Who this is for: This guide is for US citizens and green card holders living in France who invest, or are thinking of investing, in French funds or an assurance-vie. It explains why these products can be taxed harshly by the US and how to avoid an expensive mistake.
One of the most common and costly surprises for US persons in France involves ordinary French investments. A French bank or adviser will often recommend a SICAV, an FCP or an assurance-vie, all sensible choices for a French taxpayer. For a US taxpayer, many of these are PFICs, and the US taxes PFICs in a way designed to be punitive. The problem is not that the investment is illegal; it is that the US tax and reporting treatment can erase much of the benefit, and catch people who never knew the rules existed.
Table of Contents
What a PFIC is
PFIC stands for Passive Foreign Investment Company. Broadly, a foreign corporation is a PFIC if most of its income is passive or most of its assets produce passive income. Pooled investment vehicles are the classic example, which is why nearly all non-US mutual funds fall within the definition. US owners of a PFIC report it on Form 8621, generally one form per fund per year.
Why French investments are so often PFICs
The structure of common French products is the issue:
- SICAV and FCP (French mutual funds) are pooled investment vehicles and are generally PFICs for US purposes.
- Non-US ETFs, including many European-domiciled ETFs, are typically PFICs as well.
- Assurance-vie is more nuanced. The wrapper itself may raise separate questions, but where it holds SICAVs, FCPs or similar funds, those underlying investments commonly raise PFIC issues. Assurance-vie does not automatically receive the favourable US treatment some assume.
The usual suspects in a French portfolio
Common French holding | PFIC risk |
French or EU ETFs and index funds (OPCVM, UCITS) | Almost always PFICs |
Funds held inside an assurance-vie contract | Typically PFICs, looked through to the underlying funds |
PEA holding French funds | The wrapper does not help; the funds inside are usually PFICs |
Direct shares of individual companies (Air Liquide, LVMH…) | Generally not PFICs |
US-domiciled ETFs held in a US brokerage account | Not PFICs |
What decides the outcome is the fund itself, not the account it sits in. The same money moved from a French UCITS to direct shares or a US-domiciled fund usually leaves the PFIC regime entirely.
Why the tax treatment hurts
By default, PFICs fall under a regime that is deliberately unfavourable. Broadly, gains and certain distributions can be taxed at the highest ordinary rates rather than capital-gains rates, spread back over your holding period, with an interest charge added for the deferral. The result is that the effective US tax on a long-held French fund can be far higher than on an equivalent US investment, and the calculations are complex and time-consuming to prepare.
There are elective regimes that can soften this, principally the Qualified Electing Fund (QEF) election and the mark-to-market election. But the QEF election depends on the fund providing specific US tax information, which French funds usually do not, and mark-to-market has its own conditions. In practice, many US persons end up in the default regime simply because the better elections are unavailable to them.
The three regimes, briefly
Regime | When it applies | Effect |
Excess distribution (default) | If you make no election | Gains and large distributions taxed at top ordinary rates, plus an interest charge for each year held |
QEF election | Requires yearly data most French funds do not publish | Rarely available in practice for French retail funds |
Mark-to-market | Fund must be regularly traded | Annual tax on paper gains at ordinary rates; losses only partly usable |
Most people end up in the default regime, which Congress designed to sting. The IRS overview and instructions live on the Form 8621 page.
Reporting, on top of the tax
PFICs also carry a reporting burden that is separate from the tax. You may need to file a Form 8621 for each PFIC you hold, and the same assets typically also appear on your FBAR and, if thresholds are met, on Form 8938. Missing Form 8621 can keep the statute of limitations open on your return, so the reporting is not a formality.
How to avoid the trap
- Check before you invest. The cheapest fix is not buying a PFIC in the first place. Ask whether a proposed product is a non-US pooled fund before committing.
- Consider US-domiciled funds or direct holdings. Individual stocks and bonds are not PFICs, and US-domiciled funds avoid the regime, though French tax and access rules must also be weighed.
- Be cautious with assurance-vie if you are a US person. It can work against you despite its French tax advantages. Review the underlying holdings before you rely on it.
- Get a review if you already hold PFICs. Options exist, but the right election and clean-up path depend on your specific holdings and history.
Getting out of the trap
Expand CPA is a Franco-American accounting and tax advisory firm with offices in Paris, New York and Tel Aviv. We help US persons in France structure their investments to avoid the PFIC regime where possible, prepare the Form 8621 filings where PFICs are already held, and weigh the French and US tax treatment of assurance-vie together before you commit money to it. If a French adviser has recommended a fund or a policy, we can tell you how the US will treat it first. See also our guides to FBAR and FinCEN 114 and the Streamlined procedures if reporting has been missed, or get in touch.
Disclaimer: PFIC rules are among the most complex in US tax law and their application depends on the specific product and your circumstances. This article is general information only, not tax or investment advice. Please consult a qualified adviser before investing or filing.
Is your portfolio caught? A walkthrough
The PFIC tests are mechanical: a foreign company is a PFIC if 75% or more of its income is passive, or 50% or more of its assets produce passive income. Every pooled fund fails these tests by construction, because a fund’s entire income is dividends, interest and gains. Applied to the accounts a typical American in France actually holds:
Holding | PFIC exposure |
PEA holding European index trackers | The trackers are PFICs; the PEA wrapper is invisible to the IRS |
Assurance-vie, fonds en euros only | Depends on contract classification; the euro fund itself raises fewer PFIC issues than unit-linked lines, but the contract needs individual analysis |
Assurance-vie, unités de compte | Each unit-linked line is typically a separate PFIC |
Employer PEE or PERCO invested in FCPE funds | FCPEs are collective funds and generally PFICs, an exposure many employees never suspect |
Direct shares, direct bonds, cash | Not PFICs |
The audit takes an afternoon with account statements. Guessing costs more.
Form 8621 in practice
Each PFIC generally means its own Form 8621 filed with your return, one per fund per year. There is a limited reporting exception when you make no election, receive no distributions and your total PFIC holdings stay under $25,000 ($50,000 married filing jointly), but the exception covers the form, not the tax regime: the punitive rules still apply when you eventually sell. Two features make the form unusual. The statute of limitations stays open on the whole return while a required 8621 is missing. And the mark-to-market election is only available for regularly traded funds, must be made on a timely filed return, and cannot be applied retroactively to erase past years. The IRS instructions are linked from the Form 8621 page.
One more thing people hope and ask about: the France-US income tax treaty does not switch off the PFIC rules. Treaty relief covers double taxation of income; it does not reclassify a French fund for US purposes.
Frequently Asked Questions
Is a French SICAV or FCP a PFIC?
Generally yes. Most non-US pooled funds meet the PFIC definition and are reported on Form 8621, usually one form per fund per year.
Is assurance-vie a problem for US taxpayers?
It can be. Where it holds funds such as SICAVs or FCPs, those raise PFIC issues, and it does not automatically receive favourable US treatment.
How do I avoid the PFIC regime?
Often by not buying non-US pooled funds in the first place. US-domiciled funds and direct holdings avoid the regime, subject to French tax and access rules.
