Definitions and Special Rules

any corporation in which it owns at least 25% of the stock (by value).

CFC overlap rule. A U.S. shareholder (defined in section 951(b)) that includes in income its pro rata share of subpart F income for stock of a CFC that is also a PFIC will not generally be subject to the PFIC provisions for the same stock during the qualified portion of the shareholder's holding period of the stock in the PFIC. This exception does not apply to option holders. For more information, see section 1297(d).

Note: The attribution rules of section 1298(a)(2)(B) will continue to apply even if the foreign corporation is not treated as a PFIC with respect to the shareholder under section 1297(d).

Qualified Electing Fund (QEF) Election A PFIC is a QEF if a U.S. person who is a direct or indirect shareholder of the PFIC elects (under section 1295(b)) to treat the PFIC as a QEF and complies with the requirements described in section 1295(a)(2). See the instructions for Election A , later, for information on making this election.

Tax Consequences for Shareholders of a QEF

• A shareholder of a QEF must annually include in gross income, as ordinary income, its pro rata share of the ordinary earnings of the QEF and as long-term capital gain its pro rata share of the net capital gain of the QEF.

Passive Foreign Investment Company (PFIC) A foreign corporation is a PFIC if it meets either the income or asset test described next.

1. Income test. 75% or more of the corporation's gross income for its tax year is passive income (as defined in section 1297(b)).

2. Asset test. At least 50% of the average percentage of assets (determined under section 1297(e)) held by the foreign corporation during the tax year are assets that produce passive income or that are held for the production of passive income.

Basis for measuring assets. When determining PFIC status using the asset test, a foreign corporation must use adjusted basis if:

• The shareholder may elect to extend the time for payment of tax on its share of the undistributed earnings of the QEF (Election B) until the QEF election is terminated.

• If the QEF election is not made with respect to the first year of the shareholder’s holding period in the PFIC, the shareholder may be able to make a deemed sale election (Election D) or deemed dividend election (Election E) (if eligible). If the shareholder properly makes a deemed sale election or deemed dividend election in connection with its QEF election, then the PFIC will become a pedigreed QEF (as defined in Regulations section 1.1291-9(j)(2)(ii)) with respect to the shareholder.

Note: A shareholder that receives a distribution from an unpedigreed QEF (defined in Regulations section 1.1291-9(j)(2)(iii)) is also subject to the rules applicable to a shareholder of a section 1291 fund, later.

Basis adjustments. A shareholder's basis in the stock of a QEF, or in any property through which the shareholder is treated as owning stock of a QEF, is increased by the earnings included in gross income and decreased by a distribution from the QEF to the extent of previously taxed amounts.

1. The corporation is not publicly traded for the tax year; and

2. The corporation is a controlled foreign corporation (CFC) under Regulations section 1.1297-1(d)(1)(v)(B)(2).

In addition, a non-publicly traded foreign corporation that is not a CFC may use adjusted basis if an election is made to use adjusted basis. The election can be made either by the corporation or by certain of its owners. If made by an owner, the election must be made according to the rules of Regulations section 1.1297-1(d)(1)(iv).

Publicly traded foreign corporations must use fair market value when determining PFIC status using the asset test. See Regulations section 1.1297-1(f)(7) for guidance on when a foreign corporation is publicly traded for this purpose.

In addition, a non-publicly traded foreign corporation that is not a CFC may use adjusted basis if an election is made to use adjusted basis. The election can be made either by the corporation or by certain of its owners. If made by an owner, the election must be made according to the rules of Regulations section 1.1297-1(d)(1)(iv).

Section 1291 Fund A PFIC is a section 1291 fund if:

Look-thru rule. When determining if a foreign corporation is a PFIC, the foreign corporation is treated as if it directly held its proportionate share of the assets and directly received its proportionate share of the income of

1. The shareholder did not elect to treat the PFIC as a QEF or make a mark-to-market election with respect to the PFIC, or

2. The PFIC is an unpedigreed QEF (as defined in Regulations section 1.1291-9(j)(2)(iii)).

2 Instructions for Form 8621 (Rev. 12-2025)

Tax Consequences for Shareholders of a Section 1291 Fund

Shareholders of a section 1291 fund are subject to special rules when they receive an excess distribution (defined below) from, or recognize gain on the sale or disposition of the stock of, a section 1291 fund. A distribution may be partly or wholly an excess distribution. The entire amount of gain from the disposition of a section 1291 fund is treated as an excess distribution.

Excess distributions. An excess distribution is the part of the distribution received from a section 1291 fund in the current tax year that is greater than 125% of the average distributions received in respect of such stock by the shareholder during the 3 preceding tax years (or, if shorter, the portion of the shareholder's holding period before the current tax year). No part of a distribution received or deemed received during the first tax year of the shareholder's holding period of the stock will be treated as an excess distribution.

3. A foreign securities exchange that is regulated or supervised by a governmental authority of the country in which the market is located and has the characteristics described in Regulations section 1.1296-2(c)(1)(ii).

• Stock in certain PFICs described in Regulations section 1.1296-2(d).

For additional information, including special rules for regulated investment companies (RICs) that own PFIC stock, see Regulations section 1.1296-1 and 1.1296-2.

Tax Consequences

The excess distribution is determined on a per share basis and is allocated to each day in the shareholder's holding period of the stock. See section 1291(b)(3) for adjustments that are made when determining if a distribution is an excess distribution.

Portions of an excess distribution are treated differently. The portions allocated to the days in the current tax year and the shareholder's tax years in its holding period before the foreign corporation qualified as a PFIC (pre-PFIC years) are taxed as ordinary income. The portions allocated to the days in the shareholder's tax years (other than the current tax year) in its holding period when the foreign corporation was a PFIC are not included in income, but are subject to the separate tax and interest charge set forth in section 1291(c).

See the instructions for Part V, later.

Exempt organizations. If a shareholder of a PFIC is a tax-exempt organization, the rules of section 1291 will apply only if a dividend from the PFIC would be taxable to the shareholder under subchapter F.

Coordination of mark-to-market regimes with section 1291. Shareholders of a PFIC that is marked to market under section 1296 or any other Code provision may be subject to section 1291 in the first tax year in which the shareholder marks to market the PFIC stock. See Regulations sections 1.1291-1(c)(4) and 1.1296-1(i).

Mark-to-Market Election A shareholder of a PFIC may elect to mark to market the PFIC stock under section 1296 if the stock is “marketable stock.” See the instructions for Election C, later, for information on making this election.

After a PFIC shareholder elects to mark the stock to market under section 1296, the shareholder either:

1. Includes in income each year an amount equal to the excess, if any, of the fair market value of the PFIC stock as of the close of the tax year over the shareholder's adjusted basis in such stock; or

2. Is allowed a deduction equal to the lesser of: a. The excess, if any, of the adjusted basis of the PFIC stock over its fair market value as of the close of the tax year; or

b. The excess, if any, of the amount of mark-to-market gain included in the gross income of the PFIC shareholder for prior tax years over the amount allowed such PFIC shareholder as a deduction for a loss with respect to such stock for prior tax years.

See the instructions for Part II, Election C , and Part IV, later, for more information, including special rules that may apply in the year that a mark-to-market election is made.

Basis adjustment. If the stock is held directly, the shareholder's adjusted basis in the PFIC stock is increased by the amount included in income and decreased by any deductions allowed. If the stock is owned indirectly through foreign entities, see Regulations section 1.1296-1(d)(2).