Proposed Rule2022-27971
Guidance on the Foreign Government Income Exemption and the Definition of Domestically Controlled Qualified Investment Entities
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Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 29, 2022
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains proposed regulations regarding the treatment of certain entities, including qualified foreign pension funds, for purposes of the exemption from taxation afforded to foreign governments (the "proposed regulations"). The proposed regulations also address the determination of whether a qualified investment entity is domestically controlled, including the treatment of qualified foreign pension funds for this purpose.
Full Text
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<title>Federal Register, Volume 87 Issue 249 (Thursday, December 29, 2022)</title>
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[Federal Register Volume 87, Number 249 (Thursday, December 29, 2022)]
[Proposed Rules]
[Pages 80097-80108]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-27971]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-100442-22]
RIN 1545-BQ36
Guidance on the Foreign Government Income Exemption and the
Definition of Domestically Controlled Qualified Investment Entities
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations regarding the
treatment of certain entities, including qualified foreign pension
funds, for purposes of the exemption from taxation afforded to foreign
governments (the ``proposed regulations''). The proposed regulations
also address the determination of whether a qualified investment entity
is domestically controlled, including the treatment of qualified
foreign pension funds for this purpose.
DATES: Written or electronic comments and requests for a public hearing
must be received by February 27, 2023.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at <a href="http://www.regulations.gov">www.regulations.gov</a> (indicate IRS and REG-100442-
22) by following the online instructions for submitting comments. Once
submitted to the Federal eRulemaking Portal, comments cannot be edited
or withdrawn. The Department of the Treasury and the IRS will publish
for public availability any comments submitted electronically and
comments submitted on paper to its public docket. Send hard copy
submissions to: CC:PA:LPD:PR (REG-100442-22), Room 5203, Internal
Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC
20044.
FOR FURTHER INFORMATION CONTACT: Concerning Sec. 1.892-5, Joel Deuth
at (202) 317-6938; concerning Sec. 1.897-1, Arielle Borsos at (202)
317-6937; concerning submissions of comments or requests for a public
hearing, Regina Johnson at (202) 317-5177 (not toll-free numbers) or
<a href="/cdn-cgi/l/email-protection#39494c5b55505a515c584b50575e4a79504b4a175e564f"><span class="__cf_email__" data-cfemail="e69693848a8f858e8387948f888195a68f9495c8818990">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
Background
I. Section 892
Section 892(a)(1) of the Internal Revenue Code (the ``Code'')
exempts from U.S. taxation certain income derived by a foreign
government. This exemption, however, does not apply to income that is
(1) derived from the conduct of a commercial activity (whether within
or outside the United States), (2) received by a controlled commercial
entity or received (directly or indirectly) from a controlled
commercial entity, or (3) derived from the disposition of an interest
in a controlled commercial entity. Section 892(a)(2)(A).
Section 892(a)(2)(B) provides that for purposes of section
892(a)(2)(A), a controlled commercial entity is any entity engaged in
commercial activities (whether within or outside the United States) and
in which a foreign government holds (directly or indirectly) interests
according to specified thresholds. The term ``entity'' in section
892(a)(2)(B) means a corporation, a partnership, a trust, and an
estate. See Sec. 1.892-5(a)(3).
A United States real property holding corporation (``USRPHC''), as
defined in section 897(c)(2), or a foreign corporation that would be a
USRPHC if it was a United States corporation, is treated as engaged in
commercial activity and, therefore, is a controlled commercial entity
if a foreign government meets certain ownership or control thresholds
with respect to that USRPHC or foreign corporation. Sec. 1.892-
5T(b)(1).
II. Section 897
Section 897(a)(1) provides that gain or loss of a nonresident alien
individual or foreign corporation from the disposition of a United
States real property interest (``USRPI'') is taken into account under
section 871(b)(1) or 882(a)(1), as applicable, as if the nonresident
alien individual or foreign corporation were engaged in a trade or
business within the United States during the taxable year and such gain
or loss were effectively connected with that trade or business.
Subject to certain exceptions, section 897(c)(1)(A) defines a USRPI
as an interest in real property (including an interest in a mine, well,
or other natural deposit) located in the United States or the Virgin
Islands, and any interest (other than solely as a creditor) in any
domestic corporation unless the taxpayer establishes that such
corporation was at no time a USRPHC during the period set forth in
section 897(c)(1)(A)(ii) (generally, the five-year period ending on the
date of the disposition of the interest). Under section 897(c)(2), a
USRPHC is generally any corporation if the fair market value of its
USRPIs equals or exceeds 50 percent of the aggregate fair market value
of its USRPIs, its interests in real property located outside the
United States, plus any other of its assets that are used or held for
use in a trade or business.
Section 897(h)(1) provides that any distribution by a qualified
investment entity (``QIE'') to a nonresident alien individual, a
foreign corporation, or other QIE, to the extent attributable to gain
from sales or exchanges by the QIE of USRPIs, is treated as gain
recognized by such nonresident alien individual, foreign corporation,
or other QIE from the sale or exchange of a USRPI, subject to certain
exceptions. Section 897(h)(4)(A) defines a QIE as any (i) real estate
investment trust (``REIT''), and (ii) any regulated investment company
(``RIC'') which is a USRPHC or which would be a USRPHC if the
exceptions in section 897(c)(3) and 897(h)(2) did not apply to
interests in any REIT or RIC.
[[Page 80098]]
Section 897(h)(2) provides that a USRPI does not include an
interest in a domestically controlled QIE (``DC-QIE exception'').
Accordingly, gain or loss on the disposition of stock in a domestically
controlled QIE is not subject to section 897(a) (other than to the
extent provided in section 897(h)(1)). Section 897(h)(4)(B) provides
that a QIE is domestically controlled if less than 50 percent of the
value of its stock is held directly or indirectly by foreign persons at
all times during the testing period prescribed in section 897(h)(4)(D)
(generally, the five-year period ending on the date of the
disposition). The legislative history accompanying the enactment of
section 897 indicates that Congress intended for the DC-QIE exception
to apply to entities controlled by United States persons. See H.R.
Conf. Rep. No. 96-1479, at 188 (1980) (``In the case of REITs which are
controlled by U.S. persons, sales of the REIT shares by foreign
shareholders would not be subject to tax (other than in the case of
distribution by the REIT).''). Section 1.897-9T(c) defines ``foreign
person'' for purposes of section 897 as a nonresident alien individual
(including an individual subject to the provisions of section 877), a
foreign corporation (as defined in Sec. 1.897-1(l)), a foreign
partnership, a foreign trust, or a foreign estate, as such persons are
defined respectively by Sec. 1.871-2 and by section 7701 and the
regulations thereunder.\1\ Under Sec. 1.897-1(l), the term ``foreign
corporation'' generally has the meaning ascribed to it in section
7701(a)(3) and 7701(a)(5) and Sec. 301.7701-5.
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\1\ Section 1.897-9T(a) provides that Sec. 1.897-9T(c) (the
definition of ``foreign person'') would appear as Sec. 1.897-1(k)
if and when Sec. 1.897-9T is adopted as a final regulation.
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Section 897(h)(3) provides that in the case of a domestically
controlled QIE, rules similar to those in section 897(d) (which
prescribes rules requiring the recognition of gain on the distribution
of a USRPI by a foreign corporation) apply to the foreign ownership
percentage of any gain. Section 897(h)(4)(C) provides that the term
``foreign ownership percentage'' means the percentage of QIE stock that
was held (directly or indirectly) by foreign persons at the time during
the testing period (as defined in section 897(h)(4)(D)) during which
the direct and indirect ownership of stock by foreign persons was
greatest.
Section 1.897-1(c)(2)(i), which was issued when section 897(h)
addressed only domestically controlled REITs, defines domestically
controlled REITs (rather than QIEs) and otherwise restates the rule in
section 897(h)(2).\2\ Section 1.897-1(c)(2)(i) does not address the
determination of whether stock of a REIT is considered ``held directly
or indirectly by foreign persons'' under section 897(h)(4)(B) and
provides only that, for purposes of determining the ownership of the
REIT's stock, actual ownership under Sec. 1.857-8 must be taken into
account. Section 1.857-8(b) states that the actual owner of stock of a
REIT is the person who is required to include in gross income in his
return the dividends received on the stock and is generally the
shareholder of record of the REIT.
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\2\ Section 897(h) did not apply to RICs when the regulations
were finalized. Section 411 of the American Jobs Creation Act of
2004, Public Law 108-357 (2004), amended section 897(h) to apply to
certain RICs in addition to REITs and introduced the term QIE to
include such entities.
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Section 897(h)(4)(E), which was added to the Code in section
322(b)(1)(A) of the Protecting Americans from Tax Hikes Act of 2015,
Public Law 114-113, div. Q (the ``PATH Act''), provides special
ownership rules for determining the holder of QIE stock under section
897(h)(4)(B) and 897(h)(4)(C). Section 897(h)(4)(E)(i) states that, in
the case of any class of stock of the QIE that is regularly traded on
an established securities market in the United States (``U.S. publicly
traded QIE stock''), a person holding less than five percent of such
class of stock at all times during the testing period is treated as a
United States person unless the QIE has actual knowledge that such
person is not a United States person. Section 897(h)(4)(E)(ii) provides
that any stock in the QIE held by another QIE (i) any class of stock of
which is regularly traded on an established securities market, or (ii)
which is a RIC that issues redeemable securities within the meaning of
section 2 of the Investment Company Act of 1940 (an entity described in
(i) or (ii), a ``public QIE'') is treated as held by a foreign person,
except that if the public QIE is domestically controlled (determined
after the application of section 897(h)(4)(E)), such stock is treated
as held by a United States person. Finally, section 897(h)(4)(E)(iii)
provides that any stock in the QIE held by a QIE that is not a public
QIE (``non-public QIE'') is only treated as held by a United States
person in proportion to the stock of the non-public QIE that is (or is
treated under section 897(h)(4)(E)(ii) or 897(h)(4)(E)(iii) as) held by
a United States person.
