The QEF or Qualified Electing Fund election under §1295 is optional method of taxation available for certain PFICs. This election most closely mirrors the US taxation of US mutual funds and allows for capital gains treatment of some of the income as long as any prior §1291 gain has been dealt with.

Who must make a QEF election?

Any U.S. shareholder of a passive foreign investment company (PFIC) can elect to treat the PFIC as a qualified electing fund (QEF) and be taxed currently on a share of the QEF's income (IRC § 1293 ).

How does a QEF election work?

Under the Qualified Electing Fund (QEF) election, a U.S. person is taxed on the pro-rata share of the mutual fund's earned income for U.S. tax purposes, split between ordinary earnings that are taxed as ordinary income and net capital gains which are taxed as capital gains at potentially preferential rates.