Rule2024-08267
Guidance on the Definition of Domestically Controlled Qualified Investment Entities
Primary source
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
April 25, 2024
Effective
April 25, 2024
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains final regulations that address the determination of whether a qualified investment entity is domestically controlled, including the treatment of qualified foreign pension funds for this purpose. In particular, these final regulations provide guidance as to when foreign persons are considered to hold directly or indirectly stock in a qualified investment entity. The final regulations primarily affect foreign persons that own stock in a qualified investment entity that would be a United States real property interest if the qualified investment entity were not domestically controlled.
Full Text
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<title>Federal Register, Volume 89 Issue 81 (Thursday, April 25, 2024)</title>
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[Federal Register Volume 89, Number 81 (Thursday, April 25, 2024)]
[Rules and Regulations]
[Pages 31618-31632]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-08267]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9992]
RIN 1545-BQ36
Guidance on the Definition of Domestically Controlled Qualified
Investment Entities
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations that address the
determination of whether a qualified investment entity is domestically
controlled, including the treatment of qualified foreign pension funds
for this purpose. In particular, these final regulations provide
guidance as to when foreign persons are considered to hold directly or
indirectly stock in a qualified investment entity. The final
regulations primarily affect foreign persons that own stock in a
qualified investment entity that would be a United States real property
interest if the qualified investment entity were not domestically
controlled.
DATES:
Effective date: These regulations are effective on April 25, 2024.
Applicability date: For the date of applicability, see Sec. Sec.
1.897-1(a)(2) and 1.1445-2(e).
FOR FURTHER INFORMATION CONTACT: Milton Cahn at (202) 317-4934 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On December 29, 2022, the Treasury Department and the IRS published
proposed regulations (REG-100442-22), relating to the treatment of
certain entities, including qualified foreign pension funds
(``QFPFs''), for purposes of the exemption from taxation afforded to
foreign governments under section
[[Page 31619]]
892 of the Internal Revenue Code (the ``Code''), and the determination
of whether a qualified investment entity (``QIE'') is domestically
controlled under section 897(h)(4)(B) of the Code, in the Federal
Register (87 FR 80097) (the ``proposed regulations''). This Treasury
decision finalizes the proposed regulations, other than those portions
addressing the section 892 exemption (which will be addressed in a
separate rulemaking), after taking into account and addressing comments
with respect to the proposed regulations. Terms used but not defined in
this preamble have the meaning provided in the final regulations.
Comments outside the scope of this rulemaking are generally not
addressed but may be considered in connection with future regulations.
All written comments received in response to the proposed regulations
are available at <a href="http://www.regulations.gov">www.regulations.gov</a> or upon request. A public hearing
on the proposed regulations was not held because there were no requests
to speak.
Summary of Comments and Explanation of Revisions
The final regulations retain the general approach and structure of
the proposed regulations, with certain revisions. This section of the
preamble discusses the comments received in response to the proposed
regulations and explains the revisions reflected in the final
regulations.
I. Domestic Corporation Look-Through Rule
A. Background
The proposed regulations set forth proposed rules for determining
whether stock of a QIE is considered ``held directly or indirectly'' by
foreign persons for purposes of defining a domestically controlled QIE
under section 897(h)(4)(B). The proposed regulations defined stock in a
QIE that is held ``indirectly'' by taking into account stock of the QIE
held through certain entities under a limited ``look-through''
approach. As described in the preamble to the proposed regulations,
this approach gives effect to both the policy of the exception for
domestically controlled QIEs in section 897(h)(2) (``DC-QIE
exception''), which is limited to QIEs controlled by United States
persons, and 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. 87 FR 80100. The
preamble to the proposed regulations also explained that this approach
prevents the use of intermediary entities to achieve results contrary
to the purposes of the DC-QIE exception. Id. at 80100-01.
The proposed regulations addressed the meaning of direct or
indirect ownership by setting forth two categories of potential QIE
owners, ``look-through persons'' and ``non-look-through persons.''
Proposed Sec. 1.897-1(c)(3)(ii). The proposed regulations generally
treated a ``domestic C corporation,'' defined as any domestic
corporation other than a regulated investment company (``RIC'') under
section 851, a real estate investment trust (``REIT'') under section
856, or an S corporation under section 1361, as a non-look-through
person. Proposed Sec. 1.897-1(c)(3)(v)(A) and (D). However, the
proposed regulations treated non-publicly traded domestic C
corporations as look-through persons if foreign persons hold a 25
percent or greater interest (by value) in the stock of the corporation
(the ``domestic corporation look-through rule''). Proposed Sec. 1.897-
1(c)(3)(iii)(B) and (c)(3)(v)(B).
Comments generally did not raise concerns with the general look-
through approach for determining domestic control of a QIE as it
applied to most entities (for example, the treatment of partnerships)
but asserted that the domestic corporation look-through rule raises
significant issues and should be withdrawn or, if retained, modified to
reduce its scope. These comments are addressed in turn in parts I.B.
and I.C. of this Summary of Comments and Explanation of Revisions.
B. Comments Recommending Withdrawal of the Domestic Corporation Look-
Through Rule
Comments generally recommended that the domestic corporation look-
through rule be withdrawn on three related grounds: first, that the
rule is based on an incorrect reading of the Code, which for this
purpose does not permit look-through treatment for domestic C
corporations, including because there are no explicit rules providing
for constructive ownership (such as those in section 318) under section
897(h)(4)(B); second, that the enactment of other related legislation
(or consideration of legislation) demonstrates the rule is inconsistent
with congressional intent; and third, that the rule is not necessary
because domestic C corporations are subject to U.S. tax. Certain
comments also based their recommendation to withdraw the domestic
corporation look-through rule on the contention that the rule would
negatively impact the U.S. real estate market or otherwise harm the
broader U.S. economy.
The Treasury Department and the IRS have determined that it is
necessary and appropriate to provide guidance regarding the meaning of
``indirect'' for determining whether foreign persons are considered to
hold less than 50 percent of the value of the stock of a QIE. Every
word in a statute must be given effect, and both the proposed and final
regulations give effect to the term ``indirectly'' as used in section
897(h)(4)(B) by adopting a limited look-through approach that includes
the domestic corporation look-through rule (as modified in the final
regulations). The domestic corporation look-through rule does not apply
specific constructive ownership rules like those in section 318.
Rather, the guidance gives meaning to indirect ownership under section
897(h)(4)(B) in light of the purpose of the DC-QIE exception. Because
the final regulations carry out the statute's mandate to determine
indirect ownership rather than constructive ownership, the fact that
other parts of section 897 refer to section 318 is irrelevant to the
determination of whether a QIE is domestically controlled.
The Treasury Department and the IRS do not agree that the enactment
of section 897(h)(4)(E) 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''), informs whether the domestic corporation look-through
rule should be applied under section 897(h)(4)(B). The rules added in
section 897(h)(4)(E) do not prescribe how to interpret the meaning of
``indirectly'' in section 897(h)(4)(B), nor do they suggest that
Congress intended for that provision to set out the only rules for QIE
stock held by domestic corporations. Although section 897(h)(4)(E)
provides certain rules for looking through QIE stock held by another
QIE for purposes of the DC-QIE exception, the absence of other specific
rules in the statute on whether domestic C corporations (or any other
type of entity) should be looked through does not mean that all other
entities should be non-look-through persons.
The Treasury Department and the IRS also disagree with the
observation in comments that Congress sanctioned the approach taken by
a 2009 private letter ruling (the ``2009 PLR'') that treated QIE stock
held by a domestic C corporation as owned by a domestic person.\1\ The
brief citation to that ruling in a report by the Joint Committee on
Taxation is neutral and merely restates the holding in the ruling in
its description of the then current law. See STAFF OF THE
[[Page 31620]]
JOINT COMM. ON TAX'N, General Explanation of Tax Legislation Enacted in
2015 (JCS-1-16) 279 (2016) (the ``JCT Report'').\2\ The JCT Report did
not express any view regarding the effect of the 2009 PLR or indicate
that Congress endorsed a rule that precludes looking through domestic C
corporations in all cases, and it caveated that a private letter ruling
may only be relied on by the specific taxpayer to which it was issued
and only provided ``some indication of administrative practice.'' See
section 6110(k)(3). This is in contrast to other instances where
Congress has explicitly endorsed an approach taken by the IRS. See, for
example, H.R. Rep. No. 103-111, at 727-29 (1993) (in enacting section
7701(l), citing Rev. Rul. 84-152, 1984-2 C.B. 381, Rev. Rul. 84-153
1984-2 C.B. 1, and Rev. Rul. 87-89, 1987-2 C.B. 195, in stating the
``committee believes that the above-cited IRS rulings appropriately
ignore conduit entities and properly recharacterize the transactions
described therein.''); S. Rep. No. 95-762, at 8 (1978) (stating that
the IRS's ``ruling position is correct'' in enacting rules consistent
with private letter rulings indicating that certain income earned by
exempt organizations was not taxable as debt-financed income).