Section 897(l) provides an exception to the application of section
897(a) for certain foreign pension funds and their wholly owned
subsidiaries. Section 897(l) was added to the Code in section 323(a) of
the PATH Act. As originally enacted, section 897(l)(1) provided that
section 897 does not apply to any USRPI held directly (or indirectly
through one or more partnerships) by, or to any distribution received
from a REIT by, a qualified foreign pension fund (``QFPF'') or any
entity all of the interests of which are held by a QFPF. Congress later
made several technical amendments to section 897(l) in section 101(q)
of the Tax Technical Corrections Act of 2018, Public Law 115-141, div.
U (the ``Technical Corrections Act''). As amended in the Technical
Corrections Act, section 897(l) provides that neither a QFPF nor an
entity all the interests of which are held by a QFPF is treated as a
nonresident alien individual or foreign corporation for purposes of
section 897. Section 897(l)(3) provides the Secretary with the
authority to ``prescribe such regulations as may be necessary or
appropriate to carry out the purposes of this subsection.''
On June 7, 2019, the Department of the Treasury (``Treasury
Department'') and the IRS published proposed regulations in the Federal
Register (84 FR 26605) (the ``2019 proposed regulations'') under
sections 897(l), 1441, 1445 and 1446. The 2019 proposed regulations
contained rules relating to qualification for the exception under
section 897(l), as well as rules relating to withholding requirements
under sections 1441, 1445 and 1446, for dispositions of USRPIs by, and
distributions described in section 897(h) received by, QFPFs and
entities that are wholly owned by one or more QFPFs (``qualified
controlled entities,'' or ``QCEs''). The 2019 proposed regulations are
finalized in the Final Rules section of this issue of the Federal
Register.
Explanation of Provisions
I. Coordination of Exemption Under Section 897(l) With Section 892
The exemption from U.S. taxation provided to foreign governments by
section 892 does not apply to income derived from the conduct of a
commercial activity, or income received by a controlled commercial
entity or received (directly or indirectly) from a controlled
commercial entity. Section 1.892-4T(a). Section 1.892-5T(b)(1) treats a
USRPHC (or a foreign corporation that would be a USRPHC if it was a
United States corporation) as engaged in commercial activity and,
therefore, a controlled commercial entity if it is controlled by a
foreign government pursuant to Sec. 1.892-5T(a).
[[Page 80099]]
A QFPF would be a controlled commercial entity for section 892
purposes if it qualified as a USRPHC within the meaning of Sec. 1.892-
5T(b)(1) and if it were controlled by a foreign government pursuant to
Sec. 1.892-5T(a). In such case, none of the income, including, for
example, from investments in the United States in stocks or securities,
received by the foreign government from that QFPF would be eligible for
the section 892 exemption. A comment to the 2019 proposed regulations
noted that Sec. 1.892-5T(b)(1) incentivizes a government-controlled
QFPF to reduce its USRPIs to preserve the exemption provided by section
892. In addition, the comment noted that Sec. 1.892-5T(b)(1) may
necessitate that such a QFPF monitor its USRPIs for section 892
purposes despite being exempt from the application of section 897(a).
The comment recommended that a QFPF and a QCE be excluded from the
application of Sec. 1.892-5T(b)(1) or that Sec. 1.892-5T(b)(1) be
withdrawn.
Although these proposed regulations do not withdraw the rule
entirely, the Treasury Department and the IRS agree that the rule in
Sec. 1.892-5T(b)(1) should not apply to a QFPF or a QCE, and these
proposed regulations therefore adopt that recommendation. Proposed
Sec. 1.892-5(b)(1)(ii)(A). In addition, the proposed regulations
exclude certain other USRPHCs from the application of Sec. 1.892-
5T(b)(1). Proposed Sec. 1.892-5(b)(1)(ii)(B). Excluding certain other
USRPHCs from the application of Sec. 1.892-5T(b)(1) is consistent with
the policy of section 892 with respect to deemed commercial activities.
For example, in general, a foreign government under section 892
currently is not treated as engaging in commercial activities by reason
of investing in stocks, bonds, and other securities. Sec. 1.892-
4T(c)(1)(i).\3\ The proposed regulations add another category by
excluding from the application of Sec. 1.892-5T(b)(1) a corporation
that is a USRPHC solely by reason of its direct or indirect ownership
interest in one or more other corporations that are not controlled by
the foreign government. Thus, for example, if a foreign government
controls a USRPHC whose only assets are minority interests in REITs,
the proposed regulations would not treat that corporation as a
controlled commercial entity pursuant to Sec. 1.892-5T(b)(1). The
changes to Sec. 1.892-5T(b)(1) made by the proposed regulations do not
affect the analysis of whether the income itself is exempt from U.S.
taxation under section 892.\4\
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\3\ Regulations proposed under section 892 in 2011 would also
extend the policy embodied by Sec. 1.892-4T(c)(1)(i) with respect
to deemed commercial activities by providing that investments in
financial instruments will not be treated as commercial activities
for purposes of section 892, irrespective of whether such financial
instruments are held in the execution of governmental financial or
monetary policy. See proposed Sec. 1.892-4(e)(1)(i). See also
proposed Sec. Sec. 1.892-4(e)(1)(iv) and 1.892-5(d)(5)(iii), which
provide relief from being treated as engaged in certain deemed
commercial activities.
\4\ See, for example, proposed Sec. 1.892-4(e)(1)(iv), which
provides that gain derived from a disposition of a USRPI defined in
section 897(c)(1)(A)(i) will not qualify for exemption from taxation
under section 892 even though a disposition (including a deemed
disposition under section 897(h)(1)) of a USRPI, by itself, does not
constitute the conduct of a commercial activity.
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The proposed regulations also clarify Sec. 1.892-5T(b)(1) by
replacing the phrase ``or a foreign corporation that would be a United
States real property holding corporation if it was a United States
corporation'' with ``which may include a foreign corporation'' when
referencing section 897(c)(2) to define a USRPHC. Proposed Sec. 1.892-
5(b)(1)(i). Section 897(c)(2) defines a USRPHC as including ``any
corporation'', whether domestic or foreign.\5\ Thus, the phrase ``or a
foreign corporation that would be a United States real property holding
corporation if it was a United States corporation'' when referencing
the definition in section 897(c)(2) is unnecessary.
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\5\ In contrast, section 897(c)(1)(A)(ii) defines a USRPI by
reference to an interest in a USRPHC that is a domestic corporation.
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II. Effect of Section 897(l) on DC-QIE Exception
A comment received in response to the 2019 proposed regulations
recommended that regulations clarify that a QFPF is treated as a
domestic person for purposes of the DC-QIE exception. The comment
reasoned that section 897(l)(1) states that a QFPF shall not be treated
as a nonresident alien individual or foreign corporation for purposes
of all of section 897, which includes the DC-QIE exception. The comment
also noted that such a rule would be easily administrable for open-
ended investment funds and would provide certainty to such funds and
their investors that section 897(a) would not apply to the disposition
of interests in open-ended investment funds which have QFPFs as
significant investors. Another comment, however, stated that it is not
clear that the intent behind section 897(l) was to provide that a QIE
is domestically controlled if it is majority owned by QFPFs, as there
was no indication that Congress intended that result. The comment
recommended that regulations provide how QFPFs are to be treated for
purposes of the DC-QIE exception but did not recommend a specific
result.
Section 897(a) generally applies with respect to the gain or loss
of ``a nonresident alien individual or a foreign corporation.'' In
addition, section 897(h)(1) applies to any distribution by a QIE to a
nonresident alien individual or a foreign corporation (or other QIE).
Section 897(l) provides that, for purposes of section 897, a QFPF shall
not be treated as ``a nonresident alien individual or a foreign
corporation.'' The reference to ``a nonresident alien individual or a
foreign corporation'' in section 897(l) therefore is consistent with
the same class of persons subject to tax under section 897(a) and
897(h)(1). Thus, under the statute, when a QFPF disposes of a USRPI,
section 897(a) does not apply to any gain or loss from the disposition
because section 897(l) treats the QFPF as neither a nonresident alien
individual nor a foreign corporation. Similarly, when a QFPF receives a
distribution from a QIE that is attributable to gain from the sale or
exchange of a USRPI, the look-through rule under section 897(h)(1), and
the general rule under section 897(a) do not apply because section
897(l) treats the QFPF as neither a nonresident alien individual nor a
foreign corporation.
In contrast, the ownership test in section 897(h)(4)(B) for the DC-
QIE exception (which predates the enactment of section 897(l)) uses the
term ``foreign persons'' and not ``nonresident individuals or foreign
corporations.'' The DC-QIE exception applies to scenarios where a
nonresident alien individual or foreign corporation disposes of stock
in a QIE, but because the QIE is less than 50 percent owned by
``foreign persons,'' the stock disposed of is not considered a USRPI.
Although section 897(l) provides that a QFPF is not treated as a
nonresident alien individual or a foreign corporation for purposes of
section 897, it does not expressly provide that a QFPF or QCE is not
treated as a foreign person for purposes of the separate ownership test
of the DC-QIE exception.
