Cross-border Tax Talks

In Jeopardy: Sovereign wealth funds and section 892

Doug McHoney (PwC’s International Tax Services Global Leader) is joined by Nils Cousin, an international tax partner in PwC’s Washington National Tax Services Practice, for his fourth appearance on the show. Doug and Nils discuss Nils’s April 2024 Jeopardy experience before pivoting to the 1916-era Section 892 exemption: how foreign governments, sovereign wealth funds, and public pension funds use it, and how ‘commercial activity’ and ‘controlled commercial entity’ rules can taint the benefit. They unpack the December 2025 regulation package, highlighting what was finalized (including an inadvertent-activity cure period, the qualified partnership exception, and FIRPTA taint relief) and what remains proposed, especially a framework that presumptively treats many debt acquisitions and workouts as commercial activity. The episode closes with the regulation process, effective-date mechanics, and a January 18 Treasury Secretary tweet, leaving us wondering whether market feedback might drive revisions. 

Timestamps and Descriptions 

All timestamps reflect the transcript timecodes. 

• [00:06] Welcome and the show’s focus on US and OECD international tax developments; PwC’s Pillar Two engine (compliance, provision, and modeling) 
• [01:39] Jeopardy backstory: tryouts, timing, and the prep crunch 
• [03:09] Ken Jennings vs Alex Trebek: the contestant experience and hosting style 
• [03:55] Why Section 892 is in the spotlight (including Financial Times coverage) 
• [04:40] What is Section 892? Why 892 matters for FIRPTA and REIT exits 
• [06:15] Caveats - The core ‘taint’ concepts: commercial activity and controlled commercial entities 
• [07:35] Sovereign investor types - Integral parts vs controlled entities  
• [09:05] Structuring point: partnership commercial activity attribution vs corporate blockers; Private debt and origination: where ‘banking/financing’ risk matters 
• [12:25] December 2025 final + proposed regulations; comments due February 13 
• [13:40] Inadvertent commercial activity exception finalized; cure period extended to 180 days 
• [14:30] Qualified partnership exception finalized; de minimis <5% ownership: easier path to limited-partner treatment; 50%+ ownership/effective control: when the qualified partnership exception is unavailable 
• [16:10] FIRPTA ‘tainting’ background: US real property holding corporation rule 
• [18:00] Final regs relief: non-US entities no longer worry about FIRPTA tainting; loans and exempted investment activities 
• [20:10] Proposed debt rules: presumption of commercial activity + safe harbors + facts-and-circumstances 
• [21:05] Safe harbor #1: US SEC-registered offerings (with potential expansion discussion) 
• [21:30] Safe harbor #2: qualified secondary market acquisitions and the ‘firm quote’ concern 
• [23:05] Eight-factor test: preamble vs examples and why ambiguity spooked investors 
• [24:15] Proposed ‘effective control’ guidance for the operational, board, and investor-levels 
• [27:10] Financial Times ‘puny loan’ hypothetical and the ‘peppercorn’ taint problem 
• [29:10] Restructuring of a defaulted bond or loan; direct equity stakes  
• [32:50] Effective date mechanics and lack of grandfathering; potential 2027 start timing 
• [33:45] Leveraged blocker structures: when debt becomes ‘material’ compared to equity 
• [35:20] Treasury Secretary tweet, stakeholder attention, and will the Section 892 proposed regs meet the same fate as Section 899? 
• [38:10] Notice-and-comment reality check: how proposed rules can change or stall 
• [38:50] Closing remarks and disclaimer 

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