Guidance on the Definition of Domestically Controlled Qualified Investment Entities, 31618-31632 [2024-08267]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 89, Number 81 (Thursday, April 25, 2024)]
[Rules and Regulations]
[Pages 31618-31632]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-08267]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9992]
RIN 1545-BQ36


Guidance on the Definition of Domestically Controlled Qualified 
Investment Entities

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that address the 
determination of whether a qualified investment entity is domestically 
controlled, including the treatment of qualified foreign pension funds 
for this purpose. In particular, these final regulations provide 
guidance as to when foreign persons are considered to hold directly or 
indirectly stock in a qualified investment entity. The final 
regulations 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.

DATES: 
    Effective date: These regulations are effective on April 25, 2024.
    Applicability date: For the date of applicability, see Sec. Sec.  
1.897-1(a)(2) and 1.1445-2(e).

FOR FURTHER INFORMATION CONTACT: Milton Cahn at (202) 317-4934 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    On December 29, 2022, the Treasury Department and the IRS published 
proposed regulations (REG-100442-22), relating to the treatment of 
certain entities, including qualified foreign pension funds 
(``QFPFs''), for purposes of the exemption from taxation afforded to 
foreign governments under section

[[Page 31619]]

892 of the Internal Revenue Code (the ``Code''), and the determination 
of whether a qualified investment entity (``QIE'') is domestically 
controlled under section 897(h)(4)(B) of the Code, in the Federal 
Register (87 FR 80097) (the ``proposed regulations''). This Treasury 
decision finalizes the proposed regulations, other than those portions 
addressing the section 892 exemption (which will be addressed in a 
separate rulemaking), after taking into account and addressing comments 
with respect to the proposed regulations. Terms used but not defined in 
this preamble have the meaning provided in the final regulations.
    Comments outside the scope of this rulemaking are generally not 
addressed but may be considered in connection with future regulations. 
All written comments received in response to the proposed regulations 
are available at www.regulations.gov or upon request. A public hearing 
on the proposed regulations was not held because there were no requests 
to speak.

Summary of Comments and Explanation of Revisions

    The final regulations retain the general approach and structure of 
the proposed regulations, with certain revisions. This section of the 
preamble discusses the comments received in response to the proposed 
regulations and explains the revisions reflected in the final 
regulations.

I. Domestic Corporation Look-Through Rule

A. Background
    The proposed regulations set forth proposed 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). The 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. As described in the preamble to the proposed regulations, 
this approach gives effect to both the policy of the exception for 
domestically controlled QIEs in section 897(h)(2) (``DC-QIE 
exception''), which is limited to QIEs controlled by United States 
persons, and the requirement in section 897(h)(4)(B) to take into 
account ``indirect'' ownership of QIE stock by foreign persons in 
determining whether a QIE is domestically controlled. 87 FR 80100. The 
preamble to the proposed regulations also explained that this approach 
prevents the use of intermediary entities to achieve results contrary 
to the purposes of the DC-QIE exception. Id. at 80100-01.
    The proposed regulations addressed the meaning of direct or 
indirect ownership by setting forth two categories of potential QIE 
owners, ``look-through persons'' and ``non-look-through persons.'' 
Proposed Sec.  1.897-1(c)(3)(ii). The proposed regulations generally 
treated a ``domestic C corporation,'' defined as any domestic 
corporation other than a regulated investment company (``RIC'') under 
section 851, a real estate investment trust (``REIT'') under section 
856, or an S corporation under section 1361, as a non-look-through 
person. Proposed Sec.  1.897-1(c)(3)(v)(A) and (D). However, the 
proposed regulations treated 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 
(the ``domestic corporation look-through rule''). Proposed Sec.  1.897-
1(c)(3)(iii)(B) and (c)(3)(v)(B).
    Comments generally did not raise concerns with the general look-
through approach for determining domestic control of a QIE as it 
applied to most entities (for example, the treatment of partnerships) 
but asserted that the domestic corporation look-through rule raises 
significant issues and should be withdrawn or, if retained, modified to 
reduce its scope. These comments are addressed in turn in parts I.B. 
and I.C. of this Summary of Comments and Explanation of Revisions.
B. Comments Recommending Withdrawal of the Domestic Corporation Look-
Through Rule
    Comments generally recommended that the domestic corporation look-
through rule be withdrawn on three related grounds: first, that the 
rule is based on an incorrect reading of the Code, which for this 
purpose does not permit look-through treatment for domestic C 
corporations, including because there are no explicit rules providing 
for constructive ownership (such as those in section 318) under section 
897(h)(4)(B); second, that the enactment of other related legislation 
(or consideration of legislation) demonstrates the rule is inconsistent 
with congressional intent; and third, that the rule is not necessary 
because domestic C corporations are subject to U.S. tax. Certain 
comments also based their recommendation to withdraw the domestic 
corporation look-through rule on the contention that the rule would 
negatively impact the U.S. real estate market or otherwise harm the 
broader U.S. economy.
    The Treasury Department and the IRS have determined that it is 
necessary and appropriate to provide guidance regarding the meaning of 
``indirect'' for determining whether foreign persons are considered to 
hold less than 50 percent of the value of the stock of a QIE. Every 
word in a statute must be given effect, and both the proposed and final 
regulations give effect to the term ``indirectly'' as used in section 
897(h)(4)(B) by adopting a limited look-through approach that includes 
the domestic corporation look-through rule (as modified in the final 
regulations). The domestic corporation look-through rule does not apply 
specific constructive ownership rules like those in section 318. 
Rather, the guidance gives meaning to indirect ownership under section 
897(h)(4)(B) in light of the purpose of the DC-QIE exception. Because 
the final regulations carry out the statute's mandate to determine 
indirect ownership rather than constructive ownership, the fact that 
other parts of section 897 refer to section 318 is irrelevant to the 
determination of whether a QIE is domestically controlled.
    The Treasury Department and the IRS do not agree that the enactment 
of section 897(h)(4)(E) in section 322(b)(1)(A) of the Protecting 
Americans from Tax Hikes Act of 2015, Public Law 114-113, div. Q (the 
``PATH Act''), informs whether the domestic corporation look-through 
rule should be applied under section 897(h)(4)(B). The rules added in 
section 897(h)(4)(E) do not prescribe how to interpret the meaning of 
``indirectly'' in section 897(h)(4)(B), nor do they suggest that 
Congress intended for that provision to set out the only rules for QIE 
stock held by domestic corporations. Although section 897(h)(4)(E) 
provides certain rules for looking through QIE stock held by another 
QIE for purposes of the DC-QIE exception, the absence of other specific 
rules in the statute on whether domestic C corporations (or any other 
type of entity) should be looked through does not mean that all other 
entities should be non-look-through persons.
    The Treasury Department and the IRS also disagree with the 
observation in comments that Congress sanctioned the approach taken by 
a 2009 private letter ruling (the ``2009 PLR'') that treated QIE stock 
held by a domestic C corporation as owned by a domestic person.\1\ The 
brief citation to that ruling in a report by the Joint Committee on 
Taxation is neutral and merely restates the holding in the ruling in 
its description of the then current law. See STAFF OF THE

[[Page 31620]]