There is no indication that Congress intended for section 897(l) to
provide that QFPFs and QCEs are not treated as foreign persons for
purposes of applying the DC-QIE exception to other foreign persons that
are neither QFPFs nor QCEs. As originally enacted in the PATH Act,
section 897(l) provided that section 897 did not apply to USRPIs held,
and REIT distributions received, by a QFPF and a QCE but did not alter
the status of the QFPF or QCE. As a result, as originally enacted
section
[[Page 80100]]
897(l) turned off the application of section 897(a) to the QFPF or QCE.
In the same legislation, Congress also amended the rules in the DC-
QIE exception. See PATH Act secs. 133 and 322.\6\ Certain amendments to
the DC-QIE exception deem ownership in a QIE as ownership by a United
States or foreign person depending on whether certain conditions are
met. See section 897(h)(4)(E)(i), 897(h)(4)(E)(ii). These amendments
demonstrate that Congress knows how to directly identify the deemed
classification of investors as foreign persons or United States persons
and did so in one part of the PATH Act through amendments to the DC-QIE
exception. Congress could have made a similar modification to the DC-
QIE exception for QFPFs and QCEs in the same legislation but did not do
so.
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\6\ Those amendments did not relate to the new rules in section
897(l) and are described separately in the Joint Committee on
Taxation's General Explanation. See STAFF OF THE JOINT COMM. ON
TAX'N, General Explanation of Tax Legislation Enacted in 2015 (JCS-
1-16) (General Explanation) 155, 280-83 (2016) (``PATH Act General
Explanation'').
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The Technical Corrections Act modified the language of section
897(l). In particular, the modified language specifies that a QFPF and
a QCE are not treated as nonresident alien individuals or foreign
corporations for purposes of section 897. The Joint Committee on
Taxation explanation of the technical correction for section 897(l)
states that the revised language was merely intended to clarify the
language specifying which entities qualified for the benefit provided
by the new subsection. See STAFF OF THE JOINT COMM. ON TAX'N, General
Explanation of Tax Legislation Enacted in the 115th Congress (JCS-2-19)
(General Explanation) 145 (2019) (``2019 General Explanation'').
Although the 2019 General Explanation does not specify the technical
error with the PATH Act language that was corrected by the 2018
amendment, when comparing the technical correction to the PATH Act
formulation, the correction clearly allows a QFPF and QCE to jointly
own a USRPI and qualify for section 897(l) with respect to their
partial interests in it, whereas the PATH Act formulation used ``or''
between QFPF and QCE, which suggested that all of the USRPI had to be
owned by a single entity. Additionally, the change clarified that the
exception applied to distributions from all QIEs and not just REITs.
Lastly, by shifting the focus of section 897(l) from applying to the
USRPI in the PATH Act formulation (``[T]his section shall not apply to
any United States real property interest held by . . .'') to instead
applying to the QFPF in the Technical Corrections Act formulation
(``[F]or purposes of this section, a qualified foreign pension fund
shall not be treated as . . .''), the technical correction aligned the
section 897(l) exception with the operative provision in section
897(a), which modifies the tax treatment of the entity receiving income
via disposition or distribution (the QFPF or QCE), not the tax
treatment of the USRPI itself.
Ultimately, as a technical correction, the modification to section
897(l) cannot expand on the policy Congress intended to enact in the
PATH Act. A technical correction is a change that clarifies existing
law, such as through correcting errors, rather than one that
fundamentally or substantively changes the law. See Fed. Nat'l Mortgage
Assoc. v. United States, 56 Fed. Cl. 228, 234, 237 (2003), rev'd and
remanded on other grounds, 379 F.3d 1303 (Fed. Cir. 2004) (``Congress
turns to technical corrections when it wishes to clarify existing law
or repair a scrivener's error, rather than to change the substantive
meaning of the statute. . . . [A] technical correction that merely
restores the rule Congress intended to enact cannot be construed as a
fundamental change in the operation of the statute.''); STAFF OF THE
JOINT COMM. ON TAX'N, Overview of Revenue Estimating Procedures and
Methodologies Used by the Staff of the Joint Committee on Taxation
(JCX-1-05) 33 (2005) (describing a technical correction as
``legislation that is designed to correct errors in existing law in
order to fully implement the intended policies of previously enacted
legislation'' and a change that ``conforms to and does not alter the
intent'' of the underlying legislation). Both the PATH Act General
Explanation and the 2019 General Explanation make clear that the intent
of section 897(l), as originally enacted and as corrected, was to
provide that ``in determining the U.S. income tax of a qualified
foreign pension fund, section 897 does not apply.'' See 2019 General
Explanation, at 145. This intent was also clear in the original
language of section 897(l) and could not have been expanded by the
modifications in the Technical Corrections Act. Additionally, because
section 897(l) already specifically excludes QFPF and QCEs from the
application of section 897(a), treating them as not being a foreign
person for purposes of the DC-QIE exception would serve only to benefit
other foreign investors in the same QIE. Nothing in the statute or
legislative history indicates that majority ownership of a QIE by a
QFPF or QCE should allow other investors to avoid section 897, and such
treatment does not follow from the policy of either section 897(l) or
the DC-QIE exception as expressed in the legislative history of those
provisions. Further, if Congress had intended for a QFPF to not be
treated as a ``foreign person,'' which is a different and broader
characterization beyond section 897(l)'s treatment as not ``a
nonresident alien individual or a foreign corporation,'' which is
needed to turn off section 897(a) as to the QFPF or QCE, Congress
presumably would have expressly provided for that result. Cf. section
1445(f)(3)(B) (solely for purposes of section 1445, providing that an
entity that is exempt under section 897(l) is not a foreign person) and
section 897(h)(4)(E) (as discussed, treating certain QIE investors as
foreign persons (even if in fact a domestic corporation)).
Accordingly, proposed Sec. 1.897-1(c)(3)(iv)(A) provides that a
QFPF (including any part of a QFPF) or a QCE is a foreign person for
purposes of the DC-QIE exception. See parts III and IV of this
Explanation of Provisions for a discussion of the definition of
domestically controlled QIE in proposed Sec. 1.897-1(c)(3). The IRS
may challenge contrary positions before the issuance of any final
regulations regarding the treatment of a QFPF or QCE for purposes of
the DC-QIE exception.
The proposed regulations make related changes to the definitions
provided in Sec. 1.897-1. Proposed Sec. 1.897-1(k) and (l) revise the
definition of ``foreign person'' (as provided in Sec. 1.897-9T(c)) and
``foreign corporation'' to remove references that are no longer
applicable and to add cross references to the rule in proposed Sec.
1.897-1(c)(3)(iv)(A).
III. QIE Stock Held Directly or Indirectly Under Section 897(h)(4)(B)
A. Overview
The proposed regulations provide guidance for determining whether
stock of a QIE is considered ``held directly or indirectly'' by foreign
persons for determining whether a QIE is domestically controlled under
section 897(h)(4)(B). The proposed regulations define stock that is
held ``indirectly'' by taking into account stock of the QIE held
through certain entities under a limited ``look-through'' approach. The
look-through approach balances the policies of the DC-QIE exception
with the requirement in section 897(h)(4)(B) to take into account
``indirect'' ownership of QIE stock by foreign persons in determining
whether a QIE is domestically controlled. It is also
[[Page 80101]]
intended to prevent the use of intermediary entities to achieve results
contrary to the purposes of the DC-QIE exception.
Questions have arisen as to whether the reference to stock held
``indirectly'' in section 897(h)(4)(B) could be interpreted to require
looking through all entities, including, for example, all domestic and
foreign corporations, to determine the extent to which the ultimate
individual shareholders of a QIE are foreign or domestic. In its
broadest sense, the statute refers to stock held ``indirectly'' by
foreign persons, which could encompass ownership by a foreign
individual through multiple tiers of entities of any type. However, the
Treasury Department and the IRS have concluded that the term
``indirectly'' should not be interpreted so broadly given the policy
underlying section 897(h)(4). Section 897(h)(4)(B) indicates that the
determination of whether a QIE is domestically controlled looks to
ownership of QIE stock by ``foreign persons,'' not just individuals. In
addition, such a broad interpretation of ``indirectly'' mandating the
look-through of all entity types, including through multiple tiers of
entities, would likely be difficult for taxpayers to comply with, and
for the IRS to administer, particularly with respect to publicly traded
entities.
Notwithstanding that a complete look-through approach is
inappropriate, the Treasury Department and the IRS are issuing proposed
Sec. 1.897-1(c)(3) based on the conclusion that a look-through
approach in determining ``indirect'' ownership of a QIE should still
apply in specified circumstances to QIE stock held by intermediary
entities. The proposed regulations thus address the treatment of QIE
stock held by certain intermediary entities, such as domestic
partnerships. For example, assume USR, a REIT, holds a USRPI as its
sole asset. Nonresident alien individuals hold 49 percent of USR's
single class of stock. PRS, a domestic partnership 50 percent of the
interests of which are held by each of two foreign corporations, holds
the remaining 51 percent of the USR stock. If USR stock is disposed of,
taxpayers may assert that the stock is not a USRPI under the DC-QIE
exception, and therefore not subject to section 897(a), because PRS is
a United States person and, consequently, foreign persons could be
viewed as directly or indirectly holding less than 50 percent of USR's
stock by value. Taxpayers may assert this position even though, taking
into account the USR stock held by the foreign corporations through
their interests in PRS, foreign persons hold directly or indirectly all
of USR's outstanding stock. In support of this position, taxpayers may
point to Sec. 1.897-1(c)(2)(i) and its reference to Sec. 1.857-8 as
suggesting that the inclusion of the dividends received on QIE stock in
gross income on a domestic partnership's tax return, without regard to
stock held indirectly by another person, establishes the partnership
not only as the actual owner of QIE stock but, as a result of such
actual ownership, as the only relevant person for determining whether a
QIE is domestically controlled. Taxpayers may take this position even
though the determination of actual ownership pursuant to Sec. 1.857-8
is only intended to ensure the beneficial owner of stock is taken into
account when different from the shareholder of record, and Sec. 1.897-
1(c)(2)(i) does not state or otherwise suggest that the actual owners
of QIE stock as determined under Sec. 1.857-8 are the only relevant
persons for determining whether a QIE is domestically controlled or
provide any guidance on the meaning of ``held directly or indirectly by
foreign persons.''
