PFIC Rules for U.S. Expats: Why Small Foreign ETFs Cause Tax Problems

U.S. expats often trigger PFIC reporting by investing in non-U.S. ETFs, even with small amounts and minimal gains. Learn how PFIC rules work, why Form 8621 is required, and how to avoid costly mistakes.

PART OF THE U.S. EXPAT TAX SERIES BY TAX.TRAVEL

1/10/20265 min read

Investing Abroad as a U.S. Expat: The PFIC Trap That Catches Even Small Investors

For U.S. citizens and green card holders living outside the United States, investing locally usually feels sensible. You can open an account with a local bank, make relatively small trades and often hold them only briefly.

However, under U.S. tax law, many of these ordinary investments fall into one of the most punitive and least well understood regimes in the Internal Revenue Code: the PFIC rules.

What makes this particularly painful is that the compliance cost often has little connection to the amount invested or the profit made. At Antravia we regularly see situations where modest holdings with minimal gains trigger reporting requirements that cost far more than the tax itself.

This article explains why that happens, what the rules actually say, and what realistic options exist once the issue has already occurred.

What a PFIC actually is, and why expats keep running into them

A Passive Foreign Investment Company is simply a non-U.S. company that earns mainly passive income or holds mainly passive assets. That definition sounds abstract, but in practice it captures most non-U.S. collective investment products.

Non-U.S. ETFs, unit trusts, OEICs, SICAVs and local mutual funds almost always fall into PFIC territory. It does not matter that the fund tracks a mainstream index, that it is marketed as simple, that it was held for a short period, or that the gains were tiny. None of those factors override PFIC classification.

This is where many expats are caught out. In the UK, Europe, Asia and the Middle East, most retail investment products are not U.S.-domiciled, even when they look identical to U.S. ETFs. From a U.S. tax perspective, that difference is decisive.

Why Form 8621 becomes unavoidable

Once an investment is classified as a PFIC, Form 8621 becomes central to the tax return. The obligation is procedural rather than intuitive.

Each PFIC requires its own form for each tax year in which certain events occur. Buying and selling multiple funds means multiple forms. Buying and selling the same fund within the same year still counts. There is no de minimis threshold that removes the requirement just because the amounts are small or the gains are low.

From a compliance standpoint, the size of the investment is irrelevant. That is why someone can end up filing a stack of PFIC forms even when their total capital gains are well below the standard deduction.

Why you cannot “just pay the tax” and move on

A question that comes up repeatedly is whether it is possible to simply report the gains as normal capital gains, pay some extra tax, and skip the PFIC paperwork.

Unfortunately, U.S. tax law does not allow that. There is no mechanism to voluntarily overpay tax in order to bypass PFIC reporting. The PFIC regime is as much about disclosure as it is about tax. Even when the tax due is close to zero, the reporting obligation still exists.

This is why compliance costs so often dwarf the tax itself.

Why professional fees escalate so quickly

From the outside, PFIC fees can feel disproportionate, especially when the underlying investments were small.

From a professional perspective, each Form 8621 carries risk. Errors can keep the statute of limitations open on an entire return. Preparers are subject to professional standards and cannot ignore known PFICs once identified. For that reason, most firms charge per form rather than per account or per client.

The result is a harsh reality for many expats. A series of $100 or $1,000 investments can translate into four-figure compliance costs, even when the economic outcome was negligible.

The myth that PFICs only apply to “complex” funds

There is a persistent belief that PFIC rules were designed mainly for sophisticated offshore structures or aggressive tax planning. That is not how the rules operate in practice.

A straightforward foreign ETF tracking a mainstream index is still a PFIC if it is not U.S.-domiciled. The rules focus on where the fund is established, not on how complicated or innocent it looks.

What options realistically exist once the issue is discovered

Once PFICs have already been bought and sold, the options narrow quickly.

Some taxpayers choose full technical compliance and file all required Forms 8621, absorbing the cost for certainty. Others prepare the forms themselves and ask their tax preparer to review and file them, reducing fees but also taking on more responsibility. A third group makes a risk-based decision to file without PFIC forms and accept technical non-compliance. That last approach is part of the real world, but it is not something a professional adviser can recommend.

Each path involves a trade-off between cost, risk and peace of mind.

The most important lesson is prevention

The most effective PFIC strategy is avoiding the problem entirely.

For U.S. taxpayers living abroad, that usually means investing only in U.S.-domiciled ETFs, using platforms that genuinely support U.S. listings, and avoiding local funds unless specialist advice has been taken in advance.

Once a PFIC exists, the damage is already done. Planning only works before the investment is made.

Why this matters so much for U.S. expats

The PFIC regime is one of the clearest examples of how U.S. tax rules collide with normal financial behaviour outside the United States.

What looks like sensible, low-risk investing locally can become administratively complex, expensive to unwind and deeply frustrating. Understanding this early can prevent years of unnecessary compliance cost.

How Antravia helps

At Antravia, we help U.S. expats identify PFIC exposure early, understand the real compliance costs before investing, structure portfolios that avoid future PFIC problems, and navigate reporting where PFICs already exist.

Part of the U.S. Expat Tax Series by Tax.Travel

This article is part of Antravia’s U.S. Expat Tax Series - a collection of practical guides for Americans living or working abroad. Whether you’re a long-term expat, digital nomad, or remote entrepreneur, these resources explain how to stay compliant with the IRS while reducing double taxation and managing your finances internationally.

See our our other articles:

References

Internal Revenue Service (IRS)
Passive Foreign Investment Company rules and definitions
https://www.irs.gov/instructions/i8621

Internal Revenue Service (IRS)
Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company
https://www.irs.gov/forms-pubs/about-form-8621

Internal Revenue Service (IRS)
Passive Foreign Investment Companies (PFICs) – overview and tax treatment
https://www.irs.gov/individuals/international-taxpayers/passive-foreign-investment-companies

Internal Revenue Code (26 U.S. Code § 1297)
Definition of a Passive Foreign Investment Company
https://www.law.cornell.edu/uscode/text/26/1297

Internal Revenue Code (26 U.S. Code §§ 1291–1298)
Tax treatment of PFICs and shareholder obligations
https://www.law.cornell.edu/uscode/text/26/subtitle-A/chapter-1/subchapter-P/part-VI

U.S. Department of the Treasury
Foreign Account Tax Compliance Act (FATCA) overview
https://home.treasury.gov/policy-issues/tax-policy/foreign-account-tax-compliance-act

OECD
International tax transparency and information exchange background (context for FATCA-related market impact)
https://www.oecd.org/tax/transparency/

SEC – Investor.gov
Risks of investing in non-U.S. funds and differences in regulatory regimes
https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/international-investing

Disclaimer:
Content published by Antravia is provided for informational purposes only and reflects research, industry analysis, and our professional perspective. It does not constitute legal, tax, or accounting advice. Regulations vary by jurisdiction, and individual circumstances differ. Readers should seek advice from a qualified professional before making decisions that could affect their business.
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