A Practical Guide to PFICs for U.S. Citizens Living in Israel
Introduction
For U.S. citizens living in Israel, one of the trickiest tax traps is the Passive Foreign Investment Company (PFIC). Many common Israeli investments—like mutual funds, pension products, and even certain savings accounts—can fall under this category. The U.S. requires strict annual reporting and, in many cases, punitive tax treatment. Understanding what qualifies as a PFIC and how to manage your investments is critical to avoid unnecessary costs and compliance headaches.
⚠️ Key Takeaway: PFIC Disclosure Thresholds
- You must report PFICs on Form 8621.
- Exemption levels:
- Under $25,000 in total PFIC holdings (single or married filing separately)
- Under $50,000 in total PFIC holdings (married filing jointly)
- The threshold test applies each year separately. If you are over the limit in one year, you must file for that year. If in the next year your PFIC holdings fall below the threshold (and you have no distributions or elections in place), you may qualify for the exemption again.
- Important: Any sale, distribution, or other disposition of a PFIC automatically triggers a Form 8621 filing requirement — regardless of account value. Furthermore, this is where the default tax assessment is imposed.
- Taxpayers electing the Mark to Market or QEF methods must report every year.
Compliance Demands
If you own a PFIC, you face both reporting and tax obligations:
- Annual disclosure: Each PFIC holding must be reported on Form 8621. Even if no tax is due, disclosure is generally required unless you qualify for the de minimis exemption above.
- Tax assessments: By default, taxes are assessed when you sell the investment, often in a highly punitive way. Alternatively, you can elect the QEF (Qualified Electing Fund) or Mark-to-Market method, which requires you to pay taxes annually.
Bottom line: PFIC compliance is complex, expensive, and often unavoidable once your holdings cross the reporting thresholds.
The Costs of Compliance
- Tax reporting: Preparing Form 8621 and related filings can be costly, as few accountants are well-versed in PFIC rules.
- Tax liability: Depending on the method chosen, the IRS can assess taxes above and beyond the standard Israeli rates—sometimes leading to double taxation or an overall higher tax burden.
Types of Investments in Israel
1. Investments That Are Not PFICs
- Any U.S.-domiciled security (stocks, bonds, ETFs, mutual funds, savings accounts). Example providers: Fidelity, Vanguard, Schwab, Interactive Brokers. Note: While some U.S. brokerages (such as Interactive Brokers or Fidelity) may provide access to foreign-domiciled ETFs, these are generally classified as PFICs for U.S. tax purposes. To avoid PFIC reporting issues, it’s best to stick with U.S.-domiciled ETFs and mutual funds.
- Direct ownership of Israeli real estate, stocks, or bonds in shekels.
- Israeli bank savings products (pikadon or pakam).
- Specialized annuity products that comply with the U.S.–Israel tax treaty.
- Bitcoin (direct ownership or via a U.S.-based ETF).
2. The Grey Area
- Israeli employer-sponsored pensions and keren hishtalmut.
Most U.S. accountants in Israel don’t treat these as PFICs, but the law is complicated. See footnote below.
3. Investments That Are Definitely PFICs
- Israeli shekel-based funds: keren ne’emanut, teudat sal, kupat gemel (non-pension, including investment accounts), and keren hishtalmut for self-employed.
- Israeli money market funds (keren kaspit)
- Israeli bitcoin ETFs.
- “QEF” specialized Israeli funds marketed as a solution. In reality, they are still PFICs. While they may offer a more manageable reporting method, they eliminate long-term tax deferral and sometimes leave you worse off after Israeli taxes are factored in.
Quick Reference: PFIC Investment Guide
| Category | Examples | PFIC Status | Notes |
| Safe / Not PFIC | U.S. stocks, bonds, ETFs, mutual funds; U.S. brokerages (Fidelity, Vanguard, Schwab); Israeli real estate; bank deposits (pikadon/pakam); treaty-compliant annuities; direct Bitcoin ownership or U.S. ETF | ❌ Not PFIC | Best option for U.S. citizens. Easier compliance and predictable taxation. |
| Grey Area | Israeli employer pensions; employer-sponsored keren hishtalmut * – see footnote below. | ⚠️ Unclear | Most accountants treat as non-PFIC, but legal grey zone. |
| Definitely PFIC | Israeli shekel funds (keren ne’emanut, teudat sal, kupat gemel l’hashka’ah); self-employed keren hishtalmut; Israeli Bitcoin ETFs; Israeli QEF funds, keren kaspit | ✅ PFIC | Subject to complicated reporting and punitive tax treatment. |
Solutions for U.S. Citizens
Plan A: Avoid PFICs Entirely
For U.S. citizens, the safest route is to invest in U.S.-traded ETFs and mutual funds in USD. This can be done through a U.S. brokerage or sometimes through an Israeli bank or platform.