The Treasury Department and the IRS have concluded that the
interpretation of the DC-QIE exception described in the preceding
paragraph is incorrect because it would permit nonresident alien
individuals and foreign corporations to dispose of USRPIs held
indirectly through certain intermediate entities, such as domestic
partnerships, to avoid taxation under section 897(a). To prevent this
result, entities such as partnerships that are generally not subject to
U.S. Federal income tax should not, subject to certain limited
exceptions, be treated as holders of QIE stock for purposes of
determining whether a QIE is domestically controlled. This type of
look-through analysis is consistent with section 897(h)(4)(B), which
references ``indirect'' ownership in determining the shareholders of a
QIE that should be taken into account in applying the DC-QIE exception.
B. General Look-Through Approach
Consistent with the reference to stock held ``indirectly'' by
foreign persons in section 897(h)(4)(B), the determination of whether a
QIE is domestically controlled under the proposed regulations generally
applies a ``look-through'' approach to stock of a QIE that is held
through certain entities. Thus, in determining whether a QIE is
domestically controlled, only a ``non-look-through person'' is treated
as holding directly or indirectly stock of a QIE, and stock of a QIE
held by or through one or more intervening ``look-through persons'' is
treated as held proportionately by the look-through person's ultimate
owners that are non-look-through persons. Proposed Sec. 1.897-
1(c)(3)(ii)(A) and (B).
Proposed Sec. 1.897-1(c)(3)(ii)(C) provides that stock of a QIE
considered held directly or indirectly by a non-look-through person is
not considered held directly or indirectly by any other person. Under
this rule, for example, if stock of a QIE is held directly or
indirectly by a domestic C corporation (that is not a foreign-owned
domestic corporation), it is treated as held directly or indirectly
only by that domestic C corporation and is not treated as held directly
or indirectly by non-look-through shareholders of the domestic C
corporation (or any other person).
Subject to a special look-through rule for foreign-owned domestic
corporations and the special ownership rules in section 897(h)(4)(E),
discussed in parts III.C and III.D of this Explanation of Provisions,
respectively, the proposed regulations define a ``non-look-through
person'' to include persons such as individuals, ``domestic C
corporations'' (defined as a domestic corporation other than an S
corporation, a REIT or a RIC) and foreign corporations (including, for
the avoidance of doubt, foreign governments pursuant to section
892(a)(3)). Proposed Sec. 1.897-1(c)(3)(v)(D). The definition of a
non-look-through person also includes ``nontaxable holders'' (defined
to include tax-exempt entities under section 501(a) or the United
States, a State, a U.S. territory, an Indian tribal government or any
subdivision of the foregoing) because they generally do not have owners
to which the look-through approach could apply. For the same reason,
the definition of a ``non-look-through person'' includes international
organizations (as defined in section 7701(18)). In addition, a non-
look-through person includes publicly traded partnerships (domestic or
foreign) because it may be difficult to look-through such entities and
it is unlikely that these entities could be affirmatively used as
intermediary entities to create a domestically controlled QIE. Finally,
a non-look-through person includes a QFPF (including any part of a
QFPF) or QCE, which ensures that such entities are taken into account
as foreign persons for purposes of section 897(h)(4)(B) as provided
under proposed Sec. 1.897-1(c)(3)(iv)(A).
A ``look-through person'' is defined as any person that is not a
non-look-through person and includes, for example, a REIT or a RIC
(subject to the
[[Page 80102]]
special ownership rule in proposed Sec. 1.897-1(c)(3)(iii)(C)), an S
corporation, a non-publicly traded partnership (domestic or foreign),
and a trust (domestic or foreign). Proposed Sec. 1.897-1(c)(3)(v)(C).
C. Special Look-Through Rule for Foreign-Owned Domestic Corporations
Even though domestic C corporations are generally treated as non-
look-through persons, the Treasury Department and the IRS are issuing
proposed Sec. 1.897-1(c)(3)(iii)(B) based on the conclusion that a
limited look-through approach should apply to non-publicly traded
domestic C corporations in which foreign persons hold a meaningful
ownership interest. This rule would, for example, prevent the use of
intermediary domestic C corporations by foreign investors to create
domestically controlled QIEs that could exempt from the application of
section 897 QIE stock held directly by those or other foreign
investors. In such cases, the ownership of the domestic C corporation
by foreign persons should be ascertainable and taken into account in
determining the ``indirect'' ownership of the QIE by foreign persons in
applying section 897(h)(4)(B).
Accordingly, in determining whether a QIE is domestically
controlled, the proposed regulations treat a domestic C corporation
whose stock is not regularly traded on an established securities market
(``non-public domestic C corporation'') as a look-through person, but
only if the non-public domestic C corporation is a foreign-owned
domestic corporation. Proposed Sec. 1.897-1(c)(3)(iii)(B). For this
purpose, a ``foreign-owned domestic corporation'' is any non-public
domestic C corporation if foreign persons hold directly or indirectly
25 percent or more of the fair market value of the corporation's
outstanding stock. Proposed Sec. 1.897-1(c)(3)(v)(B). Whether a non-
public domestic C corporation is a foreign-owned domestic corporation
is determined by, in general, applying the same look-through rules that
apply in determining whether a QIE is domestically controlled. Thus,
for example, stock of the domestic corporation held by look-through
persons would be treated as held directly or indirectly by the look-
through person's shareholders, partners, or beneficiaries for this
purpose.
D. Special Ownership Rules in Section 897(h)(4)(E)
The proposed regulations incorporate the special ownership rules in
section 897(h)(4)(E)(i) and 897(h)(4)(E)(ii). These rules treat a
person that holds stock in a QIE as a non-look-through person to the
extent required to ensure the treatment of such person as a foreign or
United States person as prescribed under section 897(h)(4)(E)(i) and
897(h)(4)(E)(ii). Thus, a person holding less than five percent of U.S.
publicly traded QIE stock that section 897(h)(4)(E)(i) deems to be a
United States person (absent actual knowledge by the QIE that such
person is not a United States person) is treated under the proposed
regulations as a non-look-through person with respect to that stock.
Proposed Sec. 1.897-1(c)(3)(iii)(A). Stock of a QIE held by a public
QIE that, under section 897(h)(4)(E)(ii), is treated as held by a
foreign or United States person based on whether the public QIE is a
domestically controlled QIE is similarly treated under the proposed
regulations as held by a non-look-through person (even though the
general definition of a non-look-through person excludes QIEs).
Proposed Sec. 1.897-1(c)(3)(iii)(C).
For QIE stock held by a non-public QIE, whose ownership should be
more readily ascertainable, the general look-through rules in the
proposed regulations are consistent with the approach in section
897(h)(4)(E)(iii) that looks to the proportionate ownership of the non-
public QIE to determine the QIE stock held by United States persons.
The rule in proposed Sec. 1.897-1(c)(3)(iii)(A) regarding U.S.
publicly traded QIE stock applies notwithstanding any other provision
under proposed Sec. 1.897-1(c)(3) (rules regarding domestically
controlled QIEs). Thus, for example, a QFPF that holds less than five
percent of U.S. publicly traded QIE stock at all times during the
testing period (and absent actual knowledge that the person is not a
United States person), is treated as a United States person that is a
non-look through person with respect to that stock even though the QFPF
would otherwise be treated as a foreign person under proposed Sec.
1.897-1(c)(3)(iv)(A). The Treasury Department and the IRS have
determined that this priority rule is appropriate due to the
administrative and compliance difficulties that could result in
determining whether other rules would, absent the application of the
U.S publicly traded QIE rule, treat less-than-five-percent holders of
U.S. publicly traded QIE stock as foreign persons.
IV. QIE Stock Held Directly or Indirectly Under Section 897(h)(4)(C)
As noted in the Background section of this preamble, section
897(h)(4)(C) provides that the term ``foreign ownership percentage''
means the percentage of QIE stock that was held (directly or
indirectly) by foreign persons at the time during the testing period
during which the direct and indirect ownership of stock by foreign
persons was greatest. The Treasury Department and the IRS have
concluded that the determination of QIE stock held ``directly or
indirectly'' in section 897(h)(4)(C) should be interpreted in the same
manner as such phrase is interpreted in the definition of a
domestically controlled QIE in section 897(h)(4)(2). Accordingly,
proposed Sec. 1.897-1(c)(4) provides that for purposes of calculating
the foreign ownership percentage, the determination of the QIE stock
that was held directly or indirectly by foreign persons is made under
the rules that apply for purposes of determining whether a QIE is
domestically controlled.
V. Other Rules and Modifications
The proposed regulations treat international organizations (as
defined in section 7701(18)) as foreign persons for purposes of
determining whether a QIE is domestically controlled. Proposed Sec.
1.897-1(c)(3)(iv)(B). Notwithstanding that international organizations
are generally not treated as foreign persons for section 897 purposes
under Sec. 1.897-9T(e), the Treasury Department and the IRS believe
that, for reasons similar to those described in part II of this
Explanation of Provisions regarding QFPFs and QCEs, and because
international organizations would not otherwise constitute United
States persons under section 7701(a)(30), international organizations
should be treated as foreign persons in applying the DC-QIE exception.
