Is KiwiSaver a Foreign Trust or a PFIC? Two IRS Theories and What Each Costs You
The IRS has never published a ruling that says exactly what a KiwiSaver account is. So practitioners work from two competing theories: that it's a foreign grantor trust (Forms 3520 and 3520-A), or that it's a wrapper holding PFICs (a Form 8621 for each underlying fund). The two theories produce different forms, different tax math, and very different penalty exposure — and for most US citizens in New Zealand, both can apply to the same account at once.
Why a KiwiSaver account has no clean label
From a New Zealand perspective, KiwiSaver is simple: a tax-favoured, employer-linked retirement savings scheme, invested through a Portfolio Investment Entity (PIE) and taxed at a Prescribed Investor Rate. Inland Revenue treats the structure as ordinary retirement saving. Inland Revenue's KiwiSaver guidance never once mentions PFICs or foreign trusts — because those are purely American constructs.
The problem starts when you carry US citizenship. The United States taxes its citizens on worldwide income regardless of where they live, and it forces every foreign financial structure into one of its own boxes. KiwiSaver fits two of those boxes uncomfortably well and neither perfectly:
- It looks like a trust. A separate legal entity holds and manages assets for your benefit under a deed — the classic shape of a trust under US law.
- It looks like a holding of PFICs. The underlying PIE funds are foreign corporations that are almost entirely passive (75%+ passive income or 50%+ passive assets), which is the literal statutory definition of a Passive Foreign Investment Company under IRC §1297.
The IRS has issued no revenue ruling or notice resolving which characterisation controls, and the New Zealand–US income tax treaty does not bridge the gap (more on that below). That leaves two defensible-but-conflicting theories on the table.
Theory A: KiwiSaver as a foreign grantor trust
Under this theory, the KiwiSaver scheme is a foreign trust, and you — the contributing member — are treated as its owner under the grantor trust rules of IRC §§671–679. A US person who transfers property to a foreign trust and can benefit from it is generally treated as owning that portion of the trust's assets. Per the IRS Form 3520 instructions, a US owner is "the person that is treated as owning any of the assets of a foreign trust under the rules of sections 671 through 679."
If that's your account, two annual forms attach:
- Form 3520-A — the annual information return of the foreign trust. KiwiSaver providers do not file US forms, so in practice the US owner attaches a substitute Form 3520-A (including the Foreign Grantor Trust Owner Statement) to their own return.
- Form 3520 — the US owner completes Part II to report ownership, plus Part I for contributions (transfers to the trust) and Part III for any distributions received.
The penalty exposure under Theory A
This is where Theory A bites. The penalties under IRC §6677, as set out in the Form 3520 instructions, are not trivial:
| Failure | Form | Penalty (IRC §6677) |
|---|---|---|
| Not reporting a transfer to the trust (a contribution) | 3520, Part I | Greater of $10,000 or 35% of the gross value transferred |
| Not reporting a distribution from the trust | 3520, Part III | Greater of $10,000 or 35% of the gross distribution |
| Trust fails to file 3520-A / owner fails to attach substitute | 3520-A | 5% of the gross value of the trust assets you are treated as owning |
Note the 5% figure is a percentage of the whole account balance you're treated as owning, charged annually — not a percentage of income. Additional penalties accrue if non-compliance continues beyond 90 days after the IRS issues a notice.
Theory B: KiwiSaver as a holding of PFICs
Under the competing theory, you look through any trust label and treat what you actually hold: units in PIE funds, each of which is a foreign corporation meeting the PFIC test. Each underlying fund is a separate PFIC, and a US shareholder generally files a Form 8621 per PFIC under IRC §1298(f).
According to the IRS Form 8621 instructions (Rev. December 2025), you must file Form 8621 if you are a US person who, directly or indirectly, owns PFIC stock and either receives a distribution, recognises gain on disposition, makes an election, or is required to report under §1298(f). There is a limited de minimis exception: you need not complete Part I for a section 1291 fund if your total PFIC stock value is $25,000 or less on the last day of the tax year ($50,000 for joint filers), provided you have no excess distributions or gains. Indirect holdings have a parallel $5,000 threshold. Above those lines, every fund needs its own form.
How a PFIC is actually taxed
Three regimes are possible on Form 8621, and they are not equally painful:
- Section 1291 (the default). If you make no election, "excess distributions" and all gains on disposition are spread across your holding period, taxed at the highest ordinary rate in effect for each prior year, then hit with a compounding interest charge under §1291(c). This is the punitive regime the PFIC rules were designed to impose.
- Qualified Electing Fund (QEF) election under §1295. You include your pro-rata share of the fund's ordinary earnings and net capital gain each year — but this requires an annual PFIC Information Statement from the fund, which NZ PIE providers virtually never produce.
- Mark-to-market (MTM) election under §1296. Available for marketable PFIC stock; you report each year's unrealised gain as ordinary income (and limited losses). This is the most commonly usable election for KiwiSaver-style holdings, and it neutralises the §1291 interest charge going forward.
