The short version
You moved to Brazil, you opened an account, and a local advisor put you into a fundo de investimento. For you, as a US person, the first tax question is whether that particular fund is classified as a foreign corporation for US federal tax purposes. If it is, its income and assets must then be tested under the Passive Foreign Investment Company, or PFIC, rules. Holding a pooled investment or earning passive income does not, by itself, establish corporate classification.
This article walks through that sequence, the two PFIC tests, the three principal tax regimes, and the Form 8621 filing requirements that may apply. The planning point is to check the particular holding before buying, selling, or making an election. This is general tax information, not individualized tax or investment advice.
What the law actually says (primary authority first)
A PFIC is defined in Internal Revenue Code section 1297. Start with US entity classification under Treasury Regulation 301.7701-1, 301.7701-2, and 301.7701-3, including any applicable classification election. A local fund label does not resolve that question. If the entity is a foreign corporation, section 1297(a) provides two alternative tests:
- The income test. The corporation is a PFIC if 75 percent or more of its gross income for the taxable year is passive income. The statute reads that the company qualifies if “75 percent or more of the gross income of such corporation for the taxable year is passive income.”
- The asset test. The corporation is a PFIC if the average percentage of its assets that produce passive income, or are held for the production of passive income, is at least 50 percent. The statute reads “the average percentage of assets … which produce passive income or which are held for the production of passive income is at least 50 percent.”
Either test, on its own, is enough. A foreign corporation that trips one of them is a PFIC.
What counts as “passive income” is defined in section 1297(b). It generally means income of a kind that would be foreign personal holding company income under section 954(c), which is the familiar list of investment-type income: dividends, interest, rents, royalties, annuities, and net gains from the sale of property that produces that kind of income.
The annual reporting rule in section 1298(f) generally applies to US shareholders of a PFIC, subject to exceptions provided by the Secretary. Form 8621 is used for that report and other PFIC reporting and elections. The IRS instructions distinguish the filing triggers from the exceptions to Part I annual reporting. Determine the requirement for the particular shareholder, holding and year; do not assume that every PFIC holding requires a form in every year.
Why a Brazilian fundo de investimento needs a closer look
Consider a Brazilian fund that pools investors’ money to hold bonds, equities, or other financial assets. Its interest, dividends, and investment gains may fall within the passive-income definition. But that tells you about the income test, not whether the fund is a corporation for US tax purposes.
The review starts with the fund’s governing documents, legal structure, ownership and liability provisions, and any relevant classification election. If the fund is classified as a foreign corporation, apply the 75 percent income test and the 50 percent asset test to its actual facts for the year, including the applicable measurement rules and exceptions.
That is the potential trap: the US tax treatment can differ from the treatment a local investor expects. A fund classified as a foreign corporation that meets either test can be a PFIC. This article does not determine the classification or PFIC status of any particular Brazilian fund.
How it works in practice: the three regimes
For a US individual holding PFIC stock, the three principal regimes discussed here are the section 1291 default, the Qualified Electing Fund election, and the mark-to-market election. The two elections have different eligibility, information and timing requirements. Their availability must be checked for the particular fund and shareholder.
1. The default: the section 1291 excess-distribution regime. Internal Revenue Code section 1291 generally applies when neither a qualifying QEF history nor an effective mark-to-market election displaces it. As discussed below, some QEF holdings and first-year mark-to-market elections still involve section 1291. It applies to an “excess distribution” and to recognized gain on a sale or other disposition of the stock.
An excess distribution generally is the portion of the year’s distributions exceeding 125 percent of the average distributions over the preceding three tax years, or the shorter portion of your holding period before the current tax year. No distribution is an excess distribution in the first tax year of your holding period. That first-year rule does not exempt recognized gain on a sale, which section 1291 treats as an excess distribution.
When you have an excess distribution, or a recognized gain on sale, the regime works like this:
- The amount is allocated ratably to each day in your holding period.
- The amounts allocated to the current year and to pre-PFIC years are included in current-year ordinary income.
- The amounts allocated to prior PFIC years are subject to a separate tax calculation using the highest rate under section 1 or 11, as applicable, for each year. They are not simply added to your current-year ordinary income.
- An interest charge is added to that separate tax, using the section 6621 underpayment rates and method from the relevant prior return due date to the current return due date, determined without regard to extensions.
The distinction matters. Current-year and pre-PFIC amounts receive one treatment; prior PFIC-year amounts receive the separate tax and interest treatment. A sale after several years of holding can therefore produce a tax calculation that differs substantially from an ordinary capital-gain calculation.
2. The Qualified Electing Fund (QEF) election. Section 1295 permits a shareholder election when its requirements are met. Under section 1293, you generally include your pro rata share of the fund’s ordinary earnings as ordinary income and its net capital gain as long-term capital gain each year, whether or not the fund distributes the income.
