Domestically Controlled Qualified Investment Entities

DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Part 1</CFR> <DEPDOC>[REG-109742-25]</DEPDOC> <RIN>RIN 1545-BR60</RIN> <SUBJECT>Domestically Controlled Qualified Investment Entities</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Notice of proposed rulemaking. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document contains proposed regulations that would modify existing regulations on the determination of whether a qualified investment entity is domestically controlled by removing a rule that looks to the shareholders of certain domestic corporations in determining whether foreign persons hold directly or indirectly stock in a qualified investment entity. The proposed regulations would 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. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> Written or electronic comments and requests for a public hearing must be received by December 22, 2025. </EFFDATE> <HD SOURCE="HED">ADDRESSES:</HD> Commenters are strongly encouraged to submit public comments electronically via the Federal eRulemaking Portal at <E T="03">https://www.regulations.gov</E> (indicate IRS and REG-109742-25) by following the online instructions for submitting comments. Requests for a public hearing must be submitted as prescribed in the “Comments and Requests for a Public Hearing” section. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comments submitted to the IRS's public docket. Send paper submissions to: CC:PA:01:PR (REG-109742-25), Room 5503, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Concerning the proposed regulations, Andrew F. Gordon (or any other staff member in the Office of the Associate Chief Counsel (International)) at (202) 317-3800 (not a toll-free number); concerning submissions of comments, requests for a public hearing, and access to a public hearing, Publications and Regulations Section at (202) 317-6901 (not toll-free numbers) or by email to <E T="03">publichearings@irs.gov</E> (preferred). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Background</HD> Section 897(a)(1) of the Internal Revenue Code (Code) provides that gain or loss of a nonresident alien individual or foreign corporation from the disposition of a United States real property interest (USRPI) is taken into account under section 871(b)(1) or section 882(a)(1), as applicable, as if the nonresident alien individual or foreign corporation were engaged in a trade or business within the United States during the taxable year and such gain or loss were effectively connected with that trade or business. Subject to certain exceptions, section 897(c)(1)(A) defines a USRPI as an interest in real property (including an interest in a mine, well, or other natural deposit) located in the United States or the Virgin Islands, and any interest (other than solely as a creditor) in any domestic corporation unless the taxpayer establishes that such corporation was at no time a United States real property holding corporation (USRPHC) during the period set forth in section 897(c)(1)(A)(ii) (generally, the five-year period ending on the date of the disposition of the interest). Under section 897(c)(2), a USRPHC is generally any corporation if the fair market value of its USRPIs equals or exceeds 50 percent of the total fair market value of its USRPIs, its interests in real property located outside the United States, plus any other of its assets that are used or held for use in a trade or business. Section 897(h)(1) provides that any distribution by a qualified investment entity (QIE) to a nonresident alien individual, a foreign corporation, or other QIE, to the extent attributable to gain from sales or exchanges by the QIE of USRPIs, is treated as gain recognized by such nonresident alien individual, foreign corporation, or other QIE from the sale or exchange of a USRPI, subject to certain exceptions. Section 897(h)(4)(A) defines a QIE as any (i) real estate investment trust (REIT), and (ii) any regulated investment company (RIC) which is a USRPHC or which would be a USRPHC if the exceptions in section 897(c)(3) and (h)(2) did not apply to interests in any REIT or RIC. Section 897(h)(2) provides that a USRPI does not include an interest in a domestically controlled QIE (DC-QIE exception). Accordingly, gain or loss on the disposition of stock in a domestically controlled QIE is not subject to section 897(a). Section 897(h)(4)(B) provides that a QIE is domestically controlled if less than 50 percent of the value of its stock is held directly or indirectly by foreign persons at all times during the testing period prescribed in section 897(h)(4)(D) (generally, the five-year period ending on the date of the disposition). On December 29, 2022, the Treasury Department and the IRS published proposed regulations (REG-100442-22) in the <E T="04">Federal Register</E> (87 FR 80097) that set forth 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) (2022 proposed regulations). The 2022 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. Under that approach, only a “non-look-through person” is treated as holding directly or indirectly stock of a QIE, and stock of a QIE held by or through one or more intervening “look-through persons” is treated as held proportionately by the look-through person's ultimate owners that are non-look-through persons. The 2022 proposed regulations generally treated a “domestic C corporation,” defined as any domestic corporation other than a RIC, REIT, or an S corporation, as a non-look-through person. However, the 2022 proposed regulations treated certain “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 (domestic corporation look-through rule). On April 24, 2024, the Treasury Department and the IRS published TD 9992 in the <E T="04">Federal Register</E> (89 FR 31618) (2024 final regulations), which finalized the 2022 proposed regulations. The 2024 final regulations retained the general approach and structure of the 2022 proposed regulations with certain revisions. In particular, under the 2024 final regulations the domestic corporation look-through rule applies if foreign persons hold a more than 50 percent interest (by value) in the stock of the corporation. <E T="03">See</E> § 1.897-1(c)(3)(iii)(B) and (c)(3)(v)(B). The 2024 final regulations also include a transition rule that exempts existing QIEs from the application of the domestic corporation look-through rule for a 10-year period, provided that there is not a significant change in the USRPIs held by the QIE or in the QIE's ownership. <E T="03">See</E> § 1.897-1(c)(3)(vi). <HD SOURCE="HD1">Explanation of Provisions</HD> <HD SOURCE="HD2">I. Removal of Domestic Corporation Look-Through Rule</HD> Following the publication of the 2024 final regulations, the Treasury Department and the IRS received feedback from taxpayers recommending the withdrawal of the domestic corporation look-through rule, focusing on the practical difficulty of tracing upstream ownership, often without access to reliable data, resulting in legal uncertainty, operational complexity, and potentially chilling effects on investment in U.S. real estate. The Treasury Department and the IRS share these concerns. In addition, taxpayers argued that the domestic corporation look-through rule is inconsistent with the statute and conflicts with congressional intent. They noted that within the domestically controlled QIE provisions, section 897(h)(4)(B) does not contain explicit corporate look-through rules and that Congress enacted rules in 2015 providing for look-through treatment for certain corporate owners of QIEs, but only in the specific circumstances described in section 897(h)(4)(E). They argued that the presence of the look-through rules in section 897(h)(4)(E) (and in other areas under section 897) indicates that the absence of a similar rule in section 897(h)(4)(B) was intentional, and that interpreting section 897(h)(4)(B) to include corporate look-through rules would render the section 897(h)(4)(E) look-through rules surplus. The recommendations emphasized that the term “indirectly” can have meanings in the Code other than look-through treatment of domestic corporations. They further argued that the interests held by a domestic corporation are subject to U.S. corporate income tax and therefore the objective of section 897 is satisfied without looking through a domestic corporation. In response to the feedback received, the Treasury Department and the IRS have further considered whether the interpretation of “indirectly” reflected in the domestic corporation look-through rule is consistent with the statutory text and purpose of the DC-QIE exception, which Congress intended to be available for QIEs that are controlled by United States persons. In light of this further consideration, the Treasury Department and the IRS are of the view that imposing look-through treatment under the domestic corporation look-through rule with respect to an entity that is subject to U.S. taxation based on a strict 50-pe ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 35k characters. 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