PFICs: The Tax Trap Most Expats Don't Know About

A Passive Foreign Investment Company (PFIC) is a foreign corporation that earns mostly passive income — such as dividends, interest, or capital gains — and foreign mutual funds almost always qualify as PFICs. For US tax purposes, PFICs are treated extremely unfavorably: gains and distributions can be taxed at the highest ordinary income rates plus an interest charge going back to the year the investment was made. US expats who invest in local mutual funds or ETFs in their country of residence often unknowingly own PFICs and face a nasty surprise at tax time. The PFIC rules were designed to prevent US taxpayers from deferring income by parking money in foreign investment vehicles, but they end up penalizing ordinary expats trying to save for retirement locally. The safest approach is to avoid foreign mutual funds and ETFs entirely, and instead invest in US-domiciled funds even while living abroad.