In short
- A foreign fund is a PFIC when 75% or more of its income is passive or at least half of its assets produce passive income. Almost every Chilean fondo mutuo meets that test.
- Each PFIC needs its own Form 8621. Small holdings with no sales or distributions in the year can be exempt from the annual form: $25,000 in total, or $50,000 on a joint return.
- Without an election, gains and large distributions are taxed at the highest U.S. rate plus an interest charge. A mark-to-market election, available for many redeemable funds, taxes the yearly change in value as ordinary income instead.
- A missing Form 8621 can keep your whole U.S. return open to IRS review.
What makes a fund a PFIC
A passive foreign investment company (PFIC) is any foreign corporation that meets either of two tests in a year:
- Income test: 75% or more of its gross income is passive, such as interest, dividends and gains.
- Asset test: at least 50% of its assets, on average, produce passive income.
An investment fund meets both almost by definition. That covers Chilean fondos mutuos and fondos de inversión, ETFs listed outside the U.S., and funds held inside an APV or a bank investment account. Shares of an operating company, such as a Chilean bank or retailer, are generally not PFICs.
When you file Form 8621
You file one Form 8621 for each fund, attached to your Form 1040, in any year you:
- receive a distribution from the fund or sell or redeem shares,
- make or have in place an election for the fund, or
- hold PFICs worth more than $25,000 in total at year end ($50,000 on a joint return), even with no activity.
Below that amount, with no sales, distributions or elections, the annual form is generally not required. The funds still go on the FBAR and, above its thresholds, on Form 8938.
Three ways a PFIC can be taxed
| Regime | How it works | In practice with Chilean funds |
|---|---|---|
| Default (excess distribution) | No tax while you hold. On a sale or large distribution, the gain is spread over your holding years, taxed at the highest rate for each year, plus interest. | Applies automatically. The cost grows the longer you hold. |
| Qualified electing fund (QEF) | You report your share of the fund's income each year, with capital gains kept as capital gains. | Needs an annual information statement from the fund, which Chilean managers rarely provide. |
| Mark-to-market | Each year you report the rise in value as ordinary income, and can deduct falls up to past gains. | Often available for funds redeemable at a published daily value. Usually the practical choice. |
Elections are made on Form 8621, generally in the first year you own the fund. Making one late is possible but more complicated, so it pays to decide early.
How Chilean tax fits in
Chile taxes fund income under its own rules, and Chilean tax paid on that income can generally be credited against the U.S. tax on the same income. Timing is the difficulty: under the default regime the U.S. taxes a gain in the year of sale, spread back over earlier years, which can leave Chilean credits and U.S. tax in different years. Mark-to-market reduces that mismatch.
From 2027, Chile stops taxing gains on certain shares with stock-market presence. That does not change the U.S. side: the IRS still taxes the gain, and the PFIC rules still apply to funds.
Practical choices for investing from Chile
- Before you buy, ask whether you want a Chilean fund at all. Individual shares of Chilean companies are not PFICs. U.S.-listed funds held at a U.S. broker are not PFICs either, if your broker allows a client living in Chile.
- If you already hold fondos mutuos, list each fund with purchase dates and amounts. We decide fund by fund whether to elect mark-to-market or plan a sale.
- Inside an APV, the PFIC question depends on what the APV holds. See AFP, APV and the FBAR.
If you never filed Form 8621
There is no fixed penalty for a missing Form 8621, but the statute of limitations on your return generally stays open until the information is filed. It is usually fixed together with any missing FBARs, through the Streamlined or delinquent filing procedures. See catching up on U.S. filings.
General information, not individual U.S. or Chilean tax advice. Rules, thresholds and deadlines change; confirm them for your situation. Chile US Tax is an independent practice, not a government office.