Tax insight

Highlights of regulations taxing the income of foreign governments from investments in the United States

Insight
10 minute read
December 17, 2025

What happened?

Treasury and the IRS on December 12, 2025, issued (1) final regulations and (2) proposed regulations under Section 892 on the US taxation of income earned by foreign governments and their controlled entities from investments in the United States. 

The final regulations largely retain the structure of the 2011 and 2022 proposed regulations and, amongst other provisions:

Clarify what counts as ‘commercial activities’ versus exempt investment activity, including an expanded inadvertent-commercial-activity exception and updates to the controlled commercial entity (CCE) rules (such as a narrower US real property holding corporation (USRPHC) per se rule including that foreign controlled entities would no longer need to track their USRPHC status).
Refine the rules that provide an exception for when a partnership's commercial activities are not attributed to a foreign government (for purposes of the commercial activity test) including adopting a safe harbor for a limited partner who does not own more than 5% of the partnership’s capital and profits interest and otherwise satisfies all applicable safe harbor conditions.
Finalize a definition of ‘financial instrument’ that expressly covers certain derivatives (including swaps, options, forwards, and futures).

The proposed regulations would:

Provide a framework for when acquiring debt (through origination or otherwise) is treated as investment rather than commercial activity, including providing that all debt acquisitions are commercial activity except if they fall within one of the two provided safe harbors (registered offerings and certain secondary-market acquisitions) or satisfy a facts-and-circumstances test. As discussed below, the proposed guidance is expansive and could have broad implications including on credit funds structures, debt restructures, and shareholder loans commonly used in conjunction with equity investments.
Elaborate on when a foreign government has ‘effective control’ (previously referred to as ‘effective practical control’) of an entity (for CCE purposes), by looking to equity, voting, creditor, contractual, and regulatory rights and by treating certain managing-partner / managing-member roles as deemed effective control.

Why is it relevant? 

For any sovereign or party that seeks to raise capital from sovereign investors, the regulations provide important guidance regarding when a sovereign may be treated as engaging in activities that may jeopardize its status as a Section 892 eligible foreign government or may cause it to be subject to tax on its investment. While the final regulations are generally helpful and alleviate certain burdens that fund sponsors face with respect to real estate investments, the proposed regulations may change the way people think about certain lending activities and the amount of control rights that a sovereign investor can have.

Actions to consider

Taxpayers should reassess structures and CCE status and evaluate existing and planned debt positions and governance rights.

Taxpayers should consider submitting comments on the proposed regulations, including on how the debt framework and effective-control rules interact with common sovereign investment structures. Comments on the proposed regulations are due by February 13, 2026. 

Be sure to join our PwC Tax Readiness Webcast on Thursday, December 18 at 3pm ET for further details on these rules and other recent guidance released by the IRS and Treasury.