The proposed regulations do not retain the reference to Sec.
1.857-8 in Sec. 1.897-1(c)(2)(i), which is not necessary given the
rules provided in the proposed regulations for determining whether
stock of a QIE is considered to be held directly or indirectly. The
look-through rules set forth in proposed Sec. 1.897-1(c)(3) apply only
with respect to determining whether a QIE is domestically controlled
under section 897(h)(4)(B) and do not apply with respect to any other
provision, including section 897(c)(3).
Finally, the proposed regulations revise the definition of
domestically controlled REIT in Sec. 1.897-1(c)(2)(i) to reflect
amendments to section 897(h) made after those regulations were issued
that extended the application of section 897(h) to certain RICs.
Accordingly, the proposed regulations replace the
[[Page 80103]]
definition of ``domestically controlled REIT'' in Sec. 1.897-
1(c)(2)(i) by defining a ``domestically controlled QIE'' in proposed
Sec. 1.897-1(c)(3).
Applicability Dates
The regulations under section 892 are proposed to apply to taxable
years ending on or after December 28, 2022. Taxpayers may rely on the
proposed regulations under section 892 until the date of publication of
the Treasury decision adopting the regulations as final in the Federal
Register.
Subject to a special rule for entity classification elections, the
regulations under section 897 are proposed to apply to transactions
occurring on or after the date these regulations are published as final
regulations in the Federal Register; however, rules applicable for
determining whether a QIE is domestically controlled may be relevant
for determining QIE ownership during periods before the date these
regulations are published as final regulations in the Federal Register
to the extent the testing period related to a transaction that occurs
after the date these regulations are published as final regulations in
the Federal Register includes periods before that date. The IRS may
challenge positions contrary to proposed Sec. 1.897-1(c)(3) and (4)
before the issuance of final regulations relating to the topics
addressed in those proposed rules.
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
The Administrator of the Office of Information and Regulatory
Affairs (OIRA), Office of Management and Budget, has determined that
this proposed rule is not a significant regulatory action, as that term
is defined in section 3(f) of Executive Order 12866. Therefore, OIRA
has not reviewed this proposed rule pursuant to section 6(a)(3)(A) of
Executive Order 12866 and the April 11, 2018, Memorandum of Agreement
between the Treasury Department and the Office of Management and Budget
(``OMB'').
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) generally
requires that a Federal agency obtain the approval of the OMB before
collecting information from the public, whether such collection of
information is mandatory, voluntary, or required to obtain or retain a
benefit. There are no additional information collection requirements
associated with these proposed regulations.
III. Regulatory Flexibility Act
When an agency issues a rulemaking proposal, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) (``RFA'') requires the agency ``to
prepare and make available for public comment an initial regulatory
flexibility analysis'' that will ``describe the impact of the proposed
rule on small entities.'' See 5 U.S.C. 603(a). Section 605 of the RFA
provides an exception to this requirement if the agency certifies that
the proposed rulemaking will not have a significant economic impact on
a substantial number of small entities. A small entity is defined as a
small business, small nonprofit organization, or small governmental
jurisdiction. See 5 U.S.C. 601(3) through (6).
The Treasury Department and the IRS do not expect that proposed
Sec. 1.892-5(b)(1) will have a significant economic impact on a
substantial number of small entities within the meaning of sections
601(3) through 601(6) of the RFA. Proposed Sec. 1.892-5(b)(1) provides
guidance regarding whether certain foreign government-controlled
entities may be treated as controlled commercial entities within the
meaning of section 892. Proposed Sec. 1.892-5(b)(1) does not impose
any new costs on these entities. Consequently, the Treasury Department
and the IRS do not expect that proposed Sec. 1.892-5(b)(1) will have a
significant economic impact on a substantial number of small entities.
Because there is a possibility, however, of significant economic
impact on a substantial number of small entities as a result of the
rules relating to the treatment of QFPFs and QCEs for purposes of the
DC-QIE exception and the definition of a domestically controlled QIE,
an initial regulatory flexibility analysis for the proposed regulations
is provided below. The Treasury Department and the IRS request comments
from the public on the number of small entities that may be impacted
and whether that impact will be economically significant.
A. Reasons Why Action Is Being Considered
As discussed in part II of the Explanation of Provisions, there may
be some uncertainty as to whether QFPFs and QCEs, which are treated as
not ``nonresident alien individuals or foreign corporations'' for
purposes of section 897, are treated as foreign persons for purposes of
the DC-QIE exception. Treating QFPFs and QCEs as non-foreign investors
for purposes of the DC-QIE exception has the potential to expand the
effect of section 897(l) to foreign investors who are neither QFPFs nor
QCEs (by exempting such investors from tax under section 897(a). These
regulations eliminate any uncertainty that taxpayers may have as to the
proper classification of QFPFs and QCEs for purposes of the DC-QIE
exception by providing that QFPFs and QCEs are treated as foreign
persons for purposes of the DC-QIE exception.
As discussed in part III of the Explanation of Provisions, there is
uncertainty regarding the determination of whether stock of a QIE is
held ``directly or indirectly'' by foreign persons for purposes of the
DC-QIE exception. These regulations provide rules to clarify this
determination.
B. Objectives of and Legal Basis for the Proposed Regulations
These regulations clarify the treatment of QFPFs and QCEs for two
purposes: the first is for purposes of the section 892 exemption from
taxation for foreign governments, and the second is the DC-QIE
exception. The rules are intended to ensure the following: (1) foreign
government-controlled QFPFs (and QCEs) that qualify for the exemption
under section 897(l) (and certain other foreign government entities)
are not treated as controlled commercial entities for section 892
purposes by reason of qualifying as a USRPHC, and (2) the exemption
under section 897(l) does not inappropriately inure to non-QFPFs or
non-QCEs by treating QFPFs and QCEs as domestic investors for purposes
of the DC-QIE exception. These regulations also clarify whether stock
of a QIE is held ``directly or indirectly'' by foreign persons in
determining whether the DC-QIE exception applies. The legal basis for
these regulations is contained in sections 892(c), 897(l) and 7805.
C. Small Entities to Which These Regulations Will Apply
The regulation relating to the treatment of QFPFs and QCEs for
purposes of the DC-QIE exception affects other foreign investors in
QIEs. The regulation defining a domestically controlled QIE also
affects foreign investors in QIEs. Because an estimate of the number of
small businesses affected is not currently feasible, this initial
regulatory flexibility analysis assumes that a substantial number of
small businesses will be affected. The Treasury Department and the IRS
do not expect that these regulations will affect a substantial number
of small nonprofit organizations or small governmental jurisdictions.
[[Page 80104]]
D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
These regulations do not impose additional reporting or
recordkeeping obligations.
E. Duplicate, Overlapping, or Relevant Federal Rules
The Treasury Department and the IRS are not aware of any Federal
rules that duplicate, overlap, or conflict with these regulations.
F. Alternatives Considered
Section 897(a) applies to nonresident alien individuals and foreign
corporations, and neither the statute nor prior regulations establish
different rules for small entities. Moreover, the DC-QIE exception is
measured based on the ownership interests in a QIE, regardless of the
size of the investor. Because the DC-QIE exception takes into account
all investors, regardless of size, the Treasury Department and the IRS
have concluded that the DC-QIE exception should apply uniformly to
large and small business entities. The Treasury Department and the IRS
did not consider any significant alternative to the rule that provides
for the treatment of QFPFs and QCEs under the DC-QIE exception, or for
the rule relating to QFPFs, QCEs, or certain other foreign government
entities under section 892.
The Treasury Department and the IRS did consider alternatives for
the rule that defines a domestically controlled QIE, including one
alternative that generally would treat all domestic C corporations as
non-look through persons (that is, without the special rule for
foreign-owned domestic corporations discussed in part III.C of the
Explanation of Provisions section of this preamble). However, the
Treasury Department and the IRS concluded that the look-through
approach in the proposed rules best serves the purposes of the DC-QIE
exception while also taking into account ``indirect'' ownership of QIE
stock by foreign persons in determining whether a QIE is domestically
controlled under section 897(h)(4)(B). As noted in part III.C of the
Explanation of Provisions section of this preamble, the purpose of the
special rule for foreign-owned domestic corporations is to prevent the
use of intermediary domestic C corporations by foreign investors to
create domestically controlled QIEs that could exempt from the
application of section 897 QIE stock held directly by those or other
foreign investors.
The proposed rules address potential uncertainty under current law
and do not impose an additional economic burden. Consequently, the
rules represent the approach with the least economic impact.
IV. Section 7805(f)
Pursuant to section 7805(f) of the Code, the proposed regulations
have been submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on their impact on small
businesses.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a State,
local, or tribal government in the aggregate, or by the private sector,
of $100 million in 1995 dollars, updated annually for inflation. The
proposed regulations do not include any Federal mandate that may result
in expenditures by State, local, or tribal governments, or by the
private sector in excess of that threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. The proposed regulations do not have
federalism implications, do not impose substantial direct compliance
costs on State and local governments, and do not preempt State law
within the meaning of the Executive order.
Comments and Requests for Public Hearing
Before the proposed amendments are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS as prescribed in this preamble under the ADDRESSES section.
The Treasury Department and the IRS request comments on all aspects of
the proposed regulations, including the definitions of look-through
person and non-look-through person, and whether special treatment for
particular entities, such as cooperatives, may be warranted. Any
electronic and paper comments submitted will be made available at
<a href="http://www.regulations.gov">www.regulations.gov</a> or upon request.