JOINT COMM. ON TAX'N, General Explanation of Tax Legislation Enacted in 
2015 (JCS-1-16) 279 (2016) (the ``JCT Report'').\2\ The JCT Report did 
not express any view regarding the effect of the 2009 PLR or indicate 
that Congress endorsed a rule that precludes looking through domestic C 
corporations in all cases, and it caveated that a private letter ruling 
may only be relied on by the specific taxpayer to which it was issued 
and only provided ``some indication of administrative practice.'' See 
section 6110(k)(3). This is in contrast to other instances where 
Congress has explicitly endorsed an approach taken by the IRS. See, for 
example, H.R. Rep. No. 103-111, at 727-29 (1993) (in enacting section 
7701(l), citing Rev. Rul. 84-152, 1984-2 C.B. 381, Rev. Rul. 84-153 
1984-2 C.B. 1, and Rev. Rul. 87-89, 1987-2 C.B. 195, in stating the 
``committee believes that the above-cited IRS rulings appropriately 
ignore conduit entities and properly recharacterize the transactions 
described therein.''); S. Rep. No. 95-762, at 8 (1978) (stating that 
the IRS's ``ruling position is correct'' in enacting rules consistent 
with private letter rulings indicating that certain income earned by 
exempt organizations was not taxable as debt-financed income). 
Accordingly, the Treasury Department and the IRS have concluded that 
the JCT Report's reference to the 2009 PLR does not affect the 
application of the domestic corporation look-through rule.
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    \1\ PLR 200923001 (February 26, 2009).
    \2\ See also STAFF OF THE JOINT COMM. ON TAX'N, Technical 
Explanation of the Revenue Provisions of the Protecting Americans 
from Tax Hikes Act of 2015, House Amendment #2 to the Senate 
Amendment to H.R. 2029 (JCX-144-15) 186-87 (2015). As noted in the 
JCT Report, a Senate Committee on Finance report on an earlier, 
separate bill referenced the 2009 PLR in the same manner in 
describing provisions similar to those in section 322 of the PATH 
Act. See JCT Report at 277, note 943; S. Rep. No. 114-25, 6 (2015).
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    Likewise, the Treasury Department and the IRS disagree with 
comments that emphasized the discussion draft released by the Senate 
Committee on Finance in 2013 (the ``2013 Discussion Draft'') and the 
absence of any related changes to section 897 in the PATH Act. The 
relevant provision in the 2013 Discussion Draft would have replaced the 
``held directly or indirectly'' language in section 897(h)(4)(B) with 
specific constructive ownership rules in section 318 (not just those 
applicable to corporations) to address uncertainty in the determination 
of indirect ownership. See STAFF OF THE JOINT COMM. ON TAX'N, Technical 
Explanation of the Senate Committee on Finance Chairman's Staff 
Discussion Draft of Provisions to Reform International Business 
Taxation (JCX-15-13) 84 (2013). The 2013 Discussion Draft, however, is 
not authoritative and has no relevance because it was neither 
introduced as a bill nor enacted into law. Moreover, Congress did not 
provide any explanation as to why constructive ownership rules under 
section 318, as proposed in the 2013 Discussion Draft, were not adopted 
in the PATH Act nor did it provide any indication as to its 
interpretation of ``indirectly'' under the statute, and nothing in the 
legislative history of the PATH Act or otherwise suggests draft 
legislation from more than two years earlier during a different 
Congress informed what was ultimately enacted in the PATH Act. See 
United States v. Wise, 370 U.S. 405, 411 (1962) (``[S]tatutes are 
construed by the courts with reference to the circumstances existing at 
the time of the passage. The interpretation placed upon an existing 
statute by a subsequent group of Congressmen who are promoting 
legislation and who are unsuccessful has no persuasive significance 
here.'').
    The Treasury Department and the IRS also disagree with one 
comment's assertion that the legislative re-enactment doctrine bears on 
whether to issue the domestic corporation look-through rule. See 
Helvering v. Reynolds, 313 U.S. 428, 432 (1941) (``[The doctrine of 
legislative reenactment] does not mean that the prior construction has 
become so imbedded in the law that only Congress can effect a 
change.'').\3\ Accordingly, the Treasury Department and the IRS have 
determined that no changes to section 897 made in, or contemplated in 
connection with, the PATH Act, or any explanation of those changes, 
preclude, or otherwise affect, adoption of the domestic corporation 
look-through rule.
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    \3\ See also Helvering v. Wilshire Oil Co., 308 U.S. 90, 100 
(1939) (holding that the legislative reenactment doctrine applies 
where ``it does not appear that the rule or practice has been 
changed by the administrative agency through exercise of its 
continuing rule-making power''); McCoy v. United States, 802 F.2d 
762 (4th Cir. 1986); Interstate Drop Forge Co. v. Comm'r, 326 F2d 
743 (7th Cir. 1964).
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    Finally, the Treasury Department and the IRS have determined that 
the domestic corporation look-through rule is the appropriate 
interpretation of the term ``indirectly'' in section 897(h)(4)(B) 
irrespective of whether the domestic C corporation is subject to U.S. 
tax on income derived from its QIE stock. As expressed through the 
statutory text, the policy underlying the DC-QIE exception looks to 
whether control of the QIE is held directly or indirectly by United 
States or foreign persons, which does not depend on whether United 
States persons are subject to U.S. tax with respect to income derived 
from their QIE stock. The determination of domestic control is likewise 
not affected by whether a foreign shareholder of the domestic C 
corporation is subject to tax on a disposition of its stock in the 
corporation under section 897. The purpose of the inquiry is to 
determine control, and the status of an entity as taxable is not 
determinative for this purpose.
    Accordingly, the Treasury Department and the IRS do not adopt the 
recommendation to withdraw the domestic corporation look-through rule. 
However, the final regulations modify the domestic corporation look-
through rule as discussed in part I.C of this Summary of Comments and 
Explanation of Revisions.
C. Comments Recommending Modifications to the Domestic Corporation 
Look-Through Rule; Explanation of Revision
    Comments recommended that, if the final regulations retain a rule 
similar to the domestic corporation look-through rule, then the 
approach should be narrowed from what was proposed so that the final 
rule more directly addresses potentially inappropriate planning and is 
easier to comply with and administer.
    One comment suggested a variety of potential approaches to narrow 
the domestic corporation look-through rule. Under one such approach, a 
non-public domestic C corporation that owns 10 percent or less of a QIE 
(determined after applying constructive ownership rules under section 
318, so as to prevent circumvention of the threshold) would be treated 
as a non-look-through person. The comment asserted that this approach 
would be less burdensome on taxpayers and the IRS than the proposed 
regulations and is premised on the view that a foreign person would not 
structure an investment through a taxable domestic C corporation so 
that an unrelated foreign person may apply the DC-QIE exception. The 
comment described an alternative approach, also intended to reduce 
compliance and administrative burdens, that would treat a non-public 
domestic C corporation as a look-through person only if there is at 
least one foreign person that is a non-look-through person that holds, 
directly or indirectly (using constructive ownership rules under 
section 318), 25 percent or more of the value of the corporation's 
stock. Under this alternative, look-through treatment would also apply 
only as to those foreign non-look-through persons. As another 
alternative, the comment

[[Page 31621]]

