A US citizen in France who opens a French brokerage account, purchases shares in a French mutual fund, or holds sub-funds within an assurance-vie policy is, in most cases, a shareholder in a passive foreign investment company. The PFIC rules are among the most punitive provisions in the US international tax code. Absent an affirmative election, distributions from PFICs and gains on their sale are taxed at the highest ordinary income rate, plus an interest charge designed to eliminate any benefit from tax deferral. Preferential long-term capital gains rates are not available.
The PFIC rules were designed to prevent US taxpayers from deferring income in low-tax foreign investment vehicles. For US citizens in France, the result is that routine French investment activity — buying units in a French mutual fund, investing through an assurance-vie, or holding French ETFs through a brokerage account — creates a compliance obligation that does not exist for the same investments held through a US-organized fund.
Two elections offer paths to more favorable tax treatment: the Qualified Electing Fund election, which includes income annually at preferential capital gain rates, and the mark-to-market election, which produces annual ordinary income or loss based on changes in value. Both elections require affirmative action and documentation. Failing to elect means the default regime applies by operation of law.
What Is a PFIC?
A passive foreign investment company is any foreign corporation that meets either of two tests for its tax year:
Income test: 75% or more of the corporation’s gross income for the year is passive income, including dividends, interest, rents, royalties, annuities, and gains from the sale of passive assets.
Asset test: 50% or more of the average value of assets held during the year are assets that produce, or are held for the production of, passive income.
French mutual funds (SICAV and FCP structures), French ETFs, money market funds, and the investment sub-funds within assurance-vie contracts almost universally meet both tests. These are their ordinary assets and income. A US citizen who holds any of these instruments has PFIC exposure regardless of the size of the holding.
| French Investment Vehicle | PFIC Status |
|---|---|
| French mutual fund (SICAV) | PFIC in virtually all cases |
| French mutual fund (FCP) | PFIC in virtually all cases |
| French ETF (Euronext-listed) | PFIC in virtually all cases |
| Assurance-vie investment sub-funds | PFIC in virtually all cases |
| PEA (Plan d’Épargne en Actions) holdings | Underlying funds are PFICs |
| Individual French company stock | Not a PFIC (single operating company) |
| French operating business (SAS, SARL) | May qualify for CFC-PFIC overlap relief |
Form 8621 Filing Requirements
US shareholders of PFICs must file a separate Form 8621 for each PFIC. Filing is required in the following circumstances:
- Receipt of an excess distribution from a PFIC
- Recognition of gain on disposal of PFIC stock
- Making or maintaining a QEF election (annual inclusion)
- Making or maintaining a mark-to-market election
- Annual reporting required under IRC §1298(f)
The §1298(f) annual report is required for most PFIC shareholders, subject to the small-value exception. The exception waives only the routine annual filing; a distribution, sale, or election event requires Form 8621 regardless of the portfolio’s total value.
Small-value exception:
| Filer | Threshold |
|---|---|
| Single filer | Aggregate PFIC value ≤ $25,000 at year-end |
| Married filing jointly | Aggregate PFIC value ≤ $50,000 at year-end |
| Indirect ownership | ≤ $5,000 |
The Three Tax Regimes
Default Regime: Section 1291 (Excess Distribution Method)
Without an election, the Section 1291 regime applies automatically. The consequences are punitive.
Excess distributions are any distributions that exceed 125% of the average annual distributions received during the prior three tax years. All gain on disposition of PFIC stock under this regime is also treated as an excess distribution.
Tax treatment of excess distributions and gains:
- The amount is allocated ratably across the entire holding period
- The portion allocated to the current year: taxed as ordinary income in the current year
- The portion allocated to each prior PFIC year: taxed separately at the highest applicable ordinary rate, plus an interest charge on the deferred tax
The interest charge uses the IRS underpayment rate (federal short-term rate plus three percentage points) applied to the tax that would have been due in each prior year. This eliminates any benefit from deferral. There are no long-term capital gains rates on PFIC stock under the default regime.
QEF Election: Section 1295 (Qualified Electing Fund)
The QEF election converts the punitive default regime into an annual inclusion regime.
