Income of Foreign Governments and of International Organizations

<RULE> DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Part 1</CFR> <DEPDOC>[TD 10042]</DEPDOC> <RIN>RIN 1545-BG08</RIN> <SUBJECT>Income of Foreign Governments and of International Organizations</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Final and temporary regulations. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document contains final regulations relating to the taxation of the income of foreign governments from investments in the United States. In particular, these final regulations provide guidance for determining when a foreign government is engaged in commercial activity and when an entity is a controlled commercial entity. The final regulations will affect foreign governments that derive income from sources within the United States. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective date:</E> These regulations are effective on December 15, 2025. <E T="03">Applicability dates:</E> For dates of applicability, <E T="03">see</E> §§ 1.892-3(c), 1.892-4(d), and 1.892-5(e). </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Jack Zhou at (202) 317-6938 (not a toll-free number). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Authority</HD> This document contains amendments to the Income Tax Regulations (26 CFR part 1) under section 892 of the Internal Revenue Code (Code). These regulations are issued under the express delegations of authority under sections 892(c) and 7805(a) of the Code. <HD SOURCE="HD1">Background</HD> On June 27, 1988, the Department of the Treasury (Treasury Department) and the IRS published in the <E T="04">Federal Register</E> a notice of proposed rulemaking (53 FR 24100) (1988 proposed regulations) with a cross-reference to temporary regulations under section 892 (TD 8211, 53 FR 24060) (1988 temporary regulations) to provide guidance concerning the taxation of income of foreign governments and international organizations from investments in the United States following changes made to section 892 of the Code by section 1247 of the Tax Reform Act of 1986 (1986 Act) (Pub. L. 99-514, 100 Stat. 2085, 2583). After the 1988 temporary regulations and 1988 proposed regulations were published, section 892(a)(2)(A) was amended by section 1012(t) of the Technical and Miscellaneous Revenue Act of 1988 (1988 Act or TAMRA) (Pub. L. 100-647, 102 Stat. 3342, 3527-28) to provide that income derived from the disposition of any interest in a controlled commercial entity (CCE) does not qualify for the exemption under section 892. Section 1019(a) of TAMRA states that, except as otherwise provided, any amendments made by TAMRA are effective as if included in the provision of the 1986 Act to which such amendment relates. On August 1, 2002, the Treasury Department and the IRS published § 1.892-5(a)(3) in the <E T="04">Federal Register</E> (TD 9012, 67 FR 49864) to provide that the term “entity” for purposes of section 892(a)(2)(B) (defining “controlled commercial entity”) includes partnerships (2002 final regulations). On November 3, 2011, the Treasury Department and the IRS published in the <E T="04">Federal Register</E> a notice of proposed rulemaking (76 FR 68119) that would provide additional guidance for determining when a foreign government is engaged in commercial activity (2011 proposed regulations). On December 29, 2022, the Treasury Department and the IRS published in the <E T="04">Federal Register</E> a notice (87 FR 80108) to reopen the comment period for the 2011 proposed regulations. Also on December 29, 2022, the Treasury Department and the IRS published in the <E T="04">Federal Register</E> a notice of proposed rulemaking (87 FR 80097) that would make changes to § 1.892-5T(b)(1) to provide exceptions to the general rule that a United States real property holding corporation (USRPHC), as defined in section 897(c)(2), which may include a foreign corporation, is treated as engaged in commercial activity and, therefore, is a CCE if the requirements of § 1.892-5T(a)(1) or (2) are satisfied (2022 proposed regulations). The Treasury Department and the IRS received comments on the 2011 proposed regulations and the 2022 proposed regulations, all of which are available at <E T="03">https://www.regulations.gov</E> or upon request. A public hearing was not requested and none was held. After taking into account and addressing those comments, this Treasury decision finalizes, with modifications, the 2022 proposed regulations and the 2011 proposed regulations. In addition, this Treasury decision finalizes proposed § 1.892-3(a)(4) of the 1988 proposed regulations in accordance with the modifications recommended by the comments to the 2011 proposed regulations, which were reiterated by a comment to the 2022 proposed regulations. Since reopening the comment period of the 2011 proposed regulations has not resulted in any new or different comments, § 