Accordingly, the Treasury Department and the IRS have concluded that
the JCT Report's reference to the 2009 PLR does not affect the
application of the domestic corporation look-through rule.
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\1\ PLR 200923001 (February 26, 2009).
\2\ See also STAFF OF THE JOINT COMM. ON TAX'N, Technical
Explanation of the Revenue Provisions of the Protecting Americans
from Tax Hikes Act of 2015, House Amendment #2 to the Senate
Amendment to H.R. 2029 (JCX-144-15) 186-87 (2015). As noted in the
JCT Report, a Senate Committee on Finance report on an earlier,
separate bill referenced the 2009 PLR in the same manner in
describing provisions similar to those in section 322 of the PATH
Act. See JCT Report at 277, note 943; S. Rep. No. 114-25, 6 (2015).
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Likewise, the Treasury Department and the IRS disagree with
comments that emphasized the discussion draft released by the Senate
Committee on Finance in 2013 (the ``2013 Discussion Draft'') and the
absence of any related changes to section 897 in the PATH Act. The
relevant provision in the 2013 Discussion Draft would have replaced the
``held directly or indirectly'' language in section 897(h)(4)(B) with
specific constructive ownership rules in section 318 (not just those
applicable to corporations) to address uncertainty in the determination
of indirect ownership. See STAFF OF THE JOINT COMM. ON TAX'N, Technical
Explanation of the Senate Committee on Finance Chairman's Staff
Discussion Draft of Provisions to Reform International Business
Taxation (JCX-15-13) 84 (2013). The 2013 Discussion Draft, however, is
not authoritative and has no relevance because it was neither
introduced as a bill nor enacted into law. Moreover, Congress did not
provide any explanation as to why constructive ownership rules under
section 318, as proposed in the 2013 Discussion Draft, were not adopted
in the PATH Act nor did it provide any indication as to its
interpretation of ``indirectly'' under the statute, and nothing in the
legislative history of the PATH Act or otherwise suggests draft
legislation from more than two years earlier during a different
Congress informed what was ultimately enacted in the PATH Act. See
United States v. Wise, 370 U.S. 405, 411 (1962) (``[S]tatutes are
construed by the courts with reference to the circumstances existing at
the time of the passage. The interpretation placed upon an existing
statute by a subsequent group of Congressmen who are promoting
legislation and who are unsuccessful has no persuasive significance
here.'').
The Treasury Department and the IRS also disagree with one
comment's assertion that the legislative re-enactment doctrine bears on
whether to issue the domestic corporation look-through rule. See
Helvering v. Reynolds, 313 U.S. 428, 432 (1941) (``[The doctrine of
legislative reenactment] does not mean that the prior construction has
become so imbedded in the law that only Congress can effect a
change.'').\3\ Accordingly, the Treasury Department and the IRS have
determined that no changes to section 897 made in, or contemplated in
connection with, the PATH Act, or any explanation of those changes,
preclude, or otherwise affect, adoption of the domestic corporation
look-through rule.
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\3\ See also Helvering v. Wilshire Oil Co., 308 U.S. 90, 100
(1939) (holding that the legislative reenactment doctrine applies
where ``it does not appear that the rule or practice has been
changed by the administrative agency through exercise of its
continuing rule-making power''); McCoy v. United States, 802 F.2d
762 (4th Cir. 1986); Interstate Drop Forge Co. v. Comm'r, 326 F2d
743 (7th Cir. 1964).
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Finally, the Treasury Department and the IRS have determined that
the domestic corporation look-through rule is the appropriate
interpretation of the term ``indirectly'' in section 897(h)(4)(B)
irrespective of whether the domestic C corporation is subject to U.S.
tax on income derived from its QIE stock. As expressed through the
statutory text, the policy underlying the DC-QIE exception looks to
whether control of the QIE is held directly or indirectly by United
States or foreign persons, which does not depend on whether United
States persons are subject to U.S. tax with respect to income derived
from their QIE stock. The determination of domestic control is likewise
not affected by whether a foreign shareholder of the domestic C
corporation is subject to tax on a disposition of its stock in the
corporation under section 897. The purpose of the inquiry is to
determine control, and the status of an entity as taxable is not
determinative for this purpose.
Accordingly, the Treasury Department and the IRS do not adopt the
recommendation to withdraw the domestic corporation look-through rule.
However, the final regulations modify the domestic corporation look-
through rule as discussed in part I.C of this Summary of Comments and
Explanation of Revisions.
C. Comments Recommending Modifications to the Domestic Corporation
Look-Through Rule; Explanation of Revision
Comments recommended that, if the final regulations retain a rule
similar to the domestic corporation look-through rule, then the
approach should be narrowed from what was proposed so that the final
rule more directly addresses potentially inappropriate planning and is
easier to comply with and administer.
One comment suggested a variety of potential approaches to narrow
the domestic corporation look-through rule. Under one such approach, a
non-public domestic C corporation that owns 10 percent or less of a QIE
(determined after applying constructive ownership rules under section
318, so as to prevent circumvention of the threshold) would be treated
as a non-look-through person. The comment asserted that this approach
would be less burdensome on taxpayers and the IRS than the proposed
regulations and is premised on the view that a foreign person would not
structure an investment through a taxable domestic C corporation so
that an unrelated foreign person may apply the DC-QIE exception. The
comment described an alternative approach, also intended to reduce
compliance and administrative burdens, that would treat a non-public
domestic C corporation as a look-through person only if there is at
least one foreign person that is a non-look-through person that holds,
directly or indirectly (using constructive ownership rules under
section 318), 25 percent or more of the value of the corporation's
stock. Under this alternative, look-through treatment would also apply
only as to those foreign non-look-through persons. As another
alternative, the comment
[[Page 31621]]
suggested a look-through rule that would apply only if a foreign person
or a foreign related party holds both a direct interest in the QIE and
a substantial indirect interest in the QIE through a non-public
domestic C corporation.
A different comment also recommended an approach that focused on
commonality of substantial ownership by a foreign person of the QIE and
the domestic C corporation. Specifically, a domestic C corporation
would be treated as a foreign person for purposes of section
897(h)(4)(B) (but not for section 897(h)(4)(C)), if more than 50
percent of its stock is owned, by voting power or value, by foreign
persons that also hold stock of the QIE directly, or indirectly through
one or more partnerships, grantor trusts, or QIEs. Under this comment's
recommended approach, a foreign person would be included in the more
than 50 percent control test if the domestic C corporation had actual
knowledge that the foreign person has cross-ownership of the QIE after
inquiry with any person that is at least a 5-percent shareholder of the
domestic C corporation (after applying the rules of section 318(a)).
The comment reasoned that foreign investors should be considered
incidental and thus should not be counted when measuring direct or
indirect foreign control of the QIE when they invest through a domestic
C corporation and do not have cross-ownership of the QIE directly or
through related parties, or do hold interests in both entities but do
not individually or collectively control the domestic C corporation.
Finally, one comment advocated that a look-through approach to a
domestic C corporation should not apply when that corporation has
material business activities unrelated to its investment in a QIE's
stock with potential safe harbors such as where the corporation is
registered as an investment adviser under the Investment Company Act of
1940 or the foreign owner of the domestic C corporation is actively
traded on an established securities market outside of the United
States. The comment reasoned that such cases are unlikely to be
structured transactions of the type identified by the proposed
regulations. Similarly, another comment also proposed that the look-
through approach should not apply if a domestic C corporation would be
treated as engaged in a U.S. trade or business if it had been a foreign
corporation (such that the corporation is not a mere shell), and this
exception could be further limited by ensuring that the value of the
QIE stock held by the domestic C corporation is less than a certain
threshold of the affiliated group's total assets.