suggested a look-through rule that would apply only if a foreign person 
or a foreign related party holds both a direct interest in the QIE and 
a substantial indirect interest in the QIE through a non-public 
domestic C corporation.
    A different comment also recommended an approach that focused on 
commonality of substantial ownership by a foreign person of the QIE and 
the domestic C corporation. Specifically, a domestic C corporation 
would be treated as a foreign person for purposes of section 
897(h)(4)(B) (but not for section 897(h)(4)(C)), if more than 50 
percent of its stock is owned, by voting power or value, by foreign 
persons that also hold stock of the QIE directly, or indirectly through 
one or more partnerships, grantor trusts, or QIEs. Under this comment's 
recommended approach, a foreign person would be included in the more 
than 50 percent control test if the domestic C corporation had actual 
knowledge that the foreign person has cross-ownership of the QIE after 
inquiry with any person that is at least a 5-percent shareholder of the 
domestic C corporation (after applying the rules of section 318(a)). 
The comment reasoned that foreign investors should be considered 
incidental and thus should not be counted when measuring direct or 
indirect foreign control of the QIE when they invest through a domestic 
C corporation and do not have cross-ownership of the QIE directly or 
through related parties, or do hold interests in both entities but do 
not individually or collectively control the domestic C corporation.
    Finally, one comment advocated that a look-through approach to a 
domestic C corporation should not apply when that corporation has 
material business activities unrelated to its investment in a QIE's 
stock with potential safe harbors such as where the corporation is 
registered as an investment adviser under the Investment Company Act of 
1940 or the foreign owner of the domestic C corporation is actively 
traded on an established securities market outside of the United 
States. The comment reasoned that such cases are unlikely to be 
structured transactions of the type identified by the proposed 
regulations. Similarly, another comment also proposed that the look-
through approach should not apply if a domestic C corporation would be 
treated as engaged in a U.S. trade or business if it had been a foreign 
corporation (such that the corporation is not a mere shell), and this 
exception could be further limited by ensuring that the value of the 
QIE stock held by the domestic C corporation is less than a certain 
threshold of the affiliated group's total assets.
    The final regulations do not adopt any of the recommended 
modifications to the domestic corporation look-through rule. Several 
suggested modifications would limit the application of the rule to 
situations that indicate that foreign persons are using a domestic C 
corporation to establish domestic control of a QIE so that their direct 
investments in the QIE benefit from the DC-QIE exception. However, as 
discussed in part I.A of this Summary of Comments and Explanation of 
Revisions, the proposed and final regulations serve a broader purpose 
by interpreting the meaning of ``indirect'' ownership under section 
897(h)(4)(B) to effectuate the policy of the DC-QIE exception by 
ensuring that the exception is available only when a QIE is controlled 
by United States persons. The comments also proposed various 
modifications intended to limit or alter the application of the rule; 
the Treasury Department and the IRS are of the view that these would 
introduce additional complexity, such as requiring an examination of 
the business activities of a domestic C corporation. Furthermore, a 
modification that would treat domestic C corporations that own less 
than 10 percent of a QIE as a non-look-through person would not 
alleviate concerns regarding the ability to identify shareholders 
through multiple tiers of ownership, and could result in disparate and 
inconsistent results as to which foreign owners are taken into account 
in measuring domestic control of a QIE (for example, a foreign non-
look-through person that wholly owns a domestic C corporation that owns 
9 percent of a QIE would not be taken into account, while a foreign 
non-look-through person that owns 50 percent of a domestic C 
corporation that owns 10 percent of the QIE would be taken into 
account). The Treasury Department and the IRS also do not agree that 
the domestic corporation look-through rule should only apply if 25 
percent or more of the corporation's stock is owned by a single foreign 
non-look-through person (taking into account section 318 constructive 
ownership rules), as the DC-QIE exception looks to any measure of 
foreign ownership of a QIE and such a high threshold would 
inappropriately exempt foreign persons owning significant indirect 
interests in QIEs from look-through treatment.
    Although the final regulations do not adopt any of the specific 
recommendations to the domestic corporation look-through rule, the 
Treasury Department and the IRS agree that the scope of the rule should 
be narrowed to address compliance concerns and to ensure the rule is 
more appropriately limited to situations where significant indirect 
ownership by foreign persons indicative of foreign control is present. 
After considering the various suggestions raised in comments, the 
Treasury Department and the IRS have determined that this is best 
achieved by increasing the amount of foreign ownership required to look 
through a non-public domestic C corporation from 25 percent or more to 
more than 50 percent. Increasing the threshold to more than 50 percent 
significantly narrows the scope of look-through treatment to non-public 
domestic C corporations that are controlled by foreign persons, and is 
consistent with the measurement of control for purposes of the 
domestically controlled QIE test. This change is also consistent with 
the policy of the DC-QIE exception and other provisions in section 897 
that are based on a 50-percent threshold. See, for example, section 
897(c)(2) (providing that a corporation is a United States real 
property holding corporation if the fair market value of its United 
States real property interests (``USRPIs'') meets a 50 percent or 
greater threshold). Thus, rather than a ``foreign-owned domestic 
corporation,'' the final regulations apply look-through treatment with 
respect to a ``foreign-controlled domestic corporation,'' which is 
defined as any non-public domestic C corporation if foreign persons 
hold directly or indirectly more than 50 percent of the fair market 
value of that corporation's outstanding stock (the ``final domestic 
corporation look-through rule''). Sec.  1.897-1(c)(3)(v)(B). In 
addition, the final regulations adopt a transition rule for existing 
QIE structures, as discussed in part IV of this Summary of Comments and 
Explanation of Revisions.

II. Effect of Section 897(l) on the DC-QIE Exception

A. Background on Section 897(l) and Interaction With the DC-QIE 
Exception
    Section 897(l) provides an exception to the application of section 
897(a) for certain foreign pension funds and their wholly owned 
subsidiaries. As originally enacted in the PATH Act, section 897(l)(1) 
provided that section 897 does not apply to any USRPI held directly (or 
indirectly through one or more partnerships) by, or to any distribution 
received from a REIT by, a QFPF or any entity all of the interests of 
which are held by a QFPF. Congress later made several technical 
amendments to section 897(l) in section

[[Page 31622]]

101(q) of the Tax Technical Corrections Act of 2018, Public Law 115-
141, div. U (the ``2018 technical correction''). As amended by the 2018 
technical correction, section 897(l) provides that neither a QFPF nor 
an entity all the interests of which are held by a QFPF is treated as a 
nonresident alien individual or foreign corporation for purposes of 
section 897.
    The proposed regulations addressed uncertainty as to whether QFPFs 
and entities wholly owned by one or more QFPFs (``QCEs''), which are 
treated as not ``nonresident alien individuals or foreign 
corporations'' for purposes of section 897, are treated as foreign 
persons for purposes of the DC-QIE exception. Specifically, proposed 
Sec.  1.897-1(c)(3)(iv)(A) provided that a QFPF, including any part of 
a QFPF, or a QCE is a foreign person for purposes of the DC-QIE 
exception (the ``QFPF DC-QIE rule'').
B. Comments Regarding Authority To Issue the QFPF DC-QIE Rule
    Although one comment stated that it was generally in agreement with 
the QFPF DC-QIE rule, other comments recommended that the rule be 
withdrawn because it is an incorrect reading of the statute and 
contrary to congressional intent. One comment contended that the 
preamble to the proposed regulations failed to consider the existing 
definition of ``foreign person'' in Sec.  1.897-9T(c) (which includes a 
foreign corporation, a foreign partnership, a foreign trust, or a 
nonresident alien individual) and noted that Congress is presumed to 
have knowledge of that regulatory definition. The comment also 
contended that the text of section 897(l) is clear and that, without 
any textual ambiguity, the Treasury Department and the IRS lack the 
authority to issue the QPFF DC-QIE rule.
    Another comment submitted that the legislative history and policy 
of section 897, including the DC-QIE exception and the section 897(l) 
exception for QFPFs, indicate that 50 percent or more ownership of a 
QIE by a QFPF results in the DC-QIE exception being available to other 
foreign investors. The comment's overall recommendation was to clarify 
the definition of foreign person in section 897(h)(4)(B) and (C) to 
have the same meaning as ``a nonresident alien individual or a foreign 
corporation'' in section 897(a). The comment included several reasons 
for its recommendation. First, section 897(l) refers generally to 
section 897, rather than solely to section 897(a), which the comment 
argued indicates that section 897(l) is intended to be given effect for 
all purposes under section 897. According to the comment, the effect of 
section 897(l) on the DC-QIE exception can be analogized to a special 
election in section 897(i) for a foreign corporation to be treated as a 
domestic corporation for purposes of section 897 because, when that 
election applies, it has effect for all of section 897 and can benefit 
other investors in QIEs even though they are not party to the election. 
The comment also noted that the 2018 technical correction should be 
presumed to be a more accurate reflection of the original intent of 
Congress, which was to align QFPFs with exempt U.S. pension funds. 
Finally, the comment noted that because a QFPF is not taxed under 
section 897(h)(1), there is no policy reason to treat it as a foreign 
person for other rules such as the DC-QIE exception, the foreign 
ownership percentage rule in section 897(h)(3) or the wash sale rule in 
section 897(h)(5).
    The Treasury Department and the IRS have determined that the QFPF 
DC-QIE rule reflects the proper interpretation of the statute and 
congressional intent. The term ``nonresident alien individuals or 
foreign corporations'' in section 897(l) (introduced only in the 2018 
technical correction) differs from ``foreign persons'' in section 
897(h)(4)(B), and the purposes of the two provisions also differ. 
Congress provided no indication that it intended for the definition of 
foreign person in Sec.  1.897-9T(c) to apply to confer non-foreign 
person status on QFPFs for purposes of the DC-QIE exception. Instead, 
the term ``nonresident alien individuals or foreign corporations'' 
appears in section 897(a) and similar provisions to refer to the 
persons that are directly subject to tax under FIRPTA. The Treasury 
Department and the IRS also do not agree that a QFPF is analogous to a 
foreign corporation that has elected to be treated as a domestic 
corporation under section 897(i) because that election explicitly 
treats a foreign corporation as a domestic corporation and therefore 
not a foreign person. In contrast, section 897(l) treats a QFPF as not 
a nonresident alien individual or a foreign corporation but does not 
address whether a QFPF is also not a foreign person.
    The Treasury Department and the IRS agree that it is reasonable to 
presume that the changes made in the 2018 technical correction are a 
more accurate reflection of original congressional intent, which the 
preamble to the proposed regulations described (allowing a QFPF and QCE 
to jointly own a USRPI and qualify for section 897(l) with respect to 
their partial USRPI interests, as well as clarifying that the section 
897(l) exception applies to distributions from all QIEs and not just 
REITs). 87 FR 80100. However, the Treasury Department and the IRS 
disagree with the assertion that the 2018 technical correction should 
be interpreted to bestow the benefit of the DC-QIE exception on foreign 
investors that cannot claim the section 897(l) exception. Such an 
interpretation would be inconsistent with the intent of section 897(l) 
as originally enacted in the PATH Act, which was to provide an 
exception from section 897 to QFPFs (and QCEs). Where possible, as in 
this case, the technical correction should be viewed in a manner 
consistent with a core principle of the original legislation. See Fed. 
Nat'l Mortgage Assoc. v. United States, 56 Fed. Cl. 228, 234, 237 
(2003), rev'd and remanded on other grounds, 379 F.3d 1303 (Fed. Cir. 
2004) (``Congress turns to technical corrections when it wishes to 
clarify existing law or repair a scrivener's error, rather than to 
change the substantive meaning of the statute. . . . [A] technical 
correction that merely restores the rule Congress intended to enact 
cannot be construed as a fundamental change in the operation of the 
statute.''); STAFF OF THE JOINT COMM. ON TAX'N, Overview of Revenue 
Estimating Procedures and Methodologies Used by the Staff of the Joint 
Committee on Taxation (JCX-1-05) 33 (2005) (describing a technical 
correction as ``legislation that is designed to correct errors in 
existing law in order to fully implement the intended policies of 
previously enacted legislation'' and a change that ``conforms to and 
does not alter the intent'' of the underlying legislation).
    The comment discussed above asserts that there is no policy reason 
to treat a QFPF as a foreign person for other provisions in section 
897(h) such as the DC-QIE exception, given that the QFPF is not taxed 
under section 897(h)(1). The Treasury Department and the IRS disagree 
based on the statute and its policy. As described earlier in this 
preamble, the policy of the DC-QIE exception looks to foreign control, 
not control by taxable persons. The presence or absence of taxation of 
the controlling persons is not determinative. Additionally, Congress 
expressed in section 897(l) an intent to provide a tax benefit 
specifically for QFPFs, and not for other owners of a DC-QIE that would 
benefit from the QFPF's treatment. Therefore, the Treasury Department 
and the IRS have determined that the appropriate interpretation of the 
statute is one that

