Proposed Section 897 regulations would modify rules for domestically controlled qualified investment entities

What happened?

Treasury and the IRS on October 20, 2025, released proposed regulations that would modify the existing rules governing the determination of whether a Qualified Investment Entity (QIE) — such as a Real Estate Investment Trust (REIT) or Regulated Investment Company (RIC) — is considered domestically controlled for US tax purposes.

The proposed regulations would remove the “domestic corporation look-through rule” that was introduced in the final regulations released in 2024. Under that rule, if foreign persons owned more than 50% of a non-public domestic C corporation, that corporation was ‘looked through’ to its shareholders to determine whether foreign persons indirectly owned shares in a QIE. Treasury and IRS received feedback from taxpayers citing legal uncertainty, administrative complexity, and concerns that the rule discouraged investment in US real estate.  

Under the proposed regulations, domestic regular C corporations would be treated as non-look-through persons when determining whether a QIE is domestically controlled. The removal of the domestic corporation look-through rule is expected to simplify compliance for taxpayers and align regulatory definitions to be closer to statutory language. 

The proposed regulations would affect foreign persons that own stock in a QIE that would be a United States real property interest if the QIE were not domestically controlled. The proposed regulations would apply to transactions occurring on or after the filing date in the Federal Register, with an option for taxpayers to rely on them retroactively to transactions on or after April 25, 2024.