The final regulations do not adopt any of the recommended
modifications to the domestic corporation look-through rule. Several
suggested modifications would limit the application of the rule to
situations that indicate that foreign persons are using a domestic C
corporation to establish domestic control of a QIE so that their direct
investments in the QIE benefit from the DC-QIE exception. However, as
discussed in part I.A of this Summary of Comments and Explanation of
Revisions, the proposed and final regulations serve a broader purpose
by interpreting the meaning of ``indirect'' ownership under section
897(h)(4)(B) to effectuate the policy of the DC-QIE exception by
ensuring that the exception is available only when a QIE is controlled
by United States persons. The comments also proposed various
modifications intended to limit or alter the application of the rule;
the Treasury Department and the IRS are of the view that these would
introduce additional complexity, such as requiring an examination of
the business activities of a domestic C corporation. Furthermore, a
modification that would treat domestic C corporations that own less
than 10 percent of a QIE as a non-look-through person would not
alleviate concerns regarding the ability to identify shareholders
through multiple tiers of ownership, and could result in disparate and
inconsistent results as to which foreign owners are taken into account
in measuring domestic control of a QIE (for example, a foreign non-
look-through person that wholly owns a domestic C corporation that owns
9 percent of a QIE would not be taken into account, while a foreign
non-look-through person that owns 50 percent of a domestic C
corporation that owns 10 percent of the QIE would be taken into
account). The Treasury Department and the IRS also do not agree that
the domestic corporation look-through rule should only apply if 25
percent or more of the corporation's stock is owned by a single foreign
non-look-through person (taking into account section 318 constructive
ownership rules), as the DC-QIE exception looks to any measure of
foreign ownership of a QIE and such a high threshold would
inappropriately exempt foreign persons owning significant indirect
interests in QIEs from look-through treatment.
Although the final regulations do not adopt any of the specific
recommendations to the domestic corporation look-through rule, the
Treasury Department and the IRS agree that the scope of the rule should
be narrowed to address compliance concerns and to ensure the rule is
more appropriately limited to situations where significant indirect
ownership by foreign persons indicative of foreign control is present.
After considering the various suggestions raised in comments, the
Treasury Department and the IRS have determined that this is best
achieved by increasing the amount of foreign ownership required to look
through a non-public domestic C corporation from 25 percent or more to
more than 50 percent. Increasing the threshold to more than 50 percent
significantly narrows the scope of look-through treatment to non-public
domestic C corporations that are controlled by foreign persons, and is
consistent with the measurement of control for purposes of the
domestically controlled QIE test. This change is also consistent with
the policy of the DC-QIE exception and other provisions in section 897
that are based on a 50-percent threshold. See, for example, section
897(c)(2) (providing that a corporation is a United States real
property holding corporation if the fair market value of its United
States real property interests (``USRPIs'') meets a 50 percent or
greater threshold). Thus, rather than a ``foreign-owned domestic
corporation,'' the final regulations apply look-through treatment with
respect to a ``foreign-controlled domestic corporation,'' which is
defined as any non-public domestic C corporation if foreign persons
hold directly or indirectly more than 50 percent of the fair market
value of that corporation's outstanding stock (the ``final domestic
corporation look-through rule''). Sec. 1.897-1(c)(3)(v)(B). In
addition, the final regulations adopt a transition rule for existing
QIE structures, as discussed in part IV of this Summary of Comments and
Explanation of Revisions.
II. Effect of Section 897(l) on the DC-QIE Exception
A. Background on Section 897(l) and Interaction With the DC-QIE
Exception
Section 897(l) provides an exception to the application of section
897(a) for certain foreign pension funds and their wholly owned
subsidiaries. As originally enacted in the PATH Act, 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 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
[[Page 31622]]
101(q) of the Tax Technical Corrections Act of 2018, Public Law 115-
141, div. U (the ``2018 technical correction''). As amended by the 2018
technical correction, 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.
The proposed regulations addressed uncertainty as to whether QFPFs
and entities wholly owned by one or more QFPFs (``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. Specifically, proposed
Sec. 1.897-1(c)(3)(iv)(A) provided that a QFPF, including any part of
a QFPF, or a QCE is a foreign person for purposes of the DC-QIE
exception (the ``QFPF DC-QIE rule'').
B. Comments Regarding Authority To Issue the QFPF DC-QIE Rule
Although one comment stated that it was generally in agreement with
the QFPF DC-QIE rule, other comments recommended that the rule be
withdrawn because it is an incorrect reading of the statute and
contrary to congressional intent. One comment contended that the
preamble to the proposed regulations failed to consider the existing
definition of ``foreign person'' in Sec. 1.897-9T(c) (which includes a
foreign corporation, a foreign partnership, a foreign trust, or a
nonresident alien individual) and noted that Congress is presumed to
have knowledge of that regulatory definition. The comment also
contended that the text of section 897(l) is clear and that, without
any textual ambiguity, the Treasury Department and the IRS lack the
authority to issue the QPFF DC-QIE rule.
Another comment submitted that the legislative history and policy
of section 897, including the DC-QIE exception and the section 897(l)
exception for QFPFs, indicate that 50 percent or more ownership of a
QIE by a QFPF results in the DC-QIE exception being available to other
foreign investors. The comment's overall recommendation was to clarify
the definition of foreign person in section 897(h)(4)(B) and (C) to
have the same meaning as ``a nonresident alien individual or a foreign
corporation'' in section 897(a). The comment included several reasons
for its recommendation. First, section 897(l) refers generally to
section 897, rather than solely to section 897(a), which the comment
argued indicates that section 897(l) is intended to be given effect for
all purposes under section 897. According to the comment, the effect of
section 897(l) on the DC-QIE exception can be analogized to a special
election in section 897(i) for a foreign corporation to be treated as a
domestic corporation for purposes of section 897 because, when that
election applies, it has effect for all of section 897 and can benefit
other investors in QIEs even though they are not party to the election.
The comment also noted that the 2018 technical correction should be
presumed to be a more accurate reflection of the original intent of
Congress, which was to align QFPFs with exempt U.S. pension funds.
Finally, the comment noted that because a QFPF is not taxed under
section 897(h)(1), there is no policy reason to treat it as a foreign
person for other rules such as the DC-QIE exception, the foreign
ownership percentage rule in section 897(h)(3) or the wash sale rule in
section 897(h)(5).
The Treasury Department and the IRS have determined that the QFPF
DC-QIE rule reflects the proper interpretation of the statute and
congressional intent. The term ``nonresident alien individuals or
foreign corporations'' in section 897(l) (introduced only in the 2018
technical correction) differs from ``foreign persons'' in section
897(h)(4)(B), and the purposes of the two provisions also differ.
Congress provided no indication that it intended for the definition of
foreign person in Sec. 1.897-9T(c) to apply to confer non-foreign
person status on QFPFs for purposes of the DC-QIE exception. Instead,
the term ``nonresident alien individuals or foreign corporations''
appears in section 897(a) and similar provisions to refer to the
persons that are directly subject to tax under FIRPTA. The Treasury
Department and the IRS also do not agree that a QFPF is analogous to a
foreign corporation that has elected to be treated as a domestic
corporation under section 897(i) because that election explicitly
treats a foreign corporation as a domestic corporation and therefore
not a foreign person. In contrast, section 897(l) treats a QFPF as not
a nonresident alien individual or a foreign corporation but does not
address whether a QFPF is also not a foreign person.
The Treasury Department and the IRS agree that it is reasonable to
presume that the changes made in the 2018 technical correction are a
more accurate reflection of original congressional intent, which the
preamble to the proposed regulations described (allowing a QFPF and QCE
to jointly own a USRPI and qualify for section 897(l) with respect to
their partial USRPI interests, as well as clarifying that the section
897(l) exception applies to distributions from all QIEs and not just
REITs). 87 FR 80100. However, the Treasury Department and the IRS
disagree with the assertion that the 2018 technical correction should
be interpreted to bestow the benefit of the DC-QIE exception on foreign
investors that cannot claim the section 897(l) exception. Such an
interpretation would be inconsistent with the intent of section 897(l)
as originally enacted in the PATH Act, which was to provide an
exception from section 897 to QFPFs (and QCEs). Where possible, as in
this case, the technical correction should be viewed in a manner
consistent with a core principle of the original legislation. 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).