A public hearing will be scheduled if requested in writing by any
person who timely submits electronic or written comments. Requests for
a public hearing are also encouraged to be made electronically. If a
public hearing is scheduled, notice of the date and time for the public
hearing will be published in the Federal Register. Announcement 2020-4,
2020-17 IRB 1, provides that until further notice, public hearings
conducted by the IRS will be held telephonically. Any telephonic
hearing will be made accessible to people with disabilities.
Statement of Availability of IRS Documents
IRS Revenue Procedures, Revenue Rulings, Notices, and other
guidance cited in this document are published in the Internal Revenue
Bulletin or Cumulative Bulletin and are available from the
Superintendent of Documents, U.S. Government Publishing Office,
Washington, DC 20402, or by visiting the IRS website at <a href="http://www.irs.gov">www.irs.gov</a>.
Drafting Information
The principal authors of these regulations are Arielle Borsos and
Joel Deuth of the Office of Associate Chief Counsel (International).
However, other personnel from the Treasury Department and the IRS
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, the Treasury Department and the IRS propose to amend
26 CFR part 1 as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding an
entry in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.897-1 also issued under 26 U.S.C. 897(l)(3).
* * * * *
0
Par. 2. Section 1.892-5, as proposed to be amended in 76 FR 68119
(November 3, 2011), is further amended by revising paragraphs (b)
through (d) to read as follows:
Sec. 1.892-5 Controlled commercial entity.
* * * * *
(b) Entities treated as engaged in commercial activity--(1) United
States real property holding corporations--(i) General rule. Except as
provided in paragraph (b)(1)(ii) of this section, a
[[Page 80105]]
United States real property holding corporation as defined in section
897(c)(2), which may include a foreign corporation, is treated as
engaged in commercial activity and, therefore, is a controlled
commercial entity if the requirements of Sec. 1.892-5T(a)(1) or (2)
are satisfied.
(ii) Exceptions. Paragraph (b)(1)(i) of this section does not apply
to the following--
(A) A foreign corporation that is a qualified holder under Sec.
1.897(l)-1(d); or
(B) A corporation that is a United States real property holding
corporation, as defined in section 897(c)(2), solely by reason of its
direct or indirect ownership interest in one or more other corporations
that are not controlled by the foreign government (as determined under
Sec. 1.892-5T(a)).
(iii) Applicability date. This paragraph (b)(1) applies to taxable
years ending on or after December 28, 2022. For rules that apply to
taxable years ending before December 28, 2022, see Sec. 1.892-
5T(b)(1), as contained in 26 CFR part 1, revised as of April 1, 2022.
(b)(2) through (d)(4). For further guidance, see Sec. 1.892-
5T(b)(2) through (d)(4).
* * * * *
0
Par. 3. Section 1.892-5T is amended by revising paragraph (b)(1) to
read as follows:
Sec. 1.892-5T Controlled commercial entity (temporary regulations).
* * * * *
(b) * * *
(1)(i) For further guidance, see Sec. 1.892-5(b)(1)(i).
(ii) For further guidance, see Sec. 1.892-5(b)(1)(ii).
* * * * *
0
Par 4. Section 1.897-1 is amended by:
0
a. Revising paragraph (a)(2);
0
b. Removing and reserving paragraph (c)(2)(i);
0
c. Adding paragraphs (c)(3) and (4);
0
d. Adding paragraph (k);
0
e. Removing the language ``or section 897(k) and Sec. 1.897-4'' in the
second sentence and adding two sentences to the end of paragraph (l);
and
0
f. Adding paragraph (n).
The revision and additions read as follows:
Sec. 1.897-1 Taxation of foreign investment in United States real
property interests, definition of terms.
(a) * * *
(2) Effective date. Except as otherwise provided in this paragraph
(a)(2), the regulations set forth in Sec. Sec. 1.897-1 through 1.897-4
are effective for transactions occurring after June 18, 1980.
Paragraphs (c)(3) and (4), (k), and (l) of this section apply to
transactions occurring on or after [the date these regulations are
published as final regulations in the Federal Register] and
transactions occurring before [the date these regulations are published
as final regulations in the Federal Register] resulting from an entity
classification election under Sec. 301.7701-3 of this chapter that was
effective on or before [the date these regulations are published as
final regulations in the Federal Register] but was filed on or after
[DATE OF PUBLICATION OF FINAL RULE]. For transactions occurring before
[DATE OF PUBLICATION OF FINAL RULE], see paragraphs (c)(2)(i) and (l)
of this section and Sec. 1.897-9T(c) as in effect and contained in 26
CFR part 1, as revised April 1, 2022.
* * * * *
(c) * * *
(3) Domestically controlled QIE--(i) In general. An interest in a
domestically controlled QIE is not a United States real property
interest. A QIE is domestically controlled if foreign persons hold
directly or indirectly less than 50 percent of the fair market value of
the QIE's outstanding stock at all times during the testing period. For
rules that apply to distributions by a QIE (including a domestically
controlled QIE) attributable to gain from the sale or exchange of a
United States real property interest, see section 897(h)(1).
(ii) Look-through approach for determining QIE stock held directly
or indirectly. The following rules apply for purposes of determining
whether a QIE is domestically controlled:
(A) Non-look-through persons considered holders. Only a non-look-
through person is considered to hold directly or indirectly stock of
the QIE.
(B) Attribution from look-through persons. Stock of a QIE that, but
for the application of paragraph (c)(3)(ii)(A) of this section, would
be considered held by a look-through person, is instead considered held
directly or indirectly by the look-through person's shareholders,
partners, or beneficiaries, as applicable, that are non-look-through
persons based on the non-look-through person's proportionate interest
in the look-through person. To the extent the shareholders, partners,
or beneficiaries, as applicable, of the look-through person are also
look-through persons, this paragraph applies to such shareholders,
partners, or beneficiaries as if they held, but for the application of
paragraph (c)(3)(ii)(A) of this section, their proportionate share of
the stock of the QIE.
(C) No attribution from non-look-through persons. Stock of a QIE
considered held directly or indirectly by a non-look-through person is
not considered held directly or indirectly by any other person.
(iii) Special rules for applying look-through approach--(A) Certain
holders of U.S. publicly traded QIE stock. Notwithstanding any other
provision of paragraph (c)(3) of this section, a person holding less
than five percent of U.S. publicly traded QIE stock at all times during
the testing period, determined without regard to paragraph
(c)(3)(ii)(A) of this section, is treated as a United States person
that is a non-look-through person with respect to that stock, unless
the QIE has actual knowledge that such person is not a United States
person. For an example illustrating the application of this paragraph
(c)(3)(iii)(A), see paragraph (c)(3)(vi)(C) of this section.
(B) Certain foreign-owned domestic C corporations. A non-public
domestic C corporation is treated as a look-through-person if it is a
foreign-owned domestic corporation. For an example illustrating the
application of this paragraph (c)(3)(iii)(B), see paragraph
(c)(3)(vi)(B) of this section.
(C) Public QIEs. A public QIE is treated as a foreign person that
is a non-look-through person. The preceding sentence does not apply,
however, if the public QIE is a domestically controlled QIE as defined
in paragraph (c)(3) of this section, determined after the application
of this paragraph (c)(3)(iii)(C), in which case the public QIE is
treated as a United States person that is a non-look-through person.
For an example illustrating the application of this paragraph
(c)(3)(iii)(C), see paragraph (c)(3)(vi)(C) of this section (Example
3).
(iv) Treatment of certain persons as foreign persons--(A) Qualified
foreign pension fund or qualified controlled entity. For purposes of
paragraph (c)(3) of this section, a qualified foreign pension fund
(including any part of a qualified foreign pension fund) or a qualified
controlled entity is treated as a foreign person, irrespective of
whether the fund or entity qualifies for the exception from section 897
provided in Sec. 1.897(l)- 1(b)(1). For an example illustrating the
application of this paragraph (c)(3)(iv)(A), see paragraph
(c)(3)(vi)(A) of this section (Example 1). See also paragraph (k) of
this section for a definition of foreign person that applies for
purposes of sections 897, 1445, and 6039C.
(B) International organization. For purposes of paragraph (c)(3) of
this section, an international organization (as defined in section
7701(a)(18)) is treated as a foreign person. See Sec. 1.897-
[[Page 80106]]
9T(e) regarding the treatment of international organizations under
sections 897, 1445, and 6039C, which provides that an international
organization is not a foreign person with respect to United States real
property interests, and is not subject to sections 897, 1445, and 6039C
on the disposition of a United States real property interest.
(v) Definitions. The following definitions apply for purposes of
paragraph (c)(3) of this section:
(A) A domestic C corporation is any domestic corporation other than
a regulated investment company (``RIC'') as defined in section 851, a
real estate investment trust (``REIT'') as defined in section 856, or
an S corporation as defined in section 1361.
(B) A foreign-owned domestic corporation is any non-public domestic
C corporation if foreign persons hold directly or indirectly 25 percent
or more of the fair market value of the non-public domestic C
corporation's outstanding stock. For purposes of determining whether a
non-public domestic C corporation is a foreign-owned domestic
corporation, the rules of paragraphs (c)(3)(ii)(A) through (C) and
(c)(3)(iii)(C) of this section apply with the following modifications--
(1) In paragraphs (c)(3)(ii)(A) through (C) of this section,
treating references to ``QIE'' as references to ``non-public domestic C
corporation''; and
(2) A non-public domestic C corporation that is a foreign-owned
domestic corporation under paragraph (c)(3)(v)(B) of this section is
treated as a look-through person for purposes of determining whether
any other non-public domestic C corporation is a foreign-owned domestic
corporation.