[[Page 31623]]

only gives effect to the purpose of section 897(l) to provide an 
exception from section 897 for QFPFs, rather than a construction that 
would give non-QFPF investors the ability to rely on section 897(l) to 
benefit under the DC-QIE exception. The DC-QIE exception is a separate 
provision with underlying policies that focus on foreign control rather 
than taxability of controlling persons, and these policies are 
inconsistent with treating a QFPF as a United States person for 
purposes of the DC-QIE exception. Accordingly, the final regulations do 
not adopt the comments' recommendations.

III. Other Comments and Revisions

A. Certain Registered Investment Vehicles
    One comment noted that there are a large number of investment 
vehicles that are publicly registered with the Securities and Exchange 
Commission (``SEC'') that own QIEs but are not regularly traded and 
asserted that the final regulations should treat these investment 
vehicles offered to retail investors (for example, non-traded publicly 
registered REITs, non-traded publicly registered RICs, or publicly 
registered open-ended funds) as non-look-through persons. The comment 
noted that the same reasoning for applying non-look-through treatment 
to public domestic C corporations and publicly traded partnerships--
that is, difficulty in looking through to the entity's owners and the 
unlikelihood for use as an intermediary entity to establish domestic 
control--applied equally to those investment vehicles.
    The final regulations do not adopt this comment with respect to 
registered investment vehicles that are QIEs because section 
897(h)(4)(E) already provides specific rules with respect to QIE 
ownership by other QIEs that are incorporated in the final regulations. 
In particular, under section 897(h)(4)(E)(ii), stock in a QIE held by 
certain public QIEs is treated as held by a foreign or United States 
person based on whether the public QIE is itself domestically 
controlled. Sec.  1.897-1(c)(3)(iii)(C). Section 897(h)(4)(E)(iii) 
provides that stock of a QIE held by a QIE that is not a public QIE is 
only treated as held by a United States person in proportion to the 
stock of the non-public QIE that is held by a United States person. 
Section 897(h)(4)(E)(iii) thus contemplates look-through treatment for 
non-public QIEs, even if such QIEs are publicly registered with the 
SEC, and this treatment is reflected in the final regulations. Sec.  
1.897-1(c)(3)(v)(C).
    However, the Treasury Department and the IRS are of the view that 
the treatment of certain RICs that are not QIEs should be aligned with 
the treatment of other publicly held entities that are not QIEs. The 
proposed regulations provided that any RIC that is not a QIE, and thus 
not subject to the rules that apply to public QIEs, is treated as a 
look-through person. With respect to RICs whose shares are publicly 
traded or otherwise widely held, this treatment may be viewed as 
inconsistent with the treatment of publicly traded partnerships and 
public domestic C corporations, neither of which is subject to look-
through treatment under the proposed regulations primarily due to 
compliance and administrability concerns. The final regulations 
therefore provide that a public RIC, generally defined as a RIC that is 
not a QIE and whose shares are (i) regularly traded on an established 
securities market or (ii) common stock that is continuously offered 
pursuant to a public offering and held by at least 500 shareholders, is 
generally treated as a non-look-through person. Sec.  1.897-
1(c)(3)(v)(D) and (I). However, for reasons similar to those discussed 
in part I.C of this Summary of Comments and Explanation of Revisions 
(regarding foreign-controlled domestic corporations, which are treated 
as look-through persons), a RIC will not be a public RIC, and thus will 
be a look-through person, if the QIE being tested for domestically 
controlled status under Sec.  1.897-1(c)(3) has actual knowledge that 
the RIC is foreign controlled, which is determined by treating the RIC 
as a non-public domestic C corporation and applying Sec.  1.897-
1(c)(3)(v)(B). Sec.  1.897-1(c)(3)(v)(I).
B. Public Entities
    The proposed regulations provided that a person holding less than 
five percent of U.S. publicly traded stock of a QIE at all times during 
the testing period, determined without regard to proposed Sec.  1.897-
1(c)(3)(ii)(A), is treated as a United States person that is a non-
look-through person with respect to that stock, unless the QIE has 
actual knowledge that such person is not a United States person. 
Section 897(h)(4)(E)(i); proposed Sec.  1.897-1(c)(3)(iii)(A). To 
prevent the avoidance of the actual knowledge exception to this rule, 
the final regulations modify the rule to provide that it will also not 
apply if the QIE has actual knowledge that such person is foreign 
controlled (treating any person that is not a non-public domestic C 
corporation as a non-public domestic C corporation for this purpose). 
Sec.  1.897-1(c)(3)(iii)(A).
    The proposed regulations also provided non-look-through treatment 
for public domestic C corporations and publicly traded partnerships, 
which were generally defined to include entities with a class of stock 
or interests regularly traded on an established securities market. 
Proposed Sec.  1.897-1(c)(3)(v)(D), (G) and (I). In the final 
regulations, these definitions exclude domestic entities that are known 
to be foreign controlled. Thus, consistent with the treatment of public 
RICs and for reasons similar to those discussed in part I.C of this 
Summary of Comments and Explanation of Revisions (regarding foreign-
controlled domestic corporations, which are treated as look-through 
persons), a domestic C corporation or a domestic partnership will not 
be a public domestic C corporation or a publicly traded partnership, 
respectively, if the QIE being tested for domestically controlled 
status under Sec.  1.897-1(c)(3) has actual knowledge that the 
corporation or partnership is foreign controlled (treating the entity 
as a non-public domestic C corporation for this purpose). Sec.  1.897-
1(c)(3)(v)(G) and (J). In such case, the domestic C corporation or 
domestic partnership will therefore be a look-through person. Sec.  
1.897-1(c)(3)(v)(B) through (E).
C. Certification by Domestic C Corporation
    One comment recommended that the final regulations provide guidance 
on how a domestic C corporation may certify to a QIE that it is not a 
foreign-owned domestic corporation. The comment suggested that the 
regulations provide a model certification to confirm that a domestic C 
corporation is not foreign owned, such as a revised Form W-9.
    The final regulations do not provide guidance regarding the 
procedures for determining whether a domestic C corporation is a 
foreign-controlled domestic corporation, nor do they provide any 
procedures generally for a QIE to identify its non-look-through person 
owners for purposes of determining whether the QIE is domestically 
controlled. A QIE must take appropriate measures to determine the 
identity of its direct and indirect shareholders in determining whether 
it is domestically controlled, and the final regulations do not 
prescribe a specific form or method as to how it solicits or receives 
information from its shareholders. Guidance with respect to the manner 
in which a QIE determines the identity of its relevant shareholders for 
purposes of establishing domestic control is beyond the scope of this