The comment discussed above asserts that there is no policy reason
to treat a QFPF as a foreign person for other provisions in section
897(h) such as the DC-QIE exception, given that the QFPF is not taxed
under section 897(h)(1). The Treasury Department and the IRS disagree
based on the statute and its policy. As described earlier in this
preamble, the policy of the DC-QIE exception looks to foreign control,
not control by taxable persons. The presence or absence of taxation of
the controlling persons is not determinative. Additionally, Congress
expressed in section 897(l) an intent to provide a tax benefit
specifically for QFPFs, and not for other owners of a DC-QIE that would
benefit from the QFPF's treatment. Therefore, the Treasury Department
and the IRS have determined that the appropriate interpretation of the
statute is one that
[[Page 31623]]
only gives effect to the purpose of section 897(l) to provide an
exception from section 897 for QFPFs, rather than a construction that
would give non-QFPF investors the ability to rely on section 897(l) to
benefit under the DC-QIE exception. The DC-QIE exception is a separate
provision with underlying policies that focus on foreign control rather
than taxability of controlling persons, and these policies are
inconsistent with treating a QFPF as a United States person for
purposes of the DC-QIE exception. Accordingly, the final regulations do
not adopt the comments' recommendations.
III. Other Comments and Revisions
A. Certain Registered Investment Vehicles
One comment noted that there are a large number of investment
vehicles that are publicly registered with the Securities and Exchange
Commission (``SEC'') that own QIEs but are not regularly traded and
asserted that the final regulations should treat these investment
vehicles offered to retail investors (for example, non-traded publicly
registered REITs, non-traded publicly registered RICs, or publicly
registered open-ended funds) as non-look-through persons. The comment
noted that the same reasoning for applying non-look-through treatment
to public domestic C corporations and publicly traded partnerships--
that is, difficulty in looking through to the entity's owners and the
unlikelihood for use as an intermediary entity to establish domestic
control--applied equally to those investment vehicles.
The final regulations do not adopt this comment with respect to
registered investment vehicles that are QIEs because section
897(h)(4)(E) already provides specific rules with respect to QIE
ownership by other QIEs that are incorporated in the final regulations.
In particular, under section 897(h)(4)(E)(ii), stock in a QIE held by
certain public QIEs is treated as held by a foreign or United States
person based on whether the public QIE is itself domestically
controlled. Sec. 1.897-1(c)(3)(iii)(C). Section 897(h)(4)(E)(iii)
provides that stock of a QIE held by a QIE that is not a public QIE is
only treated as held by a United States person in proportion to the
stock of the non-public QIE that is held by a United States person.
Section 897(h)(4)(E)(iii) thus contemplates look-through treatment for
non-public QIEs, even if such QIEs are publicly registered with the
SEC, and this treatment is reflected in the final regulations. Sec.
1.897-1(c)(3)(v)(C).
However, the Treasury Department and the IRS are of the view that
the treatment of certain RICs that are not QIEs should be aligned with
the treatment of other publicly held entities that are not QIEs. The
proposed regulations provided that any RIC that is not a QIE, and thus
not subject to the rules that apply to public QIEs, is treated as a
look-through person. With respect to RICs whose shares are publicly
traded or otherwise widely held, this treatment may be viewed as
inconsistent with the treatment of publicly traded partnerships and
public domestic C corporations, neither of which is subject to look-
through treatment under the proposed regulations primarily due to
compliance and administrability concerns. The final regulations
therefore provide that a public RIC, generally defined as a RIC that is
not a QIE and whose shares are (i) regularly traded on an established
securities market or (ii) common stock that is continuously offered
pursuant to a public offering and held by at least 500 shareholders, is
generally treated as a non-look-through person. Sec. 1.897-
1(c)(3)(v)(D) and (I). However, for reasons similar to those discussed
in part I.C of this Summary of Comments and Explanation of Revisions
(regarding foreign-controlled domestic corporations, which are treated
as look-through persons), a RIC will not be a public RIC, and thus will
be a look-through person, if the QIE being tested for domestically
controlled status under Sec. 1.897-1(c)(3) has actual knowledge that
the RIC is foreign controlled, which is determined by treating the RIC
as a non-public domestic C corporation and applying Sec. 1.897-
1(c)(3)(v)(B). Sec. 1.897-1(c)(3)(v)(I).
B. Public Entities
The proposed regulations provided that a person holding less than
five percent of U.S. publicly traded stock of a QIE at all times during
the testing period, determined without regard to proposed Sec. 1.897-
1(c)(3)(ii)(A), 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.
Section 897(h)(4)(E)(i); proposed Sec. 1.897-1(c)(3)(iii)(A). To
prevent the avoidance of the actual knowledge exception to this rule,
the final regulations modify the rule to provide that it will also not
apply if the QIE has actual knowledge that such person is foreign
controlled (treating any person that is not a non-public domestic C
corporation as a non-public domestic C corporation for this purpose).
Sec. 1.897-1(c)(3)(iii)(A).
The proposed regulations also provided non-look-through treatment
for public domestic C corporations and publicly traded partnerships,
which were generally defined to include entities with a class of stock
or interests regularly traded on an established securities market.
Proposed Sec. 1.897-1(c)(3)(v)(D), (G) and (I). In the final
regulations, these definitions exclude domestic entities that are known
to be foreign controlled. Thus, consistent with the treatment of public
RICs and for reasons similar to those discussed in part I.C of this
Summary of Comments and Explanation of Revisions (regarding foreign-
controlled domestic corporations, which are treated as look-through
persons), a domestic C corporation or a domestic partnership will not
be a public domestic C corporation or a publicly traded partnership,
respectively, if the QIE being tested for domestically controlled
status under Sec. 1.897-1(c)(3) has actual knowledge that the
corporation or partnership is foreign controlled (treating the entity
as a non-public domestic C corporation for this purpose). Sec. 1.897-
1(c)(3)(v)(G) and (J). In such case, the domestic C corporation or
domestic partnership will therefore be a look-through person. Sec.
1.897-1(c)(3)(v)(B) through (E).
C. Certification by Domestic C Corporation
One comment recommended that the final regulations provide guidance
on how a domestic C corporation may certify to a QIE that it is not a
foreign-owned domestic corporation. The comment suggested that the
regulations provide a model certification to confirm that a domestic C
corporation is not foreign owned, such as a revised Form W-9.
The final regulations do not provide guidance regarding the
procedures for determining whether a domestic C corporation is a
foreign-controlled domestic corporation, nor do they provide any
procedures generally for a QIE to identify its non-look-through person
owners for purposes of determining whether the QIE is domestically
controlled. A QIE must take appropriate measures to determine the
identity of its direct and indirect shareholders in determining whether
it is domestically controlled, and the final regulations do not
prescribe a specific form or method as to how it solicits or receives
information from its shareholders. Guidance with respect to the manner
in which a QIE determines the identity of its relevant shareholders for
purposes of establishing domestic control is beyond the scope of this
[[Page 31624]]
rulemaking but may be considered in a separate guidance project.
D. Section 1445 Withholding on Dispositions of USRPI
Current regulations under section 1445 (imposing withholding of tax
on dispositions of USRPI) provide the circumstances under which a
transferee of property can ascertain that there is no duty to withhold
under section 1445(a) because the transferor is not a foreign person,
the property acquired is not a USRPI, or an exception to withholding
applies. Sec. 1.1445-2. Section 1.1445-2(c)(3) provides that no
withholding is required with respect to an acquisition of an interest
in a domestic corporation if the transferor provides the transferee
with a copy of a statement, issued by the corporation pursuant to Sec.
1.897-2(h), certifying that the interest in the corporation is not a
USRPI. The transferor must request the statement before the transfer,
which may be relied on if the statement is dated not more than 30 days
before the date of the transfer. A transferee may also rely on a
corporation's statement that is voluntarily provided by the domestic
corporation in response to a request from the transferee, if that
statement otherwise complies with the requirements of Sec. Sec.
1.1445-2(c)(3) and 1.897-2(h).