- U.S. brokerages: Usually cheaper, but transferring cash between the U.S. and Israel can create banking compliance issues. Also, estates with U.S.-based assets may require a transfer certificate.
- Israeli USD accounts: Easier for family continuity and simpler for Israeli tax compliance, but often with higher fees.
Caveat: If your spouse is not a U.S. citizen, they should avoid U.S.-based investments due to the harsh U.S. estate tax, which kicks in at only $60,000 of U.S. assets. By contrast, U.S. citizens benefit from an estate tax exemption of nearly $15 million (set to change in 2026). In mixed households, couples often need split strategies:
- The U.S. citizen invests in USD/U.S. brokerages.
- The non-U.S. citizen invests in Israeli instruments.
Plan B: You Already Own PFICs — Now What?
If you already hold PFIC investments, here are some strategies to consider:
- Liquidate your PFICs: Bite the bullet, pay the tax and accounting fees, and reinvest in non-PFIC assets. Painful in the short term, but cleaner long term.
- Combination approach: Sell some PFICs gradually while holding others. This allows you to manage tax liabilities and cash flow needs over time.
- Mixed couples transfer (advanced): Some attempt to transfer PFICs from the U.S. citizen spouse to the non-U.S. citizen spouse. This is complicated and risky, involving potential “deemed distributions” and U.S. gift tax issues. Not recommended without professional legal advice.
- Go rogue (not recommended): Many U.S. citizens in Israel own PFICs but don’t report them—or don’t file U.S. returns at all. This leaves you exposed to IRS enforcement. While the risk may feel low, the consequences can be severe. Israeli financial institutions have been sharing information with the US Treasury department for many years in order to comply with FATCA, so the IRS potentially could start to demand compliance.
- Hold until death: You’ll still need to comply annually with disclosure rules (Form 8621, Form 8938, FBAR), but as long as you don’t sell, no immediate tax is triggered. Caveat: According to proposed regulations, your child might not benefit from IRC 1014 stepped up basis rules. This means that they would inherit the same punitive tax regime that you had during your lifetime. This is a very complicated situation that requires individual planning and professional consultation. See: https://hodgen.com/articles/what-is-my-basis-in-an-inherited-pfic for more details.
Conclusion
Navigating PFIC rules is one of the biggest challenges for U.S. citizens living in Israel. The best strategy is usually to avoid PFICs altogether, but if you already hold them, careful planning can help manage compliance and tax burdens. Above all, make sure your approach takes into account cross-border tax laws, estate planning, and the needs of both U.S. and non-U.S. spouses.
For further reading, see this overview of investment options for Americans in Israel .
Disclaimer
This article is provided for educational purposes only.
- It may contain errors, omissions, or outdated information.
- It does not constitute legal, tax, financial, or investment advice.
- You should not act or rely on any information in this article without consulting a qualified professional who understands your specific circumstances.
* Footnote: Treasury Regulation § 1.1298-1 provides an exemption from Form 8621 PFIC reporting for certain foreign pension funds that are recognized under a U.S. income tax treaty and taxed only at distribution. However, the IRS has not provided specific guidance on whether a typical Israeli private pension fund or a keren hishtalmut qualifies for this exemption. In addition, the “savings clause” in Article 6 of the U.S.–Israel tax treaty could potentially override such a benefit for U.S. citizens, since it generally preserves U.S. taxing rights regardless of treaty provisions. Practically speaking, most U.S. tax accountants in Israel do not report Israeli pensions or keren hishtalmut on Form 8621 as PFICs. Still, the situation remains ambiguous and unresolved by formal IRS commentary, leaving a degree of uncertainty for taxpayers.
Sources:
US-Israel tax treaty: https://www.irs.gov/pub/irs-trty/israeltech.pdf
US Treasury Regulation 1.1298-1 https://www.law.cornell.edu/cfr/text/26/1.1298-0