[[Page 31624]]

rulemaking but may be considered in a separate guidance project.
D. Section 1445 Withholding on Dispositions of USRPI
    Current regulations under section 1445 (imposing withholding of tax 
on dispositions of USRPI) provide the circumstances under which a 
transferee of property can ascertain that there is no duty to withhold 
under section 1445(a) because the transferor is not a foreign person, 
the property acquired is not a USRPI, or an exception to withholding 
applies. Sec.  1.1445-2. Section 1.1445-2(c)(3) provides that no 
withholding is required with respect to an acquisition of an interest 
in a domestic corporation if the transferor provides the transferee 
with a copy of a statement, issued by the corporation pursuant to Sec.  
1.897-2(h), certifying that the interest in the corporation is not a 
USRPI. The transferor must request the statement before the transfer, 
which may be relied on if the statement is dated not more than 30 days 
before the date of the transfer. A transferee may also rely on a 
corporation's statement that is voluntarily provided by the domestic 
corporation in response to a request from the transferee, if that 
statement otherwise complies with the requirements of Sec. Sec.  
1.1445-2(c)(3) and 1.897-2(h).
    Under Sec.  1.897-2(h)(1), a foreign person holding an interest in 
a domestic corporation may request that the corporation inform the 
person whether the interest constitutes a USRPI, which the corporation 
is required to provide within a reasonable period after receipt of such 
a request. A statement must be provided by the domestic corporation to 
the foreign person indicating the corporation's determination, and 
notice must be provided to the IRS in accordance with Sec.  1.897-
2(h)(2). Section 1.897-2(h)(3), however, provides that the requirements 
of Sec.  1.897-2(h) do not apply to ``domestically-controlled REITs, as 
defined in section 897(h)(4)(B),'' although a corporation not otherwise 
required to comply with the requirements of Sec.  1.897-2(h) may 
voluntarily choose to comply with the requirements of Sec.  1.897-
2(h)(4) and attach a statement to its income tax return informing the 
IRS that it is not a United States real property holding corporation.
    The availability of the procedures in Sec.  1.1445-2(c)(3) to 
holders of stock in a domestically controlled QIE is unclear given its 
reference to a statement provided under Sec.  1.897-2(h), which is 
explicitly inapplicable to domestically controlled QIEs under Sec.  
1.897-2(h)(3). Although Sec.  1.897-2(h) generally does not apply to 
domestically controlled QIEs pursuant to Sec.  1.897-2(h)(3) (and, 
therefore, the corporation is not required, upon request, to provide a 
statement to a person holding an interest in the corporation), this 
should not preclude the availability of the rules in Sec.  1.1445-
2(c)(3) to transferors of interests seeking to avoid withholding under 
section 1445 when the corporation voluntarily provides a statement to 
an interest holder that otherwise complies with Sec.  1.897-2(h). 
Absent the availability of these procedures, the transferor would not 
be able to establish that it is transferring an interest in a 
domestically controlled QIE and is thus not subject to withholding 
under section 1445(a). The final regulations thus revise the rules in 
Sec. Sec.  1.897-2(h)(3) and 1.1445-2(c)(3) to clarify the procedures 
available to a transferor to certify to a transferee that no 
withholding is required because the DC-QIE exception applies. As 
revised, the final regulations confirm that a domestic corporation may 
voluntarily provide a statement in response to a request from a 
transferor certifying that an interest in the corporation is not a 
USRPI because the corporation is a domestically controlled QIE, which 
the transferor may furnish to the transferee, provided the statement 
issued by the corporation otherwise complies with the requirements of 
Sec.  1.897-2(h).
E. Revisions to Examples
    A comment observed that proposed Sec.  1.897-1(c)(3)(vi)(D) 
(Example 4) contained a mathematical error. The final version of this 
example corrects that error, which does not otherwise affect the 
overall conclusion that the entity at issue does not qualify as a 
domestically controlled QIE. Sec.  1.897-1(c)(3)(vii)(D) (Example 4). 
The final regulations make other revisions to the examples in proposed 
Sec.  1.897-1(c)(3)(vi) to clarify the operation of certain rules, but 
which are not intended to alter the conclusions or substance of those 
examples.

IV. Applicability Date and Transition Rules

    The proposed regulations generally were proposed to apply to 
transactions occurring on or after the date that those regulations are 
published as final regulations in the Federal Register (``the 
finalization date''). The preamble to the proposed regulations noted, 
however, that the rules applicable for determining whether a QIE is 
domestically controlled may be relevant for determining QIE ownership 
during periods before the finalization date to the extent the testing 
period related to a transaction that occurs on or after the 
finalization date includes periods before that date.
    Comments raised concerns with the proposed applicability date; in 
particular, they noted that it would have a retroactive effect because 
of the testing period element of the DC-QIE exception and argued that, 
if adopted, the domestic corporation look-through rule should apply on 
a fully prospective basis with no application to any portion of a 
testing period before the finalization date. Further, these comments 
characterized the proposed regulations as a change from existing law 
and asserted that applying the rules to existing structures would be 
inappropriate because restructuring to comply with the rules would be 
difficult and costly, and buyers may be less inclined to invest in a 
structure that may be ``tainted'' as failing to qualify for the DC-QIE 
exception.
    Comments generally advocated for the following types of transition 
relief: (i) for QIEs in existence on the date the proposed regulations 
were issued, provide an exception (subject to termination rules like 
those in Sec.  301.7701-2(d)) such that a foreign-owned domestic 
corporation is not treated as a look-through person; (ii) exempt 
foreign investors in existing QIEs from the domestic corporation look-
through rule to the extent of existing ownership and capital 
commitments as of the date the proposed regulations were issued; (iii) 
only apply the domestic corporation look-through rule to QIE stock 
acquired by a foreign-owned domestic corporation after the finalization 
date; or (iv) delay application of the domestic corporation look-
through rule to existing QIEs for some period ranging from at least 120 
days after the finalization date to tax years beginning on or after 
January 1, 2028 (drawing from the general five-year testing period 
standard).
    The final regulations do not adopt the suggestion to delay 
application of the final domestic corporation look-through rule, which 
would exempt both existing and new QIE structures from the rule. 
However, the Treasury Department and the IRS have determined that, 
although the final domestic corporation look-through rule represents 
the appropriate application of section 897(h)(4)(B), its effect should 
be limited with respect to investors that may have entered into 
structures with the expectation that domestic control of a QIE would be 
determined without regard to that rule. Thus, consistent with the first 
three types of comments noted above, the final regulations include a 
transition