Worked example: the same $50,000 KiwiSaver, two theories
Meet Daniel. Daniel is a US citizen who has lived in Wellington for nine years. His KiwiSaver balance on 31 March is NZD $50,000 (we'll treat it as roughly USD $50,000 for the example). It is spread across 3 underlying PIE funds. During the year he and his employer contributed $6,000 combined, the funds grew $4,000, and he took no distributions (he's under 65, so KiwiSaver is locked in). He files single. Here's how each theory plays out.
Theory A — foreign grantor trust:
- Forms: one Form 3520 (Part I for the $6,000 contribution, Part II for ownership) plus a substitute Form 3520-A. Two forms, account-level.
- Income tax: as a grantor trust, the $4,000 of trust earnings flows through to Daniel's 1040 in the year earned, taxed by character.
- Penalty if he misses it: the 3520-A failure alone is 5% × $50,000 = $2,500 for the year. A missed contribution report could be the greater of $10,000 or 35% of $6,000 → $10,000. Worst-case stacking dwarfs the actual tax.
Theory B — holding of PFICs:
- Forms: potentially 3 separate Forms 8621 — one per underlying PIE fund.
- De minimis check: his total PFIC value is $50,000, which is over the $25,000 single-filer threshold, so the exception does not excuse Part I. The forms are required.
- Income tax (MTM elected): his $4,000 of unrealised gain is reported as ordinary income for the year — clean, no interest charge.
- Income tax (no election, §1291 default): the growth is deferred until a distribution or sale, then taxed at top historical rates plus a compounding interest charge — far worse on a long-held account.
- Penalty if he misses it: failure-to-file penalties for Form 8621 are tied to the broader information-return regime and can suspend the statute of limitations on the entire return until filed — a different and arguably scarier exposure than a fixed dollar figure.
Same $50,000. Same $4,000 of growth. Under Theory A he files trust forms and reports the income annually; under Theory B he files per-fund PFIC forms and, if he elects MTM, also reports the income annually. The income tax outcomes can converge — but the forms, the penalty mechanics, and the statute-of-limitations consequences are entirely different. And many advisers conclude that, to be safe, Daniel should file both.
| Dimension | Theory A: Foreign grantor trust | Theory B: Holding of PFICs |
|---|---|---|
| Governing rules | IRC §§671–679, 6048, 6677 | IRC §§1291–1298 |
| Annual forms | Form 3520 + 3520-A (account-level) | Form 8621 per underlying fund |
| How income is taxed | Grantor: trust income flows to you yearly | §1291 deferral + interest, or QEF/MTM yearly |
| Headline penalty | 5% of assets owned (3520-A); greater of $10k/35% (transfers, distributions) | Suspends statute of limitations on the whole return |
| De minimis relief | Possibly Rev. Proc. 2020-17 (3520/3520-A only) | $25k single / $50k joint to skip Part I (no excess distributions) |
The treaty and pension-recognition gap — why the DTA does not save you
It is natural to assume the New Zealand–US income tax treaty shelters KiwiSaver the way it might shelter an ordinary pension. It does not, and the gap is structural:
- Article 18 addresses pension distributions, not pension build-up. Treaty pension articles typically govern how a retirement payment is taxed once paid. They do not switch off the US's domestic anti-deferral machinery — the PFIC regime (§§1291–1298) and the foreign-trust reporting regime (§§6048/6677) — while the account is still accumulating.
- No explicit KiwiSaver carve-out exists. Neither the treaty text nor any IRS notice creates an exemption from PFIC classification, Form 8621 filing, or §1291 taxation for KiwiSaver. (The Australia–US treaty has the same silence on superannuation, for what it's worth.)
- "Pension recognition" is not automatic. Even where a treaty defers tax on a foreign pension's inside build-up, that relief is generally limited to plans the treaty actually defines as a pension scheme — and KiwiSaver's status as a "pension fund" for that purpose is not settled.
There is no treaty argument that cleanly makes KiwiSaver reporting go away. The most you can say is that some practitioners take an aggressive treaty-based position on the inside build-up — but it is a position, not a settled rule, and it does nothing for the information return obligations that carry the largest penalties.
A defensible filing position and the disclosures that reduce penalty risk
Because the IRS has not chosen between the theories, the practical goal is not certainty — it is building a defensible, penalty-protective position. Here is the framework most cross-border practitioners converge on.
1. Consider Rev. Proc. 2020-17 relief from the trust forms
Revenue Procedure 2020-17 exempts certain tax-favoured foreign retirement trusts from filing Forms 3520 and 3520-A — and removes the related §6677 penalties — if the plan and the individual meet its conditions. For a retirement plan, contributions must be limited by one of: a percentage of earned income, $50,000 or less annually, or $1,000,000 or less on a lifetime basis; the plan must be tax-favoured under local law; and the individual must be otherwise tax-compliant. KiwiSaver's eligibility is plausible but not officially confirmed, so this is a position to document, not a guarantee.
Rev. Proc. 2020-17 relief applies only to Forms 3520 and 3520-A. It does not excuse Form 8621 (PFIC), FBAR (FinCEN 114), Form 8938 (FATCA), or US income tax on the earnings. Qualifying for the relief solves the trust-form problem and leaves the PFIC problem fully intact.