The information requirement matters. The Instructions for Form 8621 describe the required PFIC Annual Information Statement, including your share of ordinary earnings and net capital gain or enough information to calculate it. The instructions also address permitted intermediary or combined statements and limited alternative-documentation relief. Confirm what the particular fund can supply; do not assume that all Brazilian funds provide it or that none do.
The election history matters too. A QEF election effective for every PFIC year in your holding period generally displaces section 1291. An election beginning in a later year does not automatically remove the earlier PFIC history: an “unpedigreed QEF” remains subject to section 1291. An eligible shareholder may need a deemed-sale or deemed-dividend purging election, with its own tax consequences. A retroactive QEF election has separate requirements and is not automatic.
3. The mark-to-market election. Section 1296 permits an election for qualifying “marketable stock.” Annual increases in year-end fair market value over adjusted basis are ordinary income. An annual deduction for a decline is limited to unreversed inclusions, generally prior mark-to-market income inclusions less prior allowed deductions, with statutory adjustments. The allowed annual deduction is ordinary; this is not an unlimited deduction for every decline in value.
Marketability has its own test. Treasury Regulation 1.1296-2 covers stock regularly traded on a qualifying exchange or market and a separate category of qualifying foreign funds meeting detailed conditions. Publication of a net asset value, or redemption at that value, alone is not enough.
A valid election also does not always bypass section 1291 immediately. If the election starts after the beginning of the holding period, section 1296(j) generally applies section 1291 to first-election-year distributions, dispositions and the otherwise includible mark-to-market gain, unless the statutory QEF-history exception is met.
So the next step is a fund-specific review of classification, PFIC status, documentation, marketability and election history. There is no basis here to assume that either election is universally available or universally unavailable for Brazilian funds.
The numbers
Two tables. The first summarizes the PFIC thresholds after foreign-corporation classification is established. The second compares the regimes and the qualifications that matter when considering an election.
Table 1. The two PFIC tests (a foreign corporation is a PFIC if it meets EITHER).
| Test | Threshold | What it measures | Authority |
|---|---|---|---|
| Income test | 75 percent or more | Share of the corporation’s gross income for the year that is passive income | IRC 1297(a)(1) |
| Asset test | At least 50 percent | Average share of assets that produce, or are held to produce, passive income | IRC 1297(a)(2) |
| Passive income, defined | n/a | Generally foreign personal holding company income, including investment income such as dividends and interest, subject to statutory exceptions | IRC 1297(b); IRC 954(c) |
Table 2. The three PFIC taxation regimes.
| Regime | How income is taxed | Section 1291 interest charge | Eligibility and timing | Authority |
|---|---|---|---|---|
| Section 1291 (default) | Excess distributions and disposition gains allocated over the holding period; current-year and pre-PFIC amounts are current ordinary income; prior PFIC-year amounts use the separate highest-rate calculation | Applies to the separate tax on prior PFIC-year amounts | Applies absent qualifying QEF history or an effective mark-to-market election, subject to coordination rules | IRC 1291 |
| Qualified Electing Fund (QEF) | Annual share of ordinary earnings is ordinary income; net capital gain is long-term capital gain | Generally displaced by a pedigreed QEF; an unpedigreed QEF or purging election can involve section 1291 | Requires the election and annual information; a later-starting election does not automatically clear earlier PFIC years | IRC 1291(d); IRC 1293; IRC 1295; Instructions for Form 8621 |
| Mark-to-market | Annual value increase over adjusted basis is ordinary income; annual ordinary deduction for decline is limited to unreversed inclusions | May apply in the first election year under section 1296(j) | Requires qualifying marketable stock; net asset value alone is insufficient | IRC 1296; Treas. Reg. 1.1296-2 |
| Annual report on Form 8621 | n/a (this is the filing, not a rate) | n/a | Generally required, subject to applicable exceptions and other filing triggers | IRC 1298(f); Form 8621 |
Every row above traces to the controlling Code section or the IRS form and its instructions, listed in the Sources block.
What this means for you
A few practical points.
First, the determination is fact-specific. Review US entity classification before applying the PFIC income and asset tests. The fund’s name or passive portfolio alone cannot answer both questions.
Second, compare the regimes using the actual holding and election history. Section 1291 can impose a separate tax and interest charge on amounts allocated to prior PFIC years. QEF and mark-to-market elections have different documentation, eligibility and timing requirements, and a later election may leave an earlier PFIC exposure to address.
Third, Form 8621 filing is separate from any tax due. Filing may be required even without a sale, but PFIC ownership does not make filing universal. Check the IRS instructions for the applicable filing triggers and exceptions, including the exceptions to Part I annual reporting. An exception to Part I does not automatically eliminate another Form 8621 filing requirement. FBAR and Form 8938 obligations must be reviewed separately.