Under Sec. 1.897-2(h)(1), a foreign person holding an interest in
a domestic corporation may request that the corporation inform the
person whether the interest constitutes a USRPI, which the corporation
is required to provide within a reasonable period after receipt of such
a request. A statement must be provided by the domestic corporation to
the foreign person indicating the corporation's determination, and
notice must be provided to the IRS in accordance with Sec. 1.897-
2(h)(2). Section 1.897-2(h)(3), however, provides that the requirements
of Sec. 1.897-2(h) do not apply to ``domestically-controlled REITs, as
defined in section 897(h)(4)(B),'' although a corporation not otherwise
required to comply with the requirements of Sec. 1.897-2(h) may
voluntarily choose to comply with the requirements of Sec. 1.897-
2(h)(4) and attach a statement to its income tax return informing the
IRS that it is not a United States real property holding corporation.
The availability of the procedures in Sec. 1.1445-2(c)(3) to
holders of stock in a domestically controlled QIE is unclear given its
reference to a statement provided under Sec. 1.897-2(h), which is
explicitly inapplicable to domestically controlled QIEs under Sec.
1.897-2(h)(3). Although Sec. 1.897-2(h) generally does not apply to
domestically controlled QIEs pursuant to Sec. 1.897-2(h)(3) (and,
therefore, the corporation is not required, upon request, to provide a
statement to a person holding an interest in the corporation), this
should not preclude the availability of the rules in Sec. 1.1445-
2(c)(3) to transferors of interests seeking to avoid withholding under
section 1445 when the corporation voluntarily provides a statement to
an interest holder that otherwise complies with Sec. 1.897-2(h).
Absent the availability of these procedures, the transferor would not
be able to establish that it is transferring an interest in a
domestically controlled QIE and is thus not subject to withholding
under section 1445(a). The final regulations thus revise the rules in
Sec. Sec. 1.897-2(h)(3) and 1.1445-2(c)(3) to clarify the procedures
available to a transferor to certify to a transferee that no
withholding is required because the DC-QIE exception applies. As
revised, the final regulations confirm that a domestic corporation may
voluntarily provide a statement in response to a request from a
transferor certifying that an interest in the corporation is not a
USRPI because the corporation is a domestically controlled QIE, which
the transferor may furnish to the transferee, provided the statement
issued by the corporation otherwise complies with the requirements of
Sec. 1.897-2(h).
E. Revisions to Examples
A comment observed that proposed Sec. 1.897-1(c)(3)(vi)(D)
(Example 4) contained a mathematical error. The final version of this
example corrects that error, which does not otherwise affect the
overall conclusion that the entity at issue does not qualify as a
domestically controlled QIE. Sec. 1.897-1(c)(3)(vii)(D) (Example 4).
The final regulations make other revisions to the examples in proposed
Sec. 1.897-1(c)(3)(vi) to clarify the operation of certain rules, but
which are not intended to alter the conclusions or substance of those
examples.
IV. Applicability Date and Transition Rules
The proposed regulations generally were proposed to apply to
transactions occurring on or after the date that those regulations are
published as final regulations in the Federal Register (``the
finalization date''). The preamble to the proposed regulations noted,
however, that the rules applicable for determining whether a QIE is
domestically controlled may be relevant for determining QIE ownership
during periods before the finalization date to the extent the testing
period related to a transaction that occurs on or after the
finalization date includes periods before that date.
Comments raised concerns with the proposed applicability date; in
particular, they noted that it would have a retroactive effect because
of the testing period element of the DC-QIE exception and argued that,
if adopted, the domestic corporation look-through rule should apply on
a fully prospective basis with no application to any portion of a
testing period before the finalization date. Further, these comments
characterized the proposed regulations as a change from existing law
and asserted that applying the rules to existing structures would be
inappropriate because restructuring to comply with the rules would be
difficult and costly, and buyers may be less inclined to invest in a
structure that may be ``tainted'' as failing to qualify for the DC-QIE
exception.
Comments generally advocated for the following types of transition
relief: (i) for QIEs in existence on the date the proposed regulations
were issued, provide an exception (subject to termination rules like
those in Sec. 301.7701-2(d)) such that a foreign-owned domestic
corporation is not treated as a look-through person; (ii) exempt
foreign investors in existing QIEs from the domestic corporation look-
through rule to the extent of existing ownership and capital
commitments as of the date the proposed regulations were issued; (iii)
only apply the domestic corporation look-through rule to QIE stock
acquired by a foreign-owned domestic corporation after the finalization
date; or (iv) delay application of the domestic corporation look-
through rule to existing QIEs for some period ranging from at least 120
days after the finalization date to tax years beginning on or after
January 1, 2028 (drawing from the general five-year testing period
standard).
The final regulations do not adopt the suggestion to delay
application of the final domestic corporation look-through rule, which
would exempt both existing and new QIE structures from the rule.
However, the Treasury Department and the IRS have determined that,
although the final domestic corporation look-through rule represents
the appropriate application of section 897(h)(4)(B), its effect should
be limited with respect to investors that may have entered into
structures with the expectation that domestic control of a QIE would be
determined without regard to that rule. Thus, consistent with the first
three types of comments noted above, the final regulations include a
transition
[[Page 31625]]
rule that, for a ten-year period, exempts existing structures from the
final domestic corporation look-through rule, provided they meet
certain requirements. Sec. 1.897-1(c)(3)(vi). These requirements are
intended to ensure that the final domestic corporation look-through
rule does not apply to preexisting business arrangements, but only to
the extent the QIE does not acquire a significant amount of new USRPIs
and does not undergo a significant change in its ownership (subject to
an exception for acquisitions of a USRPI or QIE interest pursuant to a
previous binding commitment). Sec. 1.897-1(c)(3)(vi)(A) and (E). If
either of these two thresholds is exceeded, the QIE at that time
becomes subject to the final domestic corporation look-through rule
like any other QIE. Sec. 1.897-1(c)(3)(vi)(B).
A QIE is considered to have acquired a significant amount of new
USRPIs if the total fair market value of the USRPIs it acquires
directly and indirectly exceeds 20 percent of the fair market value of
the USRPIs held directly and indirectly by the QIE as of April 24,
2024. Sec. 1.897-1(c)(3)(vi)(A)(2). The final regulations provide that
the value of the USRPIs held directly and indirectly by a QIE on April
24, 2024 is determined as of that date and that, for this purpose,
taxpayers may use the most recently calculated amounts under the
quarterly tests described in section 851(b)(3) or 856(c)(4), as
applicable. Sec. 1.897-1(c)(3)(vi)(D). By using these existing rules
the final regulations minimize the need to make additional or complex
valuations.
In determining whether there has been a significant change in the
ownership of a QIE, the final regulations consider whether the direct
or indirect ownership of the QIE by non-look-through persons
(determined by applying the final domestic corporation look-through
rule) has increased by more than 50 percentage points in the aggregate
relative to the QIE stock owned by such non-look-through persons on
April 24, 2024. Sec. 1.897-1(c)(3)(vi)(A)(3). Because this rule
applies on a percentage basis, a non-pro-rata issuance or redemption of
stock is counted towards the 50 percentage point amount. To simplify
the determination of changes in ownership of stock of a QIE that is
publicly traded, the final regulations disregard transfers by any
person (regardless of whether they are a non-look-through person) that
owns a less than five-percent interest in the stock of the QIE, unless
the QIE has actual knowledge of that person's ownership. Sec. 1.897-
1(c)(3)(vi)(G).
The transition rule applies until April 24, 2034, or, if earlier,
until the requirements precluding significant acquisitions of USRPIs
and changes in ownership are not met, at which time the final domestic
corporation look-through rule applies in determining whether a QIE is
domestically controlled. Sec. 1.897-1(c)(3)(vi)(B). The ten-year
period is intended to provide sufficient time to mitigate the impact of
the final domestic corporation look-through rule on existing QIEs and
their investors, but ensures that all QIEs are eventually subject to
the same rules. However, even after the transition rule no longer
applies, the final domestic corporation look-through rule is
prospective only and thus does not apply to any portion of a testing
period during which the transition rule applied to a QIE. Sec. 1.897-
1(c)(3)(vi)(C). Thus, for example, if the transition rule ceases to
apply to a QIE due to a change in its ownership but, at such time, the
QIE is a domestically controlled QIE notwithstanding the final domestic
corporation look-through rule, the determination of domestic control
for the testing period of a subsequent disposition of QIE stock may
disregard the final domestic corporation look-through rule to the
extent the transition rule applied.
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
Pursuant to the Memorandum of Agreement, Review of Treasury
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject to the requirements of
section 6 of Executive Order 12866, as amended. Therefore, a regulatory
impact assessment is not required.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA)
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. The collection of information in Sec. 1.1445-2(c)(3) is a
statement provided by a domestic corporation that certifies that an
interest in such corporation is not a U.S. real property interest.
