In our earlier article, “PFICs: A Practical Guide for the Perplexed,” we explained what Passive Foreign Investment Companies are, why they catch so many Americans abroad by surprise, and why the rules are so unforgiving.
Once people finally understand just how harsh the PFIC regime can be, a very reasonable follow-up question almost always comes next:
“If everything is a PFIC, what can I actually invest in?”
For many U.S. taxpayers living overseas, learning about PFICs creates paralysis. Suddenly it feels like every non-U.S. investment is a tax trap waiting to happen. The result? People stop investing — not because they don’t want to, but because they’re afraid of getting it wrong.
Here’s the good news: not everything is a PFIC. There are practical, compliant ways to invest without triggering PFIC headaches.
Let’s walk through the most common PFIC-free options.
A Quick Refresher: Why PFICs Are Such a Big Deal
PFICs generally include non-U.S. mutual funds, ETFs, and other pooled investment products. These are extremely common outside the United States, which is why so many Americans abroad end up owning them without realizing it.
The problem? PFICs are subject to some of the most punitive rules in the U.S. tax code:
- Potentially confiscatory tax treatment
- Ongoing, complex annual reporting — most notably Form 8621
For most investors, the most practical strategy isn’t trying to “optimize” PFICs — it’s simply avoiding them altogether.
So… What Can You Invest In?
1. U.S.-Domiciled Investments — The Gold Standard
The simplest way to avoid PFIC problems is to stick with U.S.-domiciled investments, even if you live abroad:
- U.S.-domiciled ETFs
- U.S. mutual funds
- Individual U.S. stocks and bonds
Because these are U.S. entities, PFIC rules do not apply at all.
Many expats invest through firms such as Charles Schwab, Morgan Stanley, Fidelity, or similar platforms.
The catch: Access.
Many non-U.S. banks and brokers restrict U.S. products due to local regulations — so where you invest can be just as important as what you invest in.
Robo-advisors such as Wealthfront and Betterment can also be an option, but they often:
- Require U.S. residency
- Require a U.S. mailing address
- Exclude most overseas investors
For Israel-based clients, using U.S. accounts usually also requires filing an Israeli tax return — which doesn’t necessarily increase total tax, but does add compliance work.
2. Interactive Brokers — Know Which One You’re Using
This is where many investors get tripped up. There are two completely different “Interactive Brokers” options.
Option A: Interactive Brokers (IBKR) — U.S. Brokerage
https://www.interactivebrokers.com
This is what most expats mean when they say they use Interactive Brokers.
IBKR:
- Provides access to U.S.-domiciled ETFs and securities
- Allows portfolios that are clearly PFIC-free
- Operates in dozens of countries
- Does not require a U.S. residential address
- Is well-understood by cross-border tax professionals
For many Americans abroad, IBKR becomes the foundation of their long-term investment strategy.
Option B: Interactive Brokers Israel (IBI) — Israeli Brokerage
This is not just a local branch of IBKR. It is a separate Israeli brokerage firm.
With IBI:
- The account is Israeli-domiciled
- Israeli reporting and withholding applies
- Many locally offered funds may be PFICs
You can invest in PFIC-free assets through an Israeli brokerage — but only with deliberate security selection and coordination with a cross-border advisor.
3. Owning Individual Stocks Directly
Another PFIC-free approach is simply owning individual stocks — U.S. or non-U.S.
Why this works:
- Individual stocks are not PFICs
- No Form 8621
- Accessible almost anywhere
The trade-off is diversification: it requires more time, capital, and knowledge to build a balanced portfolio — but for some investors, the clarity is worth it.
4. Cash, Bank Interest, and Bonds
Sometimes boring is beautiful.
- Checking and savings accounts
- Term deposits
- Directly-held bonds
These are not PFICs.
Interest is taxed under normal U.S. income tax rules, with no special reporting regime.
Directly-held bonds — including U.S. Treasuries, corporate bonds, and individual foreign bonds — are also generally PFIC-free.
For Israel-based clients, banks such as Bank of Jerusalem currently offer digital savings accounts with interest rates often around 3.5%–4%+, depending on term.
https://www.bankjerusalem.co.il/en/deposits-and-savings/deposit_products
The Bottom Line
PFIC rules are restrictive — but they do not mean you are banned from investing.
With the right structure and the right platforms, it is entirely possible to build a long-term, compliant investment strategy without PFIC stress.
If you’re not sure whether your current investments are PFIC-free, or you want help building a compliant plan, professional guidance can make all the difference.
Disclaimer
This article is provided for general educational and informational purposes only and does not constitute tax, legal, investment, or financial advice. Reading this article or communicating with Cole & Waxman Tax Services does not create a client relationship.
The investment platforms, financial institutions, and products referenced in this article are mentioned for illustrative purposes only and do not constitute endorsements or recommendations. Availability, eligibility, and suitability vary by individual circumstances and jurisdiction.
Before making any investment or financial decisions, you should consult with your own qualified tax advisor, financial planner, or other professional who is familiar with your specific situation.