(C) A look-through person is any person other than a non-look-
through person. Thus, for example, a look-through person includes a
RIC, a REIT, an S corporation, a non-publicly traded partnership
(domestic or foreign), and a trust (domestic or foreign, whether or not
the trust is described in sections 671 through 679). For a special rule
that treats certain non-public domestic C corporations as look-through
persons, see paragraph (c)(3)(iii)(B) of this section.
(D) A non-look-through person is an individual, a domestic C
corporation (other than a foreign-owned domestic corporation), a
nontaxable holder, a foreign corporation (including a foreign
government pursuant to section 892(a)(3)), a publicly traded
partnership (domestic or foreign), an estate (domestic or foreign), an
international organization (as defined in section 7701(a)(18)), a
qualified foreign pension fund (including any part of a qualified
foreign pension fund), or a qualified controlled entity. For special
rules that treat certain holders of QIE stock as non-look-through
persons, see paragraphs (c)(3)(iii)(A) and (C) of this section.
(E) A non-public domestic C corporation is any domestic C
corporation that is not a public domestic C corporation.
(F) A nontaxable holder is--
(1) Any organization that is exempt from taxation by reason of
section 501(a);
(2) The United States, any State (as defined in section
7701(a)(10)), any territory of the United States, or a political
subdivision of any State or any territory of the United States; or
(3) Any Indian tribal government (as defined in section
7701(a)(40)) or its subdivision (determined in accordance with section
7871(d)).
(G) A public domestic C corporation is a domestic C corporation any
class of stock of which is regularly traded on an established
securities market within the meaning of Sec. Sec. 1.897-1(m) and
1.897-9T(d).
(H) A public QIE is a QIE any class of stock of which is regularly
traded on an established securities market within the meaning of
Sec. Sec. 1.897-1(m) and 1.897-9T(d), or that is a RIC that issues
redeemable securities within the meaning of section 2 of the Investment
Company Act of 1940.
(I) A publicly traded partnership is a partnership any class of
interest of which is regularly traded on an established securities
market within the meaning of Sec. Sec. 1.897-1(m) and 1.897-9T(d).
(J) A qualified controlled entity has the meaning set forth in
Sec. 1.897(l)-1(e)(9).
(K) A qualified foreign pension fund has the meaning set forth in
Sec. 1.897(l)-1(c).
(L) A QIE is a qualified investment entity, as defined in section
897(h)(4)(A).
(M) Testing period has the meaning set forth in section
897(h)(4)(D).
(N) U.S. publicly traded QIE stock is any class of stock of a QIE
that is regularly traded on an established securities market within the
meaning of Sec. Sec. 1.897-1(m) and 1.897-9T(d), but only if the
established securities market is in the United States.
(vi) Examples. The rules of this paragraph (c)(3) are illustrated
by the following examples. It is presumed that each entity has a single
class of stock or other ownership interests, that the ownership
described existed throughout the relevant testing period and that,
unless otherwise stated, a QIE is not a public QIE as defined under
paragraph (c)(3)(v)(H) of this section.
(A) Example 1: QIE stock held by public domestic C corporation--(1)
Facts. USR is a REIT, 51 percent of the stock of which is held by X, a
public domestic C corporation as defined in paragraph (c)(3)(v)(G) of
this section, and 49 percent of the stock of which is held by
nonresident alien individuals, which are foreign persons as defined in
paragraph (k) of this section.
(2) Analysis. Under paragraph (c)(3)(v)(L) of this section, USR is
a QIE. X is a non-look-through person as defined under paragraph
(c)(3)(v)(D) of this section. Thus, under paragraph (c)(3)(ii)(A) of
this section X is considered as holding directly or indirectly stock of
USR for purposes of determining whether USR is a domestically
controlled QIE. Under paragraph (c)(3)(ii)(C) of this section, the USR
stock held directly or indirectly by X is not considered held directly
or indirectly by any other person, including the shareholders of X.
Because X is not a foreign person as defined in paragraph (k) of this
section and holds directly or indirectly 51 percent of the single class
of outstanding stock of USR, foreign persons hold directly or
indirectly less than 50 percent of the fair market value of the stock
of USR, and USR therefore is a domestically controlled QIE under
paragraph (c)(3)(i) of this section.
(3) Alternative facts: QIE stock held by domestic partnership. The
facts are the same as in paragraph (c)(3)(vi)(A)(1) of this section
(Example 1), except that, instead of being a public domestic C
corporation, X is a domestic partnership that is not a publicly traded
partnership as defined in paragraph (c)(3)(v)(I) of this section. In
addition, FC1, a foreign corporation, holds a 50 percent interest in X,
and the remaining interests in X are held by U.S. citizens. X is a
look-through person as defined in paragraph (c)(3)(v)(C) of this
section and, therefore, under paragraph (c)(3)(ii)(A) of this section
is not considered as holding directly or indirectly stock of USR for
purposes of determining whether USR is a domestically controlled QIE.
Under paragraph (c)(3)(ii)(B) of this section, the stock of USR that,
but for paragraph (c)(3)(ii)(A) of this section, is considered held by
X, a look-through person, is instead considered held proportionately by
X's partners that are non-look-through persons. Accordingly, because
FC1 and the U.S. citizen partners in X are non-look-through persons as
defined in paragraph (c)(3)(v)(D) of this section, 25.5 percent of the
stock of USR is considered as held directly or indirectly by FC1 (50% x
51%), a foreign person
[[Page 80107]]
as defined in paragraph (k) of this section, and 25.5 percent (in the
aggregate) of the stock of USR is considered as held directly or
indirectly by the U.S. citizen partners in X (50% x 51%), who are not
foreign persons as defined in paragraph (k) of this section. Foreign
persons therefore hold directly or indirectly 74.5 percent of the stock
of USR (49 percent of the stock of USR held directly or indirectly by
nonresident alien individuals, who are non-look-through persons as
defined in paragraph (c)(3)(v)(D) of this section, plus the 25.5
percent held directly or indirectly by FC1), and USR is not a
domestically controlled QIE under paragraph (c)(3)(i) of this section.
The result described in this paragraph (c)(3)(vi)(A)(3) would be the
same if, instead of being a domestic partnership, X were a foreign
partnership.
(4) Alternative facts: QIE stock held by a qualified foreign
pension fund. The facts are the same as in paragraph (c)(3)(vi)(A)(3)
of this section (Example 1), except that, instead of being a foreign
corporation, FC1 is a qualified foreign pension fund. The analysis is
the same as in paragraph (c)(3)(vi)(A)(3) of this section regarding the
treatment of X as a look-through person as defined in paragraph
(c)(3)(v)(C) of this section. FC1, a foreign person under paragraph
(c)(3)(iv)(A) of this section, is a non-look-through person as defined
in paragraph (c)(3)(v)(D) of this section. Because FC1 and the U.S.
citizen partners in X are non-look-through persons, 25.5 percent of the
stock of USR is considered as held directly or indirectly by FC1 (50% x
51%), and 25.5 percent (in the aggregate) of the stock of USR is
considered as held directly or indirectly by the U.S. citizen partners
in X (50% x 51%). Foreign persons therefore hold directly or indirectly
74.5 percent of the stock of USR (49 percent of the stock of USR held
directly or indirectly by nonresident alien individuals, who are
foreign persons and non-look-through persons as defined in paragraph
(c)(3)(v)(D) of this section, plus the 25.5 percent held directly or
indirectly by FC1), and USR is not a domestically controlled QIE under
paragraph (c)(3)(i) of this section.
(B) Example 2: QIE stock held by non-public domestic C corporation
that is a foreign-owned domestic corporation--(1) Facts. USR is a REIT,
51 percent of the stock of which is held by X, a non-public domestic C
corporation as defined in paragraph (c)(3)(v)(E) of this section, and
49 percent of the stock of which is held by nonresident alien
individuals, which are foreign persons as defined in paragraph (k) of
this section. FC1, a foreign corporation, holds 20 percent of the stock
of X, and Y, a nonresident alien individual, holds 5 percent of the
stock of X. The remaining 75 percent of the stock of X is held by U.S.
citizens.
(2) Analysis. Under paragraph (c)(3)(v)(L) of this section, USR is
a QIE. X is a non-look-through person as defined under paragraph
(c)(3)(v)(D) of this section, unless paragraph (c)(3)(iii)(B) of this
section applies to treat X as a look-through person because X is a
foreign-owned domestic corporation. FC1, Y, and the U.S. citizen
shareholders of X are non-look-through persons as defined under
paragraph (c)(3)(v)(D) of this section. Under paragraph (c)(3)(v)(B)(1)
of this section, FC1, Y, and the U.S. citizen shareholders are all
considered as holding directly or indirectly stock of X for purposes of
determining whether X is a foreign-owned domestic corporation. Under
paragraph (c)(3)(v)(B)(1) of this section, the stock held directly or
indirectly by FC1, Y, and the U.S. citizen shareholders is not
considered held directly or indirectly by any other person. Because FC1
and Y, both foreign persons as defined in paragraph (k) of this
section, hold directly or indirectly 20 percent and 5 percent of the
stock of X, respectively, foreign persons hold directly or indirectly
25 percent of the fair market value of the stock of X, and X is a
foreign-owned domestic corporation under paragraph (c)(3)(v)(B) of this
section. Accordingly, under paragraph (c)(3)(iii)(B) of this section, X
is a look-through person as defined in paragraph (c)(3)(v)(C) of this
section and, therefore, under paragraph (c)(3)(ii)(A) of this section
is not considered as holding directly or indirectly stock of USR for
purposes of determining whether USR is a domestically controlled QIE.