[[Page 31625]]

rule that, for a ten-year period, exempts existing structures from the 
final domestic corporation look-through rule, provided they meet 
certain requirements. Sec.  1.897-1(c)(3)(vi). These requirements are 
intended to ensure that the final domestic corporation look-through 
rule does not apply to preexisting business arrangements, but only to 
the extent the QIE does not acquire a significant amount of new USRPIs 
and does not undergo a significant change in its ownership (subject to 
an exception for acquisitions of a USRPI or QIE interest pursuant to a 
previous binding commitment). Sec.  1.897-1(c)(3)(vi)(A) and (E). If 
either of these two thresholds is exceeded, the QIE at that time 
becomes subject to the final domestic corporation look-through rule 
like any other QIE. Sec.  1.897-1(c)(3)(vi)(B).
    A QIE is considered to have acquired a significant amount of new 
USRPIs if the total fair market value of the USRPIs it acquires 
directly and indirectly exceeds 20 percent of the fair market value of 
the USRPIs held directly and indirectly by the QIE as of April 24, 
2024. Sec.  1.897-1(c)(3)(vi)(A)(2). The final regulations provide that 
the value of the USRPIs held directly and indirectly by a QIE on April 
24, 2024 is determined as of that date and that, for this purpose, 
taxpayers may use the most recently calculated amounts under the 
quarterly tests described in section 851(b)(3) or 856(c)(4), as 
applicable. Sec.  1.897-1(c)(3)(vi)(D). By using these existing rules 
the final regulations minimize the need to make additional or complex 
valuations.
    In determining whether there has been a significant change in the 
ownership of a QIE, the final regulations consider whether the direct 
or indirect ownership of the QIE by non-look-through persons 
(determined by applying the final domestic corporation look-through 
rule) has increased by more than 50 percentage points in the aggregate 
relative to the QIE stock owned by such non-look-through persons on 
April 24, 2024. Sec.  1.897-1(c)(3)(vi)(A)(3). Because this rule 
applies on a percentage basis, a non-pro-rata issuance or redemption of 
stock is counted towards the 50 percentage point amount. To simplify 
the determination of changes in ownership of stock of a QIE that is 
publicly traded, the final regulations disregard transfers by any 
person (regardless of whether they are a non-look-through person) that 
owns a less than five-percent interest in the stock of the QIE, unless 
the QIE has actual knowledge of that person's ownership. Sec.  1.897-
1(c)(3)(vi)(G).
    The transition rule applies until April 24, 2034, or, if earlier, 
until the requirements precluding significant acquisitions of USRPIs 
and changes in ownership are not met, at which time the final domestic 
corporation look-through rule applies in determining whether a QIE is 
domestically controlled. Sec.  1.897-1(c)(3)(vi)(B). The ten-year 
period is intended to provide sufficient time to mitigate the impact of 
the final domestic corporation look-through rule on existing QIEs and 
their investors, but ensures that all QIEs are eventually subject to 
the same rules. However, even after the transition rule no longer 
applies, the final domestic corporation look-through rule is 
prospective only and thus does not apply to any portion of a testing 
period during which the transition rule applied to a QIE. Sec.  1.897-
1(c)(3)(vi)(C). Thus, for example, if the transition rule ceases to 
apply to a QIE due to a change in its ownership but, at such time, the 
QIE is a domestically controlled QIE notwithstanding the final domestic 
corporation look-through rule, the determination of domestic control 
for the testing period of a subsequent disposition of QIE stock may 
disregard the final domestic corporation look-through rule to the 
extent the transition rule applied.

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6 of Executive Order 12866, as amended. Therefore, a regulatory 
impact assessment is not required.

II. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) 
generally requires that a Federal agency obtain the approval of the OMB 
before collecting information from the public, whether such collection 
of information is mandatory, voluntary, or required to obtain or retain 
a benefit. The collection of information in Sec.  1.1445-2(c)(3) is a 
statement provided by a domestic corporation that certifies that an 
interest in such corporation is not a U.S. real property interest. 
Section 1.1445-2(c)(3) clarifies that the existing procedure may also 
be used by a domestic corporation to certify that it is a domestically 
controlled QIE (as determined under Sec.  1.897-1(c)(3)), as long as 
the certification is voluntarily issued and otherwise complies with the 
existing requirements in Sec.  1.897-2(h).
    This modification to Sec.  1.1445-2(c)(3) clarifies the existing 
scope of the collection of information. For purposes of the PRA, the 
reporting burden associated with the collections of information in 
Sec.  1.1445-2(c)(3) will be reflected in the Paperwork Reduction Act 
Submissions associated with the section 1445 regulations (OMB control 
number 1545-0902).

III. Regulatory Flexibility Act

A. Succinct Statement of the Need for, and Objectives of, the Final 
Regulations
    As discussed in the preamble to the proposed regulations, there may 
be some uncertainty as to whether QFPFs and QCEs, which are treated as 
not ``nonresident alien individuals or foreign corporations'' for 
purposes of section 897, are treated as foreign persons for purposes of 
the DC-QIE exception. Treating QFPFs and QCEs as non-foreign investors 
for purposes of the DC-QIE exception has the potential to expand the 
effect of section 897(l) to foreign investors who are neither QFPFs nor 
QCEs (by exempting such investors from tax under section 897(a)). These 
regulations eliminate any uncertainty that taxpayers may have as to the 
proper classification of QFPFs and QCEs for purposes of the DC-QIE 
exception by providing that QFPFs and QCEs are treated as foreign 
persons for purposes of the DC-QIE exception.
    Also as discussed in the preamble to the proposed regulations, 
there is uncertainty regarding the determination of whether stock of a 
QIE is held ``directly or indirectly'' by foreign persons for purposes 
of the DC-QIE exception. These regulations provide rules to clarify 
this determination.
    Because there was a possibility of significant economic impact on a 
substantial number of small entities as a result of the rules relating 
to the treatment of QFPFs and QCEs for purposes of the DC-QIE exception 
and the definition of a domestically controlled QIE, the proposed 
regulations provided an initial regulatory flexibility analysis and 
requested comments from the public on the number of small entities that 
may be impacted and whether that impact will be economically 
significant. No comments were received.
B. Small Entities to Which These Regulations Will Apply
    The regulation relating to the treatment of QFPFs and QCEs for 
purposes of the DC-QIE exception affects other foreign investors in 
QIEs.

[[Page 31626]]

The regulation defining a domestically controlled QIE also affects 
foreign investors in QIEs. Because an estimate of the number of small 
businesses affected is not currently feasible, this final regulatory 
flexibility analysis assumes that a substantial number of small 
businesses will be affected. The Treasury Department and the IRS do not 
expect that these regulations will affect a substantial number of small 
nonprofit organizations or small governmental jurisdictions.
C. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements
    These regulations do not impose additional reporting or 
recordkeeping obligations. However, see Part II of this Special 
Analysis describing certain voluntary reporting that these regulations 
clarify is available in Sec.  1.1445-2(c)(3) by a domestic corporation 
to certify that it is a domestically controlled QIE.
D. Steps Taken To Minimize Significant Economic Impact, Legal Reasons, 
and Alternatives Considered
    The final regulations address potential uncertainty under current 
law and do not impose an additional economic burden. Consequently, the 
rules represent the approach with the least economic impact.
    These regulations clarify the treatment of QFPFs and QCEs for 
purposes of the DC-QIE exception. The rules are intended to ensure that 
the exemption under section 897(l) does not inappropriately inure to 
non-QFPFs or non-QCEs by treating QFPFs and QCEs as domestic investors 
for purposes of the DC-QIE exception. These regulations also clarify 
whether stock of a QIE is held ``directly or indirectly'' by foreign 
persons in determining whether the DC-QIE exception applies. The legal 
basis for these regulations is contained in sections 897(l) and 7805.
    Section 897(a) applies to nonresident alien individuals and foreign 
corporations, and neither the statute nor prior regulations establish 
different rules for small entities. Moreover, the DC-QIE exception is 
measured based on the ownership interests in a QIE, regardless of the 
size of the investor. Because the DC-QIE exception takes into account 
all investors, regardless of size, the Treasury Department and the IRS 
have concluded that the DC-QIE exception should apply uniformly to 
large and small business entities. The Treasury Department and the IRS 
did not consider any significant alternative to the rule that provides 
for the treatment of QFPFs and QCEs under the DC-QIE exception.
    The Treasury Department and the IRS did consider alternatives for 
the rule that defines a domestically controlled QIE, including one 
alternative that generally would treat all domestic C corporations as 
non-look-through persons (that is, without the special rule for 
foreign-controlled domestic corporations discussed in part I of the 
Summary of Comments and Explanation of Revisions section of this 
preamble). However, the Treasury Department and the IRS concluded that 
the look-through approach in the final regulations best serves the 
purposes of the DC-QIE exception while also taking into account 
``indirect'' ownership of QIE stock by foreign persons in determining 
whether a QIE is domestically controlled under section 897(h)(4)(B).

IV. Section 7805(f)

    Pursuant to section 7805(f) of the Code, the proposed regulations 
(REG-100442-22) preceding these final regulations were submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on the impact on small businesses and no comments were 
received.

V. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a State, 
local, or Tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. The final regulations do not include any Federal mandate 
that may result in expenditures by State, local, or Tribal governments, 
or by the private sector in excess of that threshold.