Section 1.1445-2(c)(3) clarifies that the existing procedure may also
be used by a domestic corporation to certify that it is a domestically
controlled QIE (as determined under Sec. 1.897-1(c)(3)), as long as
the certification is voluntarily issued and otherwise complies with the
existing requirements in Sec. 1.897-2(h).
This modification to Sec. 1.1445-2(c)(3) clarifies the existing
scope of the collection of information. For purposes of the PRA, the
reporting burden associated with the collections of information in
Sec. 1.1445-2(c)(3) will be reflected in the Paperwork Reduction Act
Submissions associated with the section 1445 regulations (OMB control
number 1545-0902).
III. Regulatory Flexibility Act
A. Succinct Statement of the Need for, and Objectives of, the Final
Regulations
As discussed in the preamble to the proposed regulations, 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.
Also as discussed in the preamble to the proposed regulations,
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.
Because there was a possibility 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, the proposed
regulations provided an initial regulatory flexibility analysis and
requested comments from the public on the number of small entities that
may be impacted and whether that impact will be economically
significant. No comments were received.
B. 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.
[[Page 31626]]
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 final 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.
C. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
These regulations do not impose additional reporting or
recordkeeping obligations. However, see Part II of this Special
Analysis describing certain voluntary reporting that these regulations
clarify is available in Sec. 1.1445-2(c)(3) by a domestic corporation
to certify that it is a domestically controlled QIE.
D. Steps Taken To Minimize Significant Economic Impact, Legal Reasons,
and Alternatives Considered
The final regulations 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.
These regulations clarify the treatment of QFPFs and QCEs for
purposes of the DC-QIE exception. The rules are intended to ensure that
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 897(l) and 7805.
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.
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-controlled domestic corporations discussed in part I of the
Summary of Comments and Explanation of Revisions section of this
preamble). However, the Treasury Department and the IRS concluded that
the look-through approach in the final regulations 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).
IV. Section 7805(f)
Pursuant to section 7805(f) of the Code, the proposed regulations
(REG-100442-22) preceding these final regulations were submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on the impact on small businesses and no comments were
received.
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 final 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 final 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.
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 author of these final regulations is Arielle Borsos,
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.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding
entries in numerical order for Sec. Sec. 1.897-1, 1.897-2, and 1.1445-
2 to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.897-1 also issued under 26 U.S.C. 897 and 897(l)(3).
Section 1.897-2 also issued under 26 U.S.C. 897.
* * * * *
Section 1.1445-2 also issued under 26 U.S.C. 1445.
* * * * *
0
Par. 2. Section 1.897-1 is amended by:
0
1. Revising paragraph (a)(2);
0
2. Removing and reserving paragraph (c)(2)(i);
0
3. Adding paragraphs (c)(3) and (4) and (k);
0
4. Revising and republishing paragraph (l); and
0
5. Adding paragraph (n).
The revisions and additions read as follows:
Sec. 1.897-1 Taxation of foreign investment in United States real
property interests, definition of terms.
(a) * * *
(2) Applicability date. Except as otherwise provided in this
paragraph (a)(2), the regulations set forth in this section and
Sec. Sec. 1.897-2 through 1.897-4 apply to transactions occurring
after June 18, 1980. Except as otherwise
[[Page 31627]]
provided in paragraph (c)(3)(vi) of this section, paragraphs (c)(3) and
(4), (k), and (l) of this section apply to transactions occurring on or
after April 25, 2024, and transactions occurring before April 25, 2024,
resulting from an entity classification election under Sec. 301.7701-3
of this chapter that was effective on or before April 25, 2024, but was
filed on or after April 25, 2024. For transactions occurring before
April 25, 2024, see paragraphs (c)(2)(i) and (l) of this section and
Sec. 1.897-9T(c) contained in 26 CFR part 1, as revised April 1, 2024.
* * * * *
(c) * * *
(3) Domestically controlled QIE--(i) In general. An interest in a
domestically controlled qualified investment entity (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 directly or indirectly 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
(c)(3)(ii)(B) applies to such shareholders, partners, or beneficiaries
as if they directly or indirectly 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. The
following additional special rules apply for purposes of determining
whether a QIE is domestically controlled:
(A) Certain holders of U.S. publicly traded QIE stock.
Notwithstanding any other provision of this paragraph (c)(3), a person
holding less than five percent of U.S. publicly traded stock of a QIE
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 or has actual knowledge that such person is foreign
controlled as determined under paragraph (c)(3)(v)(B) of this section
(treating any person that is not a non-public domestic C corporation as
if it were a non-public domestic C corporation for this purpose). For
an example illustrating the application of this paragraph
(c)(3)(iii)(A), see paragraph (c)(3)(vii)(C) of this section (Example
3).
(B) Certain foreign-controlled domestic C corporations. A non-
public domestic C corporation is treated as a look-through-person if it
is a foreign-controlled domestic corporation. For an example
illustrating the application of this paragraph (c)(3)(iii)(B), see
paragraph (c)(3)(vii)(B) of this section (Example 2).
(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 this paragraph (c)(3), determined after the application of this
paragraph (c)(3)(iii), 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)(vii)(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
this paragraph (c)(3), 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)(vii)(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 this paragraph
(c)(3), an international organization (as defined in section
7701(a)(18)) is treated as a foreign person. See Sec. 1.897-9T(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
this paragraph (c)(3):
(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-controlled domestic corporation is any non-public
domestic C corporation if foreign persons hold directly or indirectly
more than 50 percent 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-controlled
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-
controlled domestic corporation under this paragraph (c)(3)(v)(B) is
treated as a look-through person for purposes of determining whether
any other non-public domestic C corporation is a foreign-controlled
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
REIT that is not a public QIE, an S corporation, a partnership
(domestic or foreign) that is not a publicly traded partnership, a RIC
that is not a public RIC, 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.
[[Page 31628]]
(D) A non-look-through person is an individual, a domestic C
corporation (other than a foreign-controlled 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), a public RIC, 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). A domestic C corporation is not a public domestic C
corporation, however, if the QIE whose status as domestically
controlled is being determined under this paragraph (c)(3) has actual
knowledge that the domestic C corporation is foreign controlled as
determined under paragraph (c)(3)(v)(B) of this section (treating the
domestic C corporation for this purpose as if it were a non-public
domestic C corporation).
(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 public RIC is a RIC that is not a QIE and any class of stock
of which is either regularly traded on an established securities market
within the meaning of Sec. Sec. 1.897-1(m) and 1.897-9T(d), or common
stock that is continuously offered pursuant to a public offering
(within the meaning of section 4 of the Securities Act of 1933, as
amended (15 U.S.C. 77a to 77aa)) and held by or for no fewer than 500
persons. A RIC is not a public RIC, however, if the QIE whose status as
domestically controlled is being determined under this paragraph (c)(3)
has actual knowledge that the RIC is foreign controlled as determined
under paragraph (c)(3)(v)(B) of this section (treating the RIC for this
purpose as if it were a non-public domestic C corporation).
(J) 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). A
domestic partnership is not a publicly traded partnership, however, if
the QIE whose status as domestically controlled is being determined
under this paragraph (c)(3) has actual knowledge that the domestic
partnership is foreign controlled as determined under paragraph
(c)(3)(v)(B) of this section (treating the partnership for this purpose
as if it were a non-public domestic C corporation).
(K) A qualified controlled entity has the meaning set forth in
Sec. 1.897(l)-1(e)(9).
(L) A qualified foreign pension fund has the meaning set forth in
Sec. 1.897(l)-1(c).
(M) A QIE is a qualified investment entity, as defined in section
897(h)(4)(A).
(N) Testing period has the meaning set forth in section
897(h)(4)(D).