Under paragraph (c)(3)(ii)(B) of this section, the stock of USR that,
but for paragraph (c)(3)(ii)(A) of this section, is considered held by
X, a look-through person, is instead considered held proportionately by
X's shareholders that are non-look-through persons. Accordingly,
because FC1, Y, and the U.S. citizen shareholders of X are non-look-
through persons, 10.2 percent of the stock of USR is considered as held
directly or indirectly by FC1 (20% x 51%), 2.55 percent of the stock of
USR is considered as held directly or indirectly by Y (50% x 51%), and
38.25 percent (in the aggregate) of the stock of USR is considered as
held directly or indirectly by the U.S. citizen shareholders (75% x
51%). Foreign persons therefore hold directly or indirectly 61.75
percent of the stock of USR (49 percent of the stock of USR held
directly by nonresident alien individuals, who are foreign persons and
non-look-through persons as defined in paragraph (c)(3)(v)(D) of this
section, plus the 10.2 percent and 2.55 percent held indirectly by FC1
and Y, respectively), and USR is not a domestically controlled QIE
under paragraph (c)(3)(i) of this section. The result described in this
paragraph (c)(3)(vi)(B)(2) would be different if Y were a U.S. citizen
instead of a nonresident alien individual, in which case X would be a
non-look-through person because it is not a foreign-owned domestic
corporation under paragraph (c)(3)(v)(B) of this section and,
consequently, USR would be a domestically controlled QIE under
paragraph (c)(3)(i) of this section.
(C) Example 3: QIE stock held by public QIE that is a domestically
controlled QIE--(1) Facts. USR2 is a REIT, 51 percent of the stock of
which is held by USR1, a REIT that is a public QIE as defined in
paragraph (c)(3)(v)(H) of this section, and 49 percent of the stock of
which is held by nonresident alien individuals, which are foreign
persons as defined in paragraph (k) of this section. The stock of USR1
is U.S. publicly traded QIE stock as defined in paragraph (c)(3)(v)(N)
of this section. FC1 and FC2, both foreign corporations, each hold 20
percent of the stock of USR1. The remaining 60 percent of the stock of
USR1 is held by persons that each hold less than 5 percent of the stock
of USR1 and with respect to which USR1 has no actual knowledge that
such person is not a United States person (``USR1 small public
shareholders'').
(2) Analysis. Under paragraph (c)(3)(v)(L) of this section, USR2
and USR1 are QIEs. Under paragraph (c)(3)(iii)(A) of this section, each
of the USR1 small public shareholders is treated as a United States
person that is a non-look-through person. Consequently, under paragraph
(c)(3)(i) of this section USR1 is a domestically controlled QIE because
FC1 and FC2, each a foreign person as defined in paragraph (k) of this
section, together hold directly or indirectly only 40 percent of the
stock of USR1 and, thus, foreign persons hold directly or indirectly
less than 50 percent of the fair market value of the stock of USR1. In
addition, the USR2 stock held by USR1 is treated as held directly or
indirectly by a United States person that is a non-look-through person
under paragraph (c)(3)(iii)(C) of this section. Because USR1 holds
directly or indirectly 51 percent of the stock of USR2, foreign persons
hold directly or indirectly less
[[Page 80108]]
than 50 percent of the fair market value of the stock of USR2, and USR2
is a domestically controlled QIE under paragraph (c)(3)(i) of this
section.
(3) Alternative facts: QIE stock held by public QIE that is not a
domestically controlled QIE. The facts are the same as in paragraph
(c)(3)(vi)(C)(1) of this section (Example 3), except that 25 percent of
the stock of USR1 is held by each of FC1 and FC2, with the remaining 50
percent of the stock of USR1 held by the USR1 small public
shareholders. Regardless of the treatment of the USR1 small public
shareholders, USR1 is not a domestically controlled QIE under paragraph
(c)(3)(i) of this section because FC1 and FC2, each a foreign person as
defined in paragraph (k) of this section, together hold directly or
indirectly 50 percent of the stock of USR1 and, thus, foreign persons
do not hold directly or indirectly less than 50 percent of the fair
market value of the stock of USR1. In addition, the USR2 stock held by
USR1 is treated as held by a foreign person that is a non-look-through
person under paragraph (c)(3)(iii)(C) of this section. Because USR1
holds directly or indirectly 51 percent of the stock of USR2, foreign
persons do not hold directly or indirectly less than 50 percent of the
fair market value of the stock of USR2, and USR2 is not a domestically
controlled QIE under paragraph (c)(3)(i) of this section.
(D) Example 4: QIE stock held by non-public QIE--(1) Facts. USR2 is
a REIT, 49 percent of the stock of which is held by nonresident alien
individuals, and 51 percent of the stock of which is held by USR1, a
REIT. U.S. citizens hold 50 percent of the stock of USR1. The remaining
50 percent of the stock of USR1 is held by PRS, a domestic partnership,
50 percent of the interests in which are held by DC, a public domestic
C corporation as defined in paragraph (c)(3)(v)(G) of this section, and
50 percent of the interests in which are held by nonresident alien
individuals.
(2) Analysis. Under paragraph (c)(3)(v)(L) of this section, USR2
and USR1 are QIEs. USR1 is not treated as a non-look-through person
under paragraph (c)(3)(iii)(C) of this section because USR1 is not a
public QIE as defined in paragraph (c)(3)(v)(H) of this section. Each
of USR1 and PRS is a look-through person as defined in paragraph
(c)(3)(v)(C) of this section that is not treated as holding directly or
indirectly stock in USR2 for purposes of determining whether USR2 is a
domestically controlled QIE under paragraph (c)(3)(ii)(A) of this
section. Under paragraph (c)(3)(ii)(B) of this section, stock of a QIE
that would be considered held by a look-through person but for the
application of paragraph (c)(3)(ii)(A) of this section is considered
held directly or indirectly proportionately by the look-through
person's direct or indirect owners that are non-look-through persons.
Because the U.S. citizens who hold USR1 stock are non-look-through
persons as defined in paragraph (c)(3)(v)(D) of this section, those
U.S. citizens are treated as holding directly or indirectly 25.5
percent of the stock of USR2 through their USR1 stock interest (50% x
51%) in accordance with paragraph (c)(3)(ii)(A) of this section.
Similarly, because DC and the nonresident alien partners in PRS are
non-look-through persons, each is treated as holding directly or
indirectly the stock of USR2 through its interest in PRS and PRS's
interest in USR1. Thus, DC is treated as holding directly or indirectly
12.75 percent of the stock of USR2 (50% x 50% x 51%) and the
nonresident alien individual partners, which are foreign persons as
defined in paragraph (k) of this section, are treated as directly or
indirectly holding a 12.75 percent aggregate interest in the stock of
USR2 (50% x 50% x 51%). Foreign persons therefore hold directly or
indirectly 63.25 percent of the stock of USR2 (the 49 percent stock in
USR2 directly held by nonresident alien individuals, who are foreign
persons and non-look-through persons as defined in paragraph
(c)(3)(v)(D) of this section, plus the 12.75 percent in stock
indirectly held by the nonresident alien individual partners in PRS),
and USR2 is not a domestically controlled QIE under paragraph (c)(3)(i)
of this section.
(4) Foreign ownership percentage. For purposes of calculating the
foreign ownership percentage under section 897(h)(4)(C), the
determination of the QIE stock that was held directly or indirectly by
foreign persons is made under the rules of paragraphs (c)(3)(ii)
through (vi) of this section.
* * * * *
(k) Foreign person. The term foreign person means a nonresident
alien individual (including an individual subject to the provisions of
section 877), a foreign corporation as defined in paragraph (l) of this
section, a foreign partnership, a foreign trust or a foreign estate, as
such persons are defined by section 7701 and the regulations in this
chapter under section 7701. A resident alien individual, including a
nonresident alien individual with respect to whom there is in effect an
election under section 6013(g) or 6013(h) to be treated as United
States resident, is not a foreign person. With respect to the status of
foreign governments and international organizations, see Sec. 1.897-
9T(e). See paragraph (c)(3)(iv)(A) of this section regarding the
treatment of qualified foreign pension funds and qualified controlled
entities as foreign persons for purposes of section 897(h)(4)(B).
(l) * * * For purposes of sections 897 and 6039C, however, the term
does not include a foreign corporation with respect to which there is
in effect an election under section 897(i) and Sec. 1.897-3 to be
treated as a domestic corporation. For purposes of section 897, the
term does not include a qualified holder described in Sec. 1.897(l)-
1(d); see paragraph (c)(3)(iv)(A) of this section regarding the
treatment of qualified foreign pension funds and qualified controlled
entities as foreign persons for purposes of section 897(h)(4)(B).
* * * * *
(n) See Sec. 1.897-9T(d) for a definition of regularly traded for
purposes of sections 897, 1445, and 6039C.
* * * * *
0
Par. 5. Section 1.897-9T is amended by removing and reserving paragraph
(c) and adding a sentence after the second sentence of paragraph (e).
The addition reads as follows:
Sec. 1.897-9T Treatment of certain interest in publicly traded
corporations, definition of foreign person, and foreign governments and
international organizations (temporary).
* * * * *
(e) * * * See Sec. 1.897-1(c)(3)(iv)(B) regarding the treatment of
international organizations as foreign persons for purposes of section
897(h)(4)(B). * * *
* * * * *
Melanie R. Krause,
Acting Deputy Commissioner for Services and Enforcement.
[FR Doc. 2022-27971 Filed 12-28-22; 8:45 am]
BILLING CODE 4830-01-P
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