2. Default to the PFIC theory and make a protective MTM election
Where the de minimis thresholds are exceeded, file Form 8621 for the underlying funds and consider a mark-to-market election under §1296 where the funds qualify as marketable. MTM reports growth annually as ordinary income, sidesteps the punitive §1291 interest charge going forward, and is far more administrable than chasing QEF statements NZ providers won't issue.
3. Where doubt remains, file both and disclose the position
Many advisers file the trust forms and the PFIC forms, then attach a Form 8275 disclosure statement explaining the chosen position. Consistent, fully-disclosed reporting is the single most effective penalty defence: it establishes good faith and a reasonable basis, which is the foundation of the "reasonable cause" defence to the §6677 and information-return penalties.
4. If you're already behind, the amnesty programs exist for exactly this
KiwiSaver under-reporting is one of the most common reasons US citizens in New Zealand fall out of compliance. The Streamlined Filing Compliance Procedures are designed for non-wilful taxpayers and, for those who qualify under the foreign offshore route, can eliminate the failure-to-file and FBAR penalties entirely. Coming forward proactively is almost always cheaper than waiting for an IRS notice.
- The IRS has never issued a ruling defining KiwiSaver, so two theories coexist: foreign grantor trust (Forms 3520/3520-A) and holding of PFICs (Form 8621 per fund).
- Theory A's worst penalty is 5% of the assets you own per year for a missed 3520-A, plus the greater of $10,000 or 35% on missed transfers/distributions (IRC §6677).
- Theory B's Form 8621 is required once you're over the $25,000 single / $50,000 joint de minimis line; the default §1291 regime is punitive, so a §1296 mark-to-market election is usually preferable.
- The NZ–US treaty does not clearly shelter KiwiSaver — Article 18 covers distributions, not the PFIC/foreign-trust reporting that applies during accumulation.
- Rev. Proc. 2020-17 may relieve the trust forms (caps: $50k/yr or $1M lifetime) but never the PFIC form, the FBAR, or the income tax.
- The defensible move is consistent, fully-disclosed filing — often both theories' forms plus a Form 8275 — and the Streamlined Procedures if you're behind.
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Frequently asked questions
Do I have to file both Form 3520 and Form 8621 for the same KiwiSaver?
Possibly. Because the IRS has never resolved whether KiwiSaver is a foreign trust or a holding of PFICs, many cross-border advisers file the trust forms (3520/3520-A) and a Form 8621 for each underlying fund, then disclose the position on a Form 8275. It is conservative and reduces penalty risk, but it is also the most paperwork-intensive route. Whether you can drop the trust forms depends on whether you qualify for Rev. Proc. 2020-17 relief.
What's the worst-case penalty for not reporting my KiwiSaver?
Under the foreign-trust theory, a missed Form 3520-A draws a penalty of 5% of the gross value of the trust assets you're treated as owning, per year (IRC §6677), and a missed transfer or distribution draws the greater of $10,000 or 35% of its value. Under the PFIC theory, an unfiled Form 8621 can keep the statute of limitations on your entire return open indefinitely. Both are serious; neither is a flat slap on the wrist.
Does the New Zealand–US tax treaty exempt my KiwiSaver from US tax?
No, not clearly. Article 18 of the treaty deals with how pension distributions are taxed, not the inside build-up while you're still contributing. There is no explicit treaty carve-out from PFIC classification, Form 8621 filing, or §1291 taxation for KiwiSaver, and the IRS has issued no notice creating one. Some practitioners take an aggressive treaty position on the build-up, but it remains a position rather than settled law.
Can Revenue Procedure 2020-17 make my KiwiSaver reporting disappear?
Only partly. Rev. Proc. 2020-17 can relieve you of Forms 3520 and 3520-A (and their §6677 penalties) if your plan is a qualifying tax-favoured foreign retirement trust — broadly, contributions limited to a percentage of earned income, or $50,000 a year, or $1,000,000 lifetime, with you otherwise tax-compliant. It does not excuse Form 8621, the FBAR, Form 8938, or income tax on the earnings.
Should I make a mark-to-market or QEF election on my KiwiSaver PFICs?
For most KiwiSaver holders, mark-to-market (§1296) is the practical choice: it taxes annual growth as ordinary income and avoids the punitive §1291 interest charge, and it works without cooperation from the fund. The QEF election (§1295) is usually better tax-wise but requires an annual PFIC Information Statement that New Zealand PIE providers almost never supply. Get the timing right — the election generally needs to be in place for the first year you hold the PFIC to avoid a tax-on-the-deferral catch-up.
I've never reported my KiwiSaver. What should I do now?
If your non-compliance was non-wilful, the IRS Streamlined Filing Compliance Procedures are built for exactly this situation and, under the foreign offshore route, can eliminate failure-to-file and FBAR penalties. Coming forward before the IRS contacts you is almost always cheaper than waiting. Get specific advice before filing — the program has eligibility rules and a required certification of non-wilfulness.