What is QEF Election?
An election allowing US shareholders of PFICs to be taxed currently on their share of the PFIC's earnings, avoiding punitive default rules.
Definition
A Qualified Electing Fund (QEF) election allows US shareholders of a Passive Foreign Investment Company (PFIC) to be taxed annually on their pro-rata share of the PFIC's ordinary earnings and net capital gains, rather than being subject to the punitive default PFIC taxation rules. Under the QEF election, ordinary earnings are taxed at ordinary income rates and capital gains at long-term capital gains rates, providing significantly better tax treatment than the default interest charge regime.
Who Needs to Know This?
US persons who own shares in PFICs (including foreign mutual funds) and can obtain an annual PFIC Annual Information Statement from the fund to make the election.
Key Deadline
Election made by attaching statement to timely filed tax return (including extensions) for the first year of PFIC ownership
Potential Penalties
N/A - this is an elective benefit; failure to make timely election results in default punitive treatment
Related Forms
Common Mistakes to Avoid
- 1Not making the election in the first year of ownership
- 2Not obtaining the PFIC Annual Information Statement from the fund
- 3Confusing QEF election with mark-to-market election
- 4Not understanding the purging election for late QEF elections
Related Terms
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