(O) 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) Transition rule for certain QIEs owned by foreign-controlled
domestic corporations--(A) General rule. Except as provided in
paragraph (c)(3)(vi)(B) of this section, paragraph (c)(3)(iii)(B) of
this section does not apply with respect to a QIE that is in existence
as April 24, 2024, and satisfies the following requirements at all
times on and after April 24, 2024--
(1) The QIE is domestically controlled (as determined under this
paragraph (c)(3), but without regard to paragraph (c)(3)(iii)(B) of
this section);
(2) The aggregate fair market value of any United States real
property interests acquired by the QIE directly and indirectly after
April 24, 2024, is no more than 20 percent of the aggregate fair market
value of the United States real property interests held directly and
indirectly by the QIE as of April 24, 2024 (determined in accordance
with paragraph (c)(3)(vi)(D) of this section); and
(3) The percentage of the stock of the QIE held directly or
indirectly by one or more non-look-through persons (determined based on
fair market value and under the rules of paragraphs (c)(3)(ii) through
(v) of this section and this paragraph (c)(3)(vi), including paragraph
(c)(3)(iii)(B) of this section) does not increase by more than 50
percentage points in the aggregate over the percentage of stock of the
QIE owned directly or indirectly by such non-look-through persons on
April 24, 2024.
(B) Termination of transition rule. The transition rule described
in paragraph (c)(3)(vi)(A) of this section will cease to apply, and the
rule in paragraph (c)(3)(iii)(B) of this section will apply for
purposes of determining whether a QIE is domestically controlled, with
respect to transactions occurring on or after the earlier of:
(1) The date immediately following the date on which the QIE fails
to meet any of the requirements described in paragraph (c)(3)(vi)(A) of
this section; and
(2) April 24, 2034. For an example illustrating the application of
paragraph (c)(3)(vi)(A) of this section and this paragraph
(c)(3)(vi)(B), see paragraph (c)(3)(vii)(E) of this section (Example
5).
(C) Effect of transition rule on testing period. If the transition
rule described in paragraph (c)(3)(vi)(A) of this section ceases to
apply to a QIE under paragraph (c)(3)(vi)(B) of this section, the rule
in paragraph (c)(3)(iii)(B) of this section will not apply to the QIE
with respect to the portion of any testing period during which the
transition rule in this paragraph (c)(3)(vi) applied.
(D) Determination of fair market value of United States real
property interests. For purposes of paragraph (c)(3)(vi)(A)(2) of this
section, the fair market value of the United States real property
interests held directly and indirectly by a QIE on April 24, 2024, is
the value of such property interests as calculated under section
851(b)(3) or 856(c)(4) as of the close of the most recent quarter of
the QIE's taxable year before April 24, 2024. For purposes of paragraph
(c)(3)(vi)(A)(2) of this section, the fair market value of any property
acquired after the close of the most recent quarter of the QIE's
taxable year before April 24, 2024, whether acquired before or after
April 24, 2024, is determined on the date of such acquisition using a
reasonable method, provided the QIE consistently uses the same method
with respect to all of its United States real property interests when
applying this paragraph (c)(3)(vi).
[[Page 31629]]
(E) Binding commitments. For purposes of paragraphs
(c)(3)(vi)(A)(2) and (3) of this section, a direct or indirect
acquisition of a United States real property interest, or of stock of a
QIE pursuant to a written agreement that was (subject to customary
conditions) binding before April 24, 2024, and all times thereafter, or
pursuant to a tender offer announced before April 24, 2024, that is
subject to section 14(e) of the Securities and Exchange Act of 1934 (15
U.S.C. 78n(e)) and 17 CFR 240.14e-1 through 240.14e-8 (Regulation 14E),
is treated as occurring on April 24, 2024.
(F) Ownership by certain successors under section 368(a)(1)(F). For
purposes of paragraph (c)(3)(vi)(A)(3) of this section, the transferor
corporation and the resulting corporation (as defined in Sec. 1.368-
2(m)(1)) in a reorganization described under section 368(a)(1)(F)
(whether engaged in by the QIE or by another corporation) are treated
as the same corporation.
(G) Ownership by less than five-percent public shareholders. For
purposes of paragraph (c)(3)(vi)(A)(3) of this section, in the case of
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), all such stock owned by persons holding less than 5
percent of that class of stock, determined without regard to paragraph
(c)(3)(ii)(A) of this section, is treated as stock owned by a single
non-look-through person except to the extent that the QIE has actual
knowledge regarding the ownership of any person.
(vii) Examples. The rules of this paragraph (c)(3) are illustrated
by the following examples. It is assumed 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)(M) of this section, USR is
a QIE. Because X is a public domestic C corporation, it cannot be a
foreign-controlled domestic corporation and, therefore, 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)(vii)(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)(J) 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 not a
non-look-through person as defined in paragraph (c)(3)(v)(D) of this
section and, therefore, is a look-through person as defined in
paragraph (c)(3)(v)(C) of this section. Accordingly, under paragraph
(c)(3)(ii)(A) of this section, X 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 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)(vii)(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)(vii)(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)(vii)(A)(3) (Example 1) regarding the
treatment of X as a look-through person as defined in paragraph
(c)(3)(v)(C) of this section. In addition, 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%). Thus, for the same reasons
described in paragraph (c)(3)(vii)(A)(3) (Example 1), foreign persons
hold directly or indirectly 74.5 percent of the stock of USR, 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-controlled 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 40 percent of
the stock of X, and Y, a nonresident alien individual, holds 15 percent
of the stock of X. The remaining 45 percent of the stock of X is held
by U.S. citizens.
(2) Analysis. Under paragraph (c)(3)(v)(M) of this section, USR is
a QIE. X, a non-public domestic C corporation, 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-controlled 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).
[[Page 31630]]
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-controlled 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 40 percent and 15 percent of the stock of X,
respectively, foreign persons hold directly or indirectly more than 50
percent of the fair market value of the stock of X, and X is a foreign-
controlled 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), 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, 20.4 percent of the stock of USR is considered as held
directly or indirectly by FC1 (40% x 51%), 7.65 percent of the stock of
USR is considered as held directly or indirectly by Y (15% x 51%), and
22.95 percent (in the aggregate) of the stock of USR is considered as
held directly or indirectly by the U.S. citizen shareholders (45% x
51%). Foreign persons therefore hold directly or indirectly 77.05
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), plus the
20.4 percent and 7.65 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)(vii)(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-controlled domestic
corporation under paragraph (c)(3)(v)(B) (the only foreign non-look-
through person to hold directly or indirectly stock in X is FC1, which
holds a 40-percent interest). Consequently, USR would be a domestically
controlled QIE under paragraph (c)(3)(i) of this section because
foreign persons hold directly or indirectly less than 50 percent of the
stock of USR.
(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)(O)
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 or is foreign controlled (as
determined under paragraph (c)(3)(v)(B) of this section by treating any
person that is not a non-public domestic C corporation as if it were a
non-public domestic C corporation for this purpose) (USR1 less than
five-percent public shareholders).
(2) Analysis. Under paragraph (c)(3)(v)(M) of this section, USR2
and USR1 are QIEs. Under paragraph (c)(3)(iii)(A) of this section, each
of the USR1 less than five-percent 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 that is a non-look-through person under
paragraph (c)(3)(v)(D) 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
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)(vii)(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 less than five-percent
public shareholders. Regardless of the treatment of the USR1 less than
five-percent 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 that is a
non-look-through person under paragraph (c)(3)(v)(D) 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. USR1 is not a public QIE as defined in paragraph (c)(3)(v)(H) of
this section. 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)(M) 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.
[[Page 31631]]
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 under paragraph (c)(3)(ii)(B) of this section
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 under paragraph (c)(3)(ii)(B) of this section 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 61.75 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), 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.
(E) Example 5: Transition rule asset requirement--(1) Facts. USR is
a REIT formed on January 1, 2018. From formation, 51 percent of the
stock of USR is held by X, a non-public domestic C corporation as
defined in paragraph (c)(3)(v)(E) of this section, 25 percent of the
stock of USR is held by FC1, a foreign corporation, and 24 percent of
the stock of USR is held by nonresident alien individuals. FC2, a
foreign corporation, and FC3, also a foreign corporation, each hold 50
percent of the stock of X. On April 24, 2024, USR's only property is
Asset 1, a United States real property interest. The value of Asset 1,
calculated under section 856(c)(4) as of the most recent quarter of
USR's taxable year before 24, is $100x. On January 1, 2026, USR borrows
$30x and acquires Asset 2, a United States real property interest, for
$30x.
(2) Analysis. As of April 24, 2024, USR is a domestically
controlled QIE under paragraph (c)(3)(i) of this section, because, as
determined without regard to paragraph (c)(3)(iii)(B) of this section,
X is a non-look-through person and, consequently, foreign persons hold
directly or indirectly less than 50 percent of the stock of USR.