Fourth, review the tax treatment before making a portfolio decision. Compare any proposed investment or sale with the available elections, the holding period, and the consequences in both countries. This article does not recommend that every US investor sell Brazilian funds or prescribe a replacement investment.
If you already hold one
If you already hold a fundo, start by determining its US entity classification and whether it is a PFIC. Then compare the consequences of continuing to hold it, making an available election, or selling it, using your actual basis, distributions and holding period. If you did not file Form 8621 in earlier years, first determine whether filing was required for each year after considering the applicable exceptions. If a required form was omitted, review the available correction procedures and their eligibility requirements before filing. The appropriate next step depends on the facts; relief is not automatic.
Related reading
Companion pieces in The American Expat Tax Lifecycle:
- Clean Up Your Portfolio First: The Pre-Departure Financial and PFIC Checklist. This is the planning piece that pairs with this one, the portfolio decisions to make before you move.
- You Probably Owe Nothing, But Silence Still Costs You. The introductory piece on US tax and filing obligations while living abroad.
- The Foreign Mutual Fund Trap: Why Your Overseas Brokerage Account Can Be a Tax Bomb. The general version of this PFIC problem across any country.
- Retiring to Brazil: The Totalization Agreement That Makes Social Security Work. The Brazil country-track piece on Social Security.
- The Form 3520 Penalty Trap: Foreign Gifts, Trusts, and Inheritances (on Sheepdog Tax Resolution). For separate foreign-gift and foreign-trust reporting requirements.
- Years Behind on Filing Abroad: The Streamlined Path Most Expats Don’t Know (on Sheepdog Tax Resolution). A companion discussion of Streamlined procedures; eligibility and the treatment of any omitted forms require a separate review.
For the underlying authorities, see the inline links above to Internal Revenue Code section 1297 (the PFIC definition), section 1291 (the excess-distribution regime), and Form 8621 (the annual return), all listed in the Sources block.
How Sheepdog Tax can help
I am Noah Green, a CPA licensed in Texas and a Certified Fraud Examiner, and this is a veteran-owned practice.
A good first step is a free Brazil-move portfolio tax-readiness review: a plain look at what you hold or plan to hold, which positions would be PFICs for a US person, what the section 1291 default would cost, and whether a cleaner structure makes sense before or early in your move. Every situation is different, and I do not promise a particular result. What I offer is an honest reading of where you stand and a clear list of what, if anything, to change. To start, reach me at noah@sheepdogtax.com.
Sources (primary authority first, then secondary commentary)
- 26 U.S.C. 1297, Passive foreign investment company (the 75 percent income test and 50 percent asset test; definition of passive income). https://www.law.cornell.edu/uscode/text/26/1297
- 26 U.S.C. 1291, Interest on tax deferral (the excess-distribution regime, ratable allocation, separate highest-rate tax on prior PFIC-year amounts, and the section 6621 interest charge). https://www.law.cornell.edu/uscode/text/26/1291
- 26 U.S.C. 1295, Qualified electing fund (the QEF election). https://www.law.cornell.edu/uscode/text/26/1295
- 26 U.S.C. 1296, Election of mark to market for marketable stock (the mark-to-market election). https://www.law.cornell.edu/uscode/text/26/1296
- 26 U.S.C. 1298, Special rules (subsection (f) annual reporting requirement for US shareholders of a PFIC). https://www.law.cornell.edu/uscode/text/26/1298
- 26 U.S.C. 954, Foreign base company income (subsection (c) foreign personal holding company income, referenced by section 1297(b) to define passive income). https://www.law.cornell.edu/uscode/text/26/954
- IRS, About Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund. https://www.irs.gov/forms-pubs/about-form-8621
- IRS, Instructions for Form 8621 (Rev. December 2025) (filing triggers and Part I exceptions; QEF information and election requirements; section 1291 and mark-to-market coordination). https://www.irs.gov/instructions/i8621
- 26 U.S.C. 1293, Current taxation of income from qualified electing funds (annual ordinary-earnings and long-term capital-gain inclusions). https://www.law.cornell.edu/uscode/text/26/1293
- Treasury Regulations 301.7701-1, 301.7701-2 and 301.7701-3 (US entity classification, business entities and classification elections). https://www.law.cornell.edu/cfr/text/26/301.7701-1 https://www.law.cornell.edu/cfr/text/26/301.7701-2 https://www.law.cornell.edu/cfr/text/26/301.7701-3
- Treasury Regulation 1.1296-2, Definition of marketable stock (qualifying trading and foreign-fund conditions). https://www.law.cornell.edu/cfr/text/26/1.1296-2
Prepared by Noah Green, CPA, CFE.