1.892-3(a)(4) is finalized without reproposing the provision (as discussed in part II.B.2 of the Summary of Comments and Explanation of Revisions). Terms used but not defined in this preamble have the meaning provided in the final regulations. <HD SOURCE="HD1">Summary of Comments and Explanation of Revisions</HD> The final regulations retain the general approach and structure of the 2011 proposed regulations and the 2022 proposed regulations, with certain revisions. This section of the preamble discusses the comments received in response to the 2011 proposed regulations and the 2022 proposed regulations, and explains the revisions reflected in the final regulations. <HD SOURCE="HD1">I. Overview</HD> Section 892 exempts a foreign government from U.S. income taxation under subtitle A of the Code on certain qualified income received from investments in the United States in stocks, bonds, or other domestic securities, or financial instruments held in the execution of governmental financial or monetary policy. Section 892(a)(1)(A). This exemption does not apply to income that is (1) derived from the conduct of any commercial activity (whether within or outside the United States), (2) received by a CCE or received (directly or indirectly) from a CCE, or (3) derived from the disposition of any interest in a CCE. Section 892(a)(2)(A). Section 892 does not define the term “foreign government.” The 1988 temporary regulations generally define a foreign government to consist only of integral parts and controlled entities of a foreign sovereign, and define an “integral part” of a foreign sovereign to include any body, however designated, that constitutes a governing authority of a foreign country. <E T="03">See</E> § 1.892-2T(a)(2). The 1988 temporary regulations generally define a “controlled entity” of a foreign sovereign to mean an entity that is separate in form from a foreign sovereign or otherwise constitutes a separate juridical entity if it satisfies certain requirements, including that it is wholly owned and controlled by the foreign sovereign directly or indirectly through one or more controlled entities. <E T="03">See</E> § 1.892-2T(a)(3). The 1988 temporary regulations provide that a controlled entity does not include partnerships or any other entity owned and controlled by more than one foreign sovereign. Thus, a foreign financial organization organized and wholly owned and controlled by several foreign sovereigns to foster economic, financial, and technical cooperation between various foreign nations is not a controlled entity for purposes of section 892. <E T="03">See</E> § 1.892-2T(a)(3). Section 892(a)(2)(B) provides that, for purposes of section 892(a)(2)(A), a CCE is any entity engaged in commercial activities (whether within or outside the United States) and in which a foreign government holds (directly or indirectly) interests that meet specified thresholds. The 2002 final regulations provide that the term “entity” in section 892(a)(2)(B) means a corporation, a partnership, a trust (including a pension trust described in § 1.892-2T(c)), and an estate. <E T="03">See</E> § 1.892-5(a)(3). Section 892(c) authorizes the Secretary to prescribe such regulations as may be necessary or appropriate to carry out the purposes of section 892. <HD SOURCE="HD1">II. Defining Commercial Activities</HD> <HD SOURCE="HD2">A. General Rule</HD> The 1988 temporary regulations define commercial activities to include all activities (whether conducted within or outside the United States) which are ordinarily conducted by the taxpayer or by other persons with a view towards the current or future production of income or gain. <E T="03">See</E> § 1.892-4T(b). Furthermore, those regulations provide that an activity may be considered commercial activity even if that activity does not constitute the conduct of a trade or business in the United States under section 864(b). <E T="03">Id.</E> The 2011 proposed regulations would continue to define commercial activities to include all activities (whether conducted within or outside the United States) which are ordinarily conducted for the current or future production of income or gain, and provide that only the nature of the activity, not the purpose or motivation for conducting it, is determinative of whether the activity is commercial in character. <FTREF/> <SU>1</SU> <E T="03">See</E> proposed § 1.892-4(d) (which corresponds to the rule in § 1.892-4T(b)). Moreover, the 2011 proposed regulations would provide that an activity may be considered commercial activity even if that activity does not constitute a trade or business for purposes of section 162 or does not constitute (or would not constitute if undertaken in the United States) the conduct of a trade or business in the United States for purposes of section ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 153k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━