for certain former citizens and long-term residents (26 U.S.C. 2501(a)(2)). For gift tax, being a nonresident depends on your domicile (where you live with no definite intention of leaving), not on the income tax tests, so someone on a short assignment may still be a gift-tax nonresident after arriving (26 CFR 25.2501-1(b)). If the person who receives the shares is or becomes a US person, such as a spouse moving with you, the fund is generally their PFIC stock from the day they become one.

After you arrive, Form 8621's instructions treat stock of a default-rule fund as disposed of when it is sold, transferred or pledged, so a gift can bring the excess-distribution tax (IRS: Form 8621 instructions, line 15f). Using the shares as security for a loan is treated by statute as a disposition (26 U.S.C. 1298(b)(6)). Gift tax returns for gifts made while domiciled in the US are covered in Giving money or shares to family abroad.

Does your home country's tax treaty switch off the PFIC rules?

Generally not. The saving clause lets the US tax its residents as if the treaty did not exist, with listed exceptions (IRS: Publication 519).

The one broad relief is for a dual resident whose treaty tie-breaker makes them a nonresident: they need no Form 8621 for the period the treaty treats them as a nonresident if they file on time with Form 8833: on Form 1040-NR if nonresident at year-end, or on Form 1040 with the required nonresident-period schedule if resident at year-end (26 CFR 1.1298-1(c)(5)). A tie-breaker claim changes far more than PFIC filing; for Canada, see Treaty tie-breaker for dual residents.

You're on a short assignment: what happens to Form 8621 and your funds when you leave?

Form 8621 is filed only by US persons, so the annual filing stops after your residency ends. Leaving the US is not itself a sale, transfer or pledge, so it does not by itself trigger PFIC tax (IRS: Form 8621 instructions).

• While you are resident, each default-rule fund needs Form 8621 unless all your PFIC stock is worth $25,000 or less at year-end ($50,000 on a joint return) and there is no excess distribution or sale gain that year. An election always requires the form (26 CFR 1.1298-1(c)(2)).
• A sale or payout while you are resident is taxed under the regime you chose. Whether and how to file each later year is covered in Form 8621 filing and missed years.
• Your departure year is usually a dual-status year; the residency ending date rules are in Publication 519. Whether that year needs Form 8621 is worth checking.
• A sale after your residency ends is made as a nonresident; whether your US years still bring any PFIC tax is a point to have checked before you sell.
• A green card held in at least 8 of the last 15 tax years can bring the exit tax when you give it up; see Exit tax.

What should you collect before the move?

Collect the records that fix values on dates you cannot go back to:

1. Every purchase lot: date, units, cost and currency.
2. Each fund's market value on January 1 of the arrival year and on your arrival date.
3. Year-end statements and the full payout history.
4. Each fund's prospectus: its legal form, where it is registered and whether it is exchange-listed.
5. The fund's written answer on whether it issues a PFIC Annual Information Statement.
6. Account statements showing any tax-free wrapper, loans against the account or pledges.
7. Your travel dates for the arrival year and the year before, and your visa or green card date.

Example

These examples are illustrative. The first uses euros; the second and third use US dollars.

Sold before arrival, or kept

A French engineer arrives on an L-1 visa in June and stays the rest of the year, with no earlier US trips that year. She holds €100,000 of fund units in a French equity savings plan, €30,000 of it gain.

• She sells in May, before her residency starting date. The €30,000 is a nonresident's foreign-source gain, outside US tax.
• She keeps the units instead. They are PFIC stock from her first resident day. Her first US return needs a Form 8621 for each fund, because her total holding is far above the single filer's small-holding limit.

A first-year mark-to-market election

A green card holder, filing on a calendar year, lands in September with an exchange-listed foreign fund. Cost $40,000; value $70,000 on January 1, $66,000 in September and $75,000 at year-end. Applying the regulation's starting-value rule, a first-year mark-to-market election would start from $70,000, so $5,000 would be ordinary income for the year, as long as the coordination rule above does not apply. The September value plays no part. Her basis for other purposes would stay $40,000, plus the $5,000 she included.

A three-year assignment

A German employee holds $60,000 in exchange-listed foreign funds and makes no election.

• Each year he is resident: his return needs Form 8621 for each fund while his total is over the single filer's limit.
• The year he leaves: leaving is not a sale of the funds. He files a dual-status return, and checks whether that year needs Form 8621.
• The year after: if he is no longer a US person, Form 8621 stops.

Different for you?

• Your residency starting date, the first-year choice or a dual-status return is unclear: see First year as a US tax resident.
• You hold large fund positions, many lots, or a fund with a big gain since purchase: the unsettled pre-arrival rule and a hard-to-undo election need cross-border tax review before your first US return.
• You already live in the US and missed Forms 8621: see Form 8621 filing and missed years.
• You want to change or add an election after the first year: see QEF and mark-to-market elections.
• You own your own company abroad: see Founder moving to the US.
• You hold a pension, provident fund or savings insurance policy: see Foreign pension reporting or Insurance policies bought abroad.
• You are moving from Canada: see RRSP and TFSA after leaving Canada, and, if both countries treat you as resident, Treaty tie-breaker for dual residents.
• You hold a green card and plan to give it up: see Exit tax.