VI. Executive Order 13132: Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. The final regulations do not have 
federalism implications, do not impose substantial direct compliance 
costs on State and local governments, and do not preempt State law 
within the meaning of the Executive order.

Statement of Availability of IRS Documents

    IRS Revenue Procedures, Revenue Rulings, Notices, and other 
guidance cited in this document are published in the Internal Revenue 
Bulletin or Cumulative Bulletin and are available from the 
Superintendent of Documents, U.S. Government Publishing Office, 
Washington, DC 20402, or by visiting the IRS website at www.irs.gov.

Drafting Information

    The principal author of these final regulations is Arielle Borsos, 
Office of Associate Chief Counsel (International). However, other 
personnel from the Treasury Department and the IRS participated in 
their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order for Sec. Sec.  1.897-1, 1.897-2, and 1.1445-
2 to read in part as follows:

    Authority:  26 U.S.C. 7805 * * *
* * * * *
    Section 1.897-1 also issued under 26 U.S.C. 897 and 897(l)(3).
    Section 1.897-2 also issued under 26 U.S.C. 897.
* * * * *
    Section 1.1445-2 also issued under 26 U.S.C. 1445.
* * * * *

0
Par. 2. Section 1.897-1 is amended by:
0
1. Revising paragraph (a)(2);
0
2. Removing and reserving paragraph (c)(2)(i);
0
3. Adding paragraphs (c)(3) and (4) and (k);
0
4. Revising and republishing paragraph (l); and
0
5. Adding paragraph (n).
    The revisions and additions read as follows:


Sec.  1.897-1  Taxation of foreign investment in United States real 
property interests, definition of terms.

    (a) * * *
    (2) Applicability date. Except as otherwise provided in this 
paragraph (a)(2), the regulations set forth in this section and 
Sec. Sec.  1.897-2 through 1.897-4 apply to transactions occurring 
after June 18, 1980. Except as otherwise

[[Page 31627]]

provided in paragraph (c)(3)(vi) of this section, paragraphs (c)(3) and 
(4), (k), and (l) of this section apply to transactions occurring on or 
after April 25, 2024, and transactions occurring before April 25, 2024, 
resulting from an entity classification election under Sec.  301.7701-3 
of this chapter that was effective on or before April 25, 2024, but was 
filed on or after April 25, 2024. For transactions occurring before 
April 25, 2024, see paragraphs (c)(2)(i) and (l) of this section and 
Sec.  1.897-9T(c) contained in 26 CFR part 1, as revised April 1, 2024.
* * * * *
    (c) * * *
    (3) Domestically controlled QIE--(i) In general. An interest in a 
domestically controlled qualified investment entity (QIE) is not a 
United States real property interest. A QIE is domestically controlled 
if foreign persons hold directly or indirectly less than 50 percent of 
the fair market value of the QIE's outstanding stock at all times 
during the testing period. For rules that apply to distributions by a 
QIE (including a domestically controlled QIE) attributable to gain from 
the sale or exchange of a United States real property interest, see 
section 897(h)(1).
    (ii) Look-through approach for determining QIE stock held directly 
or indirectly. The following rules apply for purposes of determining 
whether a QIE is domestically controlled:
    (A) Non-look-through persons considered holders. Only a non-look-
through person is considered to hold directly or indirectly stock of 
the QIE.
    (B) Attribution from look-through persons. Stock of a QIE that, but 
for the application of paragraph (c)(3)(ii)(A) of this section, would 
be considered directly or indirectly held by a look-through person, is 
instead considered held directly or indirectly by the look-through 
person's shareholders, partners, or beneficiaries, as applicable, that 
are non-look-through persons based on the non-look-through person's 
proportionate interest in the look-through person. To the extent the 
shareholders, partners, or beneficiaries, as applicable, of the look-
through person are also look-through persons, this paragraph 
(c)(3)(ii)(B) applies to such shareholders, partners, or beneficiaries 
as if they directly or indirectly held, but for the application of 
paragraph (c)(3)(ii)(A) of this section, their proportionate share of 
the stock of the QIE.
    (C) No attribution from non-look-through persons. Stock of a QIE 
considered held directly or indirectly by a non-look-through person is 
not considered held directly or indirectly by any other person.
    (iii) Special rules for applying look-through approach. The 
following additional special rules apply for purposes of determining 
whether a QIE is domestically controlled:
    (A) Certain holders of U.S. publicly traded QIE stock. 
Notwithstanding any other provision of this paragraph (c)(3), a person 
holding less than five percent of U.S. publicly traded stock of a QIE 
at all times during the testing period, determined without regard to 
paragraph (c)(3)(ii)(A) of this section, is treated as a United States 
person that is a non-look-through person with respect to that stock, 
unless the QIE has actual knowledge that such person is not a United 
States person or has actual knowledge that such person is foreign 
controlled as determined under paragraph (c)(3)(v)(B) of this section 
(treating any person that is not a non-public domestic C corporation as 
if it were a non-public domestic C corporation for this purpose). For 
an example illustrating the application of this paragraph 
(c)(3)(iii)(A), see paragraph (c)(3)(vii)(C) of this section (Example 
3).
    (B) Certain foreign-controlled domestic C corporations. A non-
public domestic C corporation is treated as a look-through-person if it 
is a foreign-controlled domestic corporation. For an example 
illustrating the application of this paragraph (c)(3)(iii)(B), see 
paragraph (c)(3)(vii)(B) of this section (Example 2).
    (C) Public QIEs. A public QIE is treated as a foreign person that 
is a non-look-through person. The preceding sentence does not apply, 
however, if the public QIE is a domestically controlled QIE as defined 
in this paragraph (c)(3), determined after the application of this 
paragraph (c)(3)(iii), in which case the public QIE is treated as a 
United States person that is a non-look-through person. For an example 
illustrating the application of this paragraph (c)(3)(iii)(C), see 
paragraph (c)(3)(vii)(C) of this section (Example 3).
    (iv) Treatment of certain persons as foreign persons--(A) Qualified 
foreign pension fund or qualified controlled entity. For purposes of 
this paragraph (c)(3), a qualified foreign pension fund (including any 
part of a qualified foreign pension fund) or a qualified controlled 
entity is treated as a foreign person, irrespective of whether the fund 
or entity qualifies for the exception from section 897 provided in 
Sec.  1.897(l)-1(b)(1). For an example illustrating the application of 
this paragraph (c)(3)(iv)(A), see paragraph (c)(3)(vii)(A) of this 
section (Example 1). See also paragraph (k) of this section for a 
definition of foreign person that applies for purposes of sections 897, 
1445, and 6039C.
    (B) International organization. For purposes of this paragraph 
(c)(3), an international organization (as defined in section 
7701(a)(18)) is treated as a foreign person. See Sec.  1.897-9T(e) 
(regarding the treatment of international organizations under sections 
897, 1445, and 6039C), which provides that an international 
organization is not a foreign person with respect to United States real 
property interests, and is not subject to sections 897, 1445, and 6039C 
on the disposition of a United States real property interest.
    (v) Definitions. The following definitions apply for purposes of 
this paragraph (c)(3):
    (A) A domestic C corporation is any domestic corporation other than 
a regulated investment company (RIC) as defined in section 851, a real 
estate investment trust (REIT) as defined in section 856, or an S 
corporation as defined in section 1361.
    (B) A foreign-controlled domestic corporation is any non-public 
domestic C corporation if foreign persons hold directly or indirectly 
more than 50 percent of the fair market value of the non-public 
domestic C corporation's outstanding stock. For purposes of determining 
whether a non-public domestic C corporation is a foreign-controlled 
domestic corporation, the rules of paragraphs (c)(3)(ii)(A) through (C) 
and (c)(3)(iii)(C) of this section apply with the following 
modifications--
    (1) In paragraphs (c)(3)(ii)(A) through (C) of this section, 
treating references to QIE as references to non-public domestic C 
corporation; and
    (2) A non-public domestic C corporation that is a foreign-
controlled domestic corporation under this paragraph (c)(3)(v)(B) is 
treated as a look-through person for purposes of determining whether 
any other non-public domestic C corporation is a foreign-controlled 
domestic corporation.
    (C) A look-through person is any person other than a non-look-
through person. Thus, for example, a look-through person includes a 
REIT that is not a public QIE, an S corporation, a partnership 
(domestic or foreign) that is not a publicly traded partnership, a RIC 
that is not a public RIC, and a trust (domestic or foreign, whether or 
not the trust is described in sections 671 through 679). For a special 
rule that treats certain non-public domestic C corporations as look-
through persons, see paragraph (c)(3)(iii)(B) of this section.