How it works:
- Each year, the shareholder includes their pro rata share of the PFIC’s ordinary earnings (as ordinary income) and net capital gain (as long-term capital gain)
- Basis increases by included amounts; decreases by distributions of previously taxed amounts
- Subsequent distributions of previously included amounts are excluded from income
- Capital gain character is preserved on ultimate disposition
Pedigreed vs. unpedigreed QEF:
| Type | Condition | Consequence |
|---|---|---|
| Pedigreed | QEF election made in the first year of ownership | Clean treatment from inception |
| Unpedigreed | QEF election made in year 2 or later | Prior holding period subject to §1291 treatment; purge election required |
Purge elections: An unpedigreed QEF can be converted to pedigreed status by making a deemed sale election (Election D, recognizing gain at current FMV) or a deemed dividend election (Election E, treating the unrealized appreciation as a dividend). Both are taxable events.
Documentation requirement: The PFIC must provide an annual statement showing the shareholder’s pro rata ordinary earnings and net capital gain. Without this statement, the QEF election may be invalidated. US shareholders in French funds should request the annual PFIC statement from their fund or administrator.
Mark-to-Market Election: Section 1296
The MTM election requires annual recognition of ordinary income or loss based on year-end fair market value. It is available only for marketable PFIC stock listed on a qualified foreign securities exchange.
| Year-End Position | Tax Treatment |
|---|---|
| FMV exceeds adjusted basis | Ordinary income; basis increases by income included |
| Adjusted basis exceeds FMV | Ordinary loss, limited to cumulative net gains previously included |
First-year trap: Making the MTM election after years under the default regime triggers Section 1291 treatment on the accumulated appreciation as of the election date, as if a sale occurred. This is often a large taxable event that makes switching to MTM from the default regime very costly.
When to consult a specialist: The PFIC election regime — QEF, mark-to-market, or default — must be chosen in the first year of ownership. An election made in a later year triggers either a taxable purge election or §1291 treatment on all accumulated appreciation: both are irreversible taxable events. Determining the optimal approach requires analysis of the specific fund, the holding period, the availability of a PFIC Annual Information Statement, and the individual’s broader tax position. A qualified US–France tax specialist can assess your specific circumstances. Request Introduction.
Assurance-Vie: Compounded Reporting Obligations
The assurance-vie contract creates layered obligations for US citizens in France:
- The contract itself: Reportable on FBAR as a foreign life insurance or annuity contract with a cash surrender value. Also reportable on Form 8938 as a specified foreign financial asset.
- The investment sub-funds: Each underlying fund is typically a PFIC. A separate Form 8621 may be required for each sub-fund.
- Threshold interaction: The full value of the assurance-vie counts toward the Form 8938 threshold. If Form 8621 is filed for the sub-funds, they may be exempt from detailed reporting on Form 8938 Part IV, but their value must still be counted toward the threshold.
Technical References
PFIC definition: IRC §1297(a) defines a passive foreign investment company as any foreign corporation meeting either the income test (IRC §1297(a)(1)) or the asset test (IRC §1297(a)(2)).
Default regime: IRC §1291 governs the tax treatment of excess distributions from §1291 funds. The interest charge is computed under §1291(c) using the underpayment rate under §6621(a)(2).
QEF election: IRC §1295 establishes the Qualified Electing Fund regime. Annual inclusion of ordinary earnings and net capital gain preserves capital gain character. Election A on Form 8621 Part II.
Mark-to-market election: IRC §1296 governs the mark-to-market regime for marketable stock. Gain is ordinary income; losses are ordinary deductions limited to cumulative net gains.
Small-value exception: The $25,000/$50,000 annual reporting waiver under IRC §1298(f) and Treasury Regulations applies only to the routine §1298(f) annual report. It does not waive filing when an election, distribution, or disposition event occurred during the year.
Form 8938 interaction: PFIC interests are specified foreign financial assets under IRC §6038D and count toward the Form 8938 filing threshold. If Form 8621 is filed, the PFIC interest may be exempt from detailed reporting in Form 8938 Part IV, but the value must still be included in the threshold calculation.
Form 8621 instructions: https://www.irs.gov/instructions/i8621