PFIC Rules for UCITS Funds: What US Tax Residents Need to Know in 2026

The Foreign Fund Trap For Americans

If you moved to the United States years ago and still hold the European or UK pooled investment funds you owned when you arrived, the US tax code has been treating you a certain way the entire time ,and the form that captures it has just changed for the 2025 tax year.

This article explains how the Passive Foreign Investment Company (PFIC) regime applies to a foreign national or dual citizen who has been a US tax resident for two or more years and still owns home-country funds: what makes a fund a PFIC, the three tax regimes that can apply, the December 2025 revision to Form 8621, when filing is still required, and the compliance routes for taxpayers who have missed prior filings.

Why Your UK, Irish or European Fund Is Almost Certainly a PFIC

The PFIC rules exist to neutralize what the US views as an avoidance risk: a US taxpayer deferring income inside a foreign pooled investment. A foreign corporation is a PFIC if it meets either of two tests in any year. The income test is met if 75% or more of its gross income is passive. The asset test is met if 50% or more of its assets (by value) produce passive income or are held to produce it.

The income test

A pooled investment fund holds shares, bonds and cash. Dividends, interest and capital gains inside the fund are passive. In practice, the income test is met for almost every UK unit trust, UCITS fund, Irish-domiciled ETF and continental European pooled fund a US resident is likely to own.

The asset test

Even a fund whose income profile fluctuates year to year will usually meet the asset test, because the underlying portfolio is income-producing by design. This is why UCITS-structured ETFs, including the household-name funds sold across Europe, are virtually always PFICs, regardless of what they are called locally.

In plain English: if you kept your European or UK funds when you moved to the US, the IRS has treated them as PFICs every year you have held them. That treatment is not triggered by a sale or a distribution. It is the regime you are in by default from the moment US residency begins.

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The Three Tax Regimes: Default 1291, QEF, and Mark-to-market

Three tax regimes can apply to a PFIC. The default regime applies unless the taxpayer elects otherwise, and the two elective regimes are only available in specific circumstances.

The default §1291 regime taxes "excess distributions", any distribution above 125% of the average of the prior three years, and any gain on sale, at the highest ordinary-income rate in force during the holding period, with an interest charge on the deferred tax. The result is usually a high effective rate and a significant compliance burden at sale.

The Qualified Electing Fund (QEF) election converts the fund into something more like a US mutual fund for tax purposes, the taxpayer is taxed annually on a pro-rata share of ordinary earnings and net capital gains, whether distributed or not. The election requires the fund itself to provide an annual PFIC Annual Information Statement. Most non-US funds do not, so QEF is often unavailable in practice.

The Mark-to-Market (MTM) election treats unrealized appreciation as ordinary income each year, with losses deductible up to prior MTM income on the same security. It is only available for PFIC shares regularly traded on a qualified exchange, a point that turns on the specific listing of the share class.

In my experience, the most consequential point for an expat already in the US is not which regime is "best" in the abstract. Once the default regime has applied in prior years, moving to a different regime is not a simple election on a future return, it can require purging the prior §1291 treatment, which is itself a taxable event.

Form 8621 for the 2025 Tax Year: the December2025 Revision and the De Minimis Threshold

Form 8621 is the information return that captures the PFIC regime on a US tax return. The December 2025 revision restructured Part V, the section dealing with §1291 excess distributions, for the 2025 tax year. Prior-year positions do not always map one-to-one onto the new layout. The IRS Form 8621 instructions are the authoritative source for the current-year layout.

A narrow de minimis exception can relieve the filing requirement. Broadly, an individual shareholder may be excused from filing Form 8621 for a year in which no QEF or MTM election is in force, no distribution is received, no disposition occurs, and the aggregate value of PFICs held at year-end is below roughly $25,000 single or $50,000 joint. The thresholds and conditions are in the current Form 8621 instructions and change from time to time. Critically, the exception relieves filing, it does not change the substantive PFIC tax regime itself.

When Filing Is Still Required, Even with No Sale and No Distribution

The most counter-intuitive feature of the PFIC regime, and the one that most often catches expats off guard, is that Form8621 can be required in a year with no sale, no distribution, and no activity in the account. With a QEF or MTM election in force, annual inclusions flowthrough whether the fund distributes or not. Under the default §1291 regime, filing can still be required simply to report the holding above the de minimis threshold.

This matters more than it first appears, because the statute of limitations on the entire tax return is suspended where a required Form 8621 has not been filed. Under §6501(c)(8), the three-year clock does not start running for PFIC information that was required but omitted. The return remains open indefinitely, not just to PFIC adjustments, but to other items on the return, until the required form is filed.

What I see most often is a taxpayer who has filed US returns for several years, assumed each year had closed, and is then told by a new preparer that none of those years has actually closed for statute purposes because Form 8621 was never filed.

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If You've Been Non-compliant in Prior Years

For taxpayers who have been non-compliant in prior years, the main compliance routes are the IRS Streamlined Filing Compliance Procedures and the targeted use of protective elections. The Streamlined procedures are intended for non-willful non-compliance and require three years of amended returns (including the relevant Forms 8621), six years of FBARs, and a non-willfulness certification.

Where a taxpayer is in-time to make a QEF election for the current year, typically requiring a "purging election" to clear prior §1291 tax, the mechanics, the timing, and the cost of running the calculation properly are all meaningful. This is not an area where a generic US tax preparer is usually the right adviser. The PFIC calculation, the interaction with treaty positions, the mapping onto the revised Form 8621, and the handling of prior-year non-compliance are specialist work.

The Three PFIC Regimes at a Glance

Illustrative comparison of the three US tax regimes that can apply to a PFIC held by a US tax resident. This table summarizes general mechanics and is educational, not a recommendation, the IRS Form 8621 instructions are the authoritative source for current-year treatment.

Source: Skybound 2026

Questions To Raise With A Qualified Adviser

For an expat in the US still holding home-country pooled investment funds, a short list of questions to raise with a qualified cross-border tax preparer includes:

• Which of my current foreign pooled investments meet the PFIC income or asset test?
• Which of my prior US returns included Form 8621, and which did not?
• Am I above or below the current de minimis threshold for Form 8621 filing?
• Is a QEF election available for any of my funds, and what would a purging election cost?
• Is MTM available for the specific share classes I hold on a qualified exchange?
• If Form 8621 was not filed in prior years, is the Streamlined Filing route available to me?
• How do my PFIC positions interact with the US treaty position of my home country?

The PFIC regime is one of the most counter-intuitive features of US tax law for expats who have settled into US life, because it operates silently in the background for years at a time. The December 2025 revision to Form 8621 is a useful prompt to look again at how those positions have been reported, and whether they have been reported at all.