Accordingly, USR satisfies the requirement under paragraph
(c)(3)(vi)(A)(1) of this section. USR also satisfies the requirements
under paragraphs (c)(3)(vi)(A)(2) and (3) of this section,
respectively, as of such date, because USR has not acquired directly or
indirectly any United States real property interests, and the ownership
of stock of USR has not changed. Thus, as of April 24, 2024, USR
qualifies for the transition relief under paragraph (c)(3)(vi)(A) of
this section. However, on January 1, 2026, USR no longer meets the
requirement for transition relief in paragraph (c)(3)(vi)(A)(2) of this
section because the fair market value of Asset 2, $30x, is 30 percent
(which is more than 20 percent) of $100x, which (as calculated in
accordance with paragraphs (c)(3)(vi)(A)(2) and (c)(3)(vi)(D) of this
section) is the fair market value of USR's United States real property
interests, namely Asset 1, as of April 24, 2024. Therefore, under
paragraph (c)(3)(vi)(B)(1) of this section the transition rule ceases
to apply to USR and, thus, paragraph (c)(3)(iii)(B) applies for
purposes of determining whether USR is domestically controlled with
respect to transactions occurring after January 1, 2026. Because FC2
and FC3 are non-look-through persons that hold more than 50 percent of
the stock of X, X is a foreign-controlled domestic corporation under
paragraph (c)(3)(iii)(B), and USR will not be a domestically controlled
QIE under paragraph (c)(3)(i) of this section as of January 2, 2026,
because foreign non-look-through persons (FC1, 25 percent, FC2, 25.5
percent, FC3, 25.5 percent, and the nonresident alien individuals, 24
percent) directly or indirectly hold more than 50 percent of the stock
of USR.
(3) Alternative facts: transition rule ownership requirement. The
facts are the same as in paragraph (c)(3)(vii)(E)(1) of this section
(Example 5), except that instead of USR borrowing funds and acquiring
Asset 2, FC3 sells its 50-percent stock interest in X to FC2 on June 1,
2024, and, on January 1, 2026, FC1 sells its 25-percent stock interest
in USR to FC4, a foreign corporation. Following FC3's sale of its X
stock to FC2 on June 1, 2024, FC2's stock interest in USR has increased
by 25.5 percentage points, from 25.5 percent on April 24, 2024 (which
is 50 percent of 51 percent), to 51 percent. Following FC1's sale of
its USR stock to FC4 on January 1, 2026, FC4's stock interest in USR
has increased by 25 percentage points, from zero percent on April 24,
2024, to 25 percent. Accordingly, in the aggregate, non-look-through
persons have increased their ownership in USR by 50.5 percentage points
(25.5 percent and 25 percent for FC2 and FC4, respectively), and USR no
longer meets the requirement for transition relief in paragraph
(c)(3)(vi)(A)(3) of this section as of January 1, 2026. Therefore,
under paragraph (c)(3)(vi)(B)(1) of this section the transition rule
ceases to apply to USR and, thus, paragraph (c)(3)(iii)(B) of this
section applies for purposes of determining whether USR is domestically
controlled with respect to transactions occurring after January 1,
2026. Because FC2, a non-look-through person, holds more than 50
percent of the stock of X, X is a foreign-controlled domestic
corporation under paragraph (c)(3)(iii)(B) of this section, and USR
will not be a domestically controlled QIE under paragraph (c)(3)(i) of
this section because foreign non-look-through persons (FC2, 51 percent,
FC4, 25 percent, and the nonresident alien individuals, 24 percent)
directly or indirectly hold more than 50 percent of the stock of USR.
(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 (vii) 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 (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) Foreign corporation. The term foreign corporation has the
meaning ascribed to such term in section 7701(a)(3) and (5) and Sec.
301.7701-5. For purposes of sections 897 and 6039C, however, the term
does not include a foreign corporation with respect to
[[Page 31632]]
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) Regularly traded cross-reference. See Sec. 1.897-9T(d) for a
definition of regularly traded for purposes of sections 897, 1445, and
6039C.
* * * * *
0
Par. 3. Section 1.897-2 is amended by revising paragraph (h)(3) to read
as follows:
Sec. 1.897-2 United States real property holding corporations.
* * * * *
(h) * * *
(3) Requirements not applicable. The requirements of this paragraph
(h) do not apply to domestically-controlled qualified investment
entities, as defined in section 897(h)(4)(B). But see Sec. 1.1445-
2(c)(3) for rules providing that no withholding is required under
section 1445(a) in certain cases when a statement is voluntarily issued
by the corporation and otherwise complies with the requirements of this
paragraph (h). The requirements of this paragraph (h) also do not apply
to a corporation any class of stock in which is regularly traded on an
established securities market at any time during the calendar year.
However, such a corporation may voluntarily choose to comply with the
requirements of paragraph (h)(4) of this section.
* * * * *
0
Par. 4. Section 1.897-9T is amended by:
0
1. Removing and reserving paragraph (c); and
0
2. Revising and republishing paragraph (e).
The revision 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) Foreign governments and international organizations. A foreign
government shall be treated as a foreign person with respect to U.S.
real property interests, and shall be subject to sections 897, 1445,
and 6039C on the disposition of a U.S. real property interest except to
the extent specifically otherwise provided in the regulations in this
chapter issued under section 892. An international organization (as
defined in section 7701(a)(18)) is not a foreign person with respect to
U.S. real property interests, and is not subject to sections 897, 1445,
and 6039C on the disposition of a U.S. real property interest. 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).
Buildings or parts of buildings and the land ancillary thereto
(including the residence of the head of the diplomatic mission) used by
the foreign government for a diplomatic mission shall not be a U.S.
real property interest in the hands of the respective foreign
government.
* * * * *
0
Par. 5. Section 1.1445-2 is amended by:
0
1. Revising paragraph (c)(3)(i); and
0
2. Adding two sentences at the end of paragraph (e).
The revision and additions read as follows:
Sec. 1.1445-2 Situations in which withholding is not required under
section 1445(a).
* * * * *
(c) * * *
(3) * * *
(i) In general. No withholding is required under section 1445(a)
upon the acquisition of an interest in a domestic corporation, if the
transferor provides the transferee with a copy of a statement, issued
by the corporation pursuant to Sec. 1.897-2(h), certifying that the
interest is not a U.S. real property interest, or if the transferor
provides the transferee with a statement certifying that the
corporation is a domestically controlled qualified investment entity
(as determined under Sec. 1.897-1(c)(3)) that is voluntarily issued by
the corporation but otherwise complies with the requirements of Sec.
1.897-2(h). In general, a corporation may issue such a statement only
if the corporation was not a U.S. real property holding corporation at
any time during the previous five years (or the period in which the
interest was held by its present holder, if shorter), the corporation
is a domestically controlled qualified investment entity (as determined
under Sec. 1.897-1(c)(3)), or if interests in the corporation ceased
to be United States real property interests under section 897(c)(1)(B).
(A corporation may not provide such a statement based on its
determination that the interest in question is an interest solely as a
creditor.) See Sec. 1.897-2(f) and (h). The corporation may provide
such a statement directly to the transferee at the transferor's
request. The transferor must request such a statement before the
transfer, and shall, to the extent possible, specify the anticipated
date of the transfer. A corporation's statement may be relied upon for
purposes of this paragraph (c)(3) only if the statement is dated not
more than 30 days before the date of the transfer. A transferee may
also rely upon a corporation's statement that is voluntarily provided
by the corporation in response to a request from the transferee, if
that statement otherwise complies with the requirements of this
paragraph (c)(3) and Sec. 1.897-2(h).
* * * * *
(e) * * * Paragraph (c)(3)(i) of this section applies with respect
to dispositions of U.S. real property interests, and distributions
described in section 897(h), occurring on or after April 25, 2024. For
dispositions of U.S. real property interests, and distributions
described in section 897(h), occurring before April 25, 2024, see Sec.
1.1445-2(c)(3)(i), as contained in 26 CFR part 1, revised as of April
1, 2024.
Douglas W. O'Donnell,
Deputy Commissioner.
Approved: April 2, 2024.
Aviva Aron-Dine,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2024-08267 Filed 4-24-24; 8:45 am]
BILLING CODE 4830-01-P
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</html>Indexed from Federal Register on April 25, 2024.
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