Tax insight

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

Insight
5 minute read
October 29, 2025

What happened?

Treasury and the IRS on October 20, 2025, released proposed regulations (REG-109742-25) modifying the existing rules for determining whether a Qualified Investment Entity (QIE) – such as a real estate investment trust (REIT) or regulated investment company (RIC) – is domestically controlled under Section 897. The proposed regulations would remove the ”domestic corporation look-through rule” that was included in final regulations released on April 24, 2024 (2024 final regulations).

Why is it relevant?

The proposed regulations primarily affect foreign persons that own stock in a QIE that would be a United States real property interest (USRPI) if the QIE were not domestically controlled. The proposed regulations would treat all domestic C corporations as non-look-through persons in determining whether a QIE is domestically controlled, along with certain conforming revisions.

Gain recognized by a foreign person on the disposition of an interest in a “domestically controlled QIE” (DC QIE)--generally referring to REITs and certain RICs that primarily hold US real property--is excluded from taxation under the Foreign Investment in Real Property Tax Act (FIRPTA).

A QIE is domestically controlled if, during a testing period, less than 50% of the value of the shares is held, directly or indirectly, by foreign persons. For purposes of determining the foreign ownership percentage in a QIE, the 2024 final regulations set the threshold for look-through treatment with respect to the domestic corporation look-through rule at 50% (increased from 25%, under regulations proposed in 2022). The proposed regulations would remove the domestic corporation look-through rule, which would relieve taxpayers of the obligation to conduct upstream, possibly multi-level inquiries as to the ownership of domestic C corporations.

Actions to consider

Taxpayers that conducted a DC QIE analysis treating a US corporation as a look-through person may consider revisiting their analysis to determine the impact of the proposed repeal of the domestic corporation look-through rule. The proposed regulations would apply to transactions occurring on or after the date they become final. Taxpayers may apply the proposed regulations once they are final to transactions occurring on or after April 24, 2024 (including certain transactions resulting from entity classification elections that were effective on or before April 24, 2024, but were filed after April 25, 2024). Taxpayers also are permitted to rely on the proposed regulations for transactions occurring before the date the proposed regulations are finalized.