[[Page 31628]]

    (D) A non-look-through person is an individual, a domestic C 
corporation (other than a foreign-controlled domestic corporation), a 
nontaxable holder, a foreign corporation (including a foreign 
government pursuant to section 892(a)(3)), a publicly traded 
partnership (domestic or foreign), a public RIC, an estate (domestic or 
foreign), an international organization (as defined in section 
7701(a)(18)), a qualified foreign pension fund (including any part of a 
qualified foreign pension fund), or a qualified controlled entity. For 
special rules that treat certain holders of QIE stock as non-look-
through persons, see paragraphs (c)(3)(iii)(A) and (C) of this section.
    (E) A non-public domestic C corporation is any domestic C 
corporation that is not a public domestic C corporation.
    (F) A nontaxable holder is--
    (1) Any organization that is exempt from taxation by reason of 
section 501(a);
    (2) The United States, any State (as defined in section 
7701(a)(10)), any territory of the United States, or a political 
subdivision of any State or any territory of the United States; or
    (3) Any Indian Tribal government (as defined in section 
7701(a)(40)) or its subdivision (determined in accordance with section 
7871(d)).
    (G) A public domestic C corporation is a domestic C corporation any 
class of stock of which is regularly traded on an established 
securities market within the meaning of Sec. Sec.  1.897-1(m) and 
1.897-9T(d). A domestic C corporation is not a public domestic C 
corporation, however, if the QIE whose status as domestically 
controlled is being determined under this paragraph (c)(3) has actual 
knowledge that the domestic C corporation is foreign controlled as 
determined under paragraph (c)(3)(v)(B) of this section (treating the 
domestic C corporation for this purpose as if it were a non-public 
domestic C corporation).
    (H) A public QIE is a QIE any class of stock of which is regularly 
traded on an established securities market within the meaning of 
Sec. Sec.  1.897-1(m) and 1.897-9T(d), or that is a RIC that issues 
redeemable securities within the meaning of section 2 of the Investment 
Company Act of 1940.
    (I) A public RIC is a RIC that is not a QIE and any class of stock 
of which is either regularly traded on an established securities market 
within the meaning of Sec. Sec.  1.897-1(m) and 1.897-9T(d), or common 
stock that is continuously offered pursuant to a public offering 
(within the meaning of section 4 of the Securities Act of 1933, as 
amended (15 U.S.C. 77a to 77aa)) and held by or for no fewer than 500 
persons. A RIC is not a public RIC, however, if the QIE whose status as 
domestically controlled is being determined under this paragraph (c)(3) 
has actual knowledge that the RIC is foreign controlled as determined 
under paragraph (c)(3)(v)(B) of this section (treating the RIC for this 
purpose as if it were a non-public domestic C corporation).
    (J) A publicly traded partnership is a partnership any class of 
interest of which is regularly traded on an established securities 
market within the meaning of Sec. Sec.  1.897-1(m) and 1.897-9T(d). A 
domestic partnership is not a publicly traded partnership, however, if 
the QIE whose status as domestically controlled is being determined 
under this paragraph (c)(3) has actual knowledge that the domestic 
partnership is foreign controlled as determined under paragraph 
(c)(3)(v)(B) of this section (treating the partnership for this purpose 
as if it were a non-public domestic C corporation).
    (K) A qualified controlled entity has the meaning set forth in 
Sec.  1.897(l)-1(e)(9).
    (L) A qualified foreign pension fund has the meaning set forth in 
Sec.  1.897(l)-1(c).
    (M) A QIE is a qualified investment entity, as defined in section 
897(h)(4)(A).
    (N) Testing period has the meaning set forth in section 
897(h)(4)(D).
    (O) U.S. publicly traded QIE stock is any class of stock of a QIE 
that is regularly traded on an established securities market within the 
meaning of Sec. Sec.  1.897-1(m) and 1.897-9T(d), but only if the 
established securities market is in the United States.
    (vi) Transition rule for certain QIEs owned by foreign-controlled 
domestic corporations--(A) General rule. Except as provided in 
paragraph (c)(3)(vi)(B) of this section, paragraph (c)(3)(iii)(B) of 
this section does not apply with respect to a QIE that is in existence 
as April 24, 2024, and satisfies the following requirements at all 
times on and after April 24, 2024--
    (1) The QIE is domestically controlled (as determined under this 
paragraph (c)(3), but without regard to paragraph (c)(3)(iii)(B) of 
this section);
    (2) The aggregate fair market value of any United States real 
property interests acquired by the QIE directly and indirectly after 
April 24, 2024, is no more than 20 percent of the aggregate fair market 
value of the United States real property interests held directly and 
indirectly by the QIE as of April 24, 2024 (determined in accordance 
with paragraph (c)(3)(vi)(D) of this section); and
    (3) The percentage of the stock of the QIE held directly or 
indirectly by one or more non-look-through persons (determined based on 
fair market value and under the rules of paragraphs (c)(3)(ii) through 
(v) of this section and this paragraph (c)(3)(vi), including paragraph 
(c)(3)(iii)(B) of this section) does not increase by more than 50 
percentage points in the aggregate over the percentage of stock of the 
QIE owned directly or indirectly by such non-look-through persons on 
April 24, 2024.
    (B) Termination of transition rule. The transition rule described 
in paragraph (c)(3)(vi)(A) of this section will cease to apply, and the 
rule in paragraph (c)(3)(iii)(B) of this section will apply for 
purposes of determining whether a QIE is domestically controlled, with 
respect to transactions occurring on or after the earlier of:
    (1) The date immediately following the date on which the QIE fails 
to meet any of the requirements described in paragraph (c)(3)(vi)(A) of 
this section; and
    (2) April 24, 2034. For an example illustrating the application of 
paragraph (c)(3)(vi)(A) of this section and this paragraph 
(c)(3)(vi)(B), see paragraph (c)(3)(vii)(E) of this section (Example 
5).
    (C) Effect of transition rule on testing period. If the transition 
rule described in paragraph (c)(3)(vi)(A) of this section ceases to 
apply to a QIE under paragraph (c)(3)(vi)(B) of this section, the rule 
in paragraph (c)(3)(iii)(B) of this section will not apply to the QIE 
with respect to the portion of any testing period during which the 
transition rule in this paragraph (c)(3)(vi) applied.
    (D) Determination of fair market value of United States real 
property interests. For purposes of paragraph (c)(3)(vi)(A)(2) of this 
section, the fair market value of the United States real property 
interests held directly and indirectly by a QIE on April 24, 2024, is 
the value of such property interests as calculated under section 
851(b)(3) or 856(c)(4) as of the close of the most recent quarter of 
the QIE's taxable year before April 24, 2024. For purposes of paragraph 
(c)(3)(vi)(A)(2) of this section, the fair market value of any property 
acquired after the close of the most recent quarter of the QIE's 
taxable year before April 24, 2024, whether acquired before or after 
April 24, 2024, is determined on the date of such acquisition using a 
reasonable method, provided the QIE consistently uses the same method 
with respect to all of its United States real property interests when 
applying this paragraph (c)(3)(vi).

[[Page 31629]]

    (E) Binding commitments. For purposes of paragraphs 
(c)(3)(vi)(A)(2) and (3) of this section, a direct or indirect 
acquisition of a United States real property interest, or of stock of a 
QIE pursuant to a written agreement that was (subject to customary 
conditions) binding before April 24, 2024, and all times thereafter, or 
pursuant to a tender offer announced before April 24, 2024, that is 
subject to section 14(e) of the Securities and Exchange Act of 1934 (15 
U.S.C. 78n(e)) and 17 CFR 240.14e-1 through 240.14e-8 (Regulation 14E), 
is treated as occurring on April 24, 2024.
    (F) Ownership by certain successors under section 368(a)(1)(F). For 
purposes of paragraph (c)(3)(vi)(A)(3) of this section, the transferor 
corporation and the resulting corporation (as defined in Sec.  1.368-
2(m)(1)) in a reorganization described under section 368(a)(1)(F) 
(whether engaged in by the QIE or by another corporation) are treated 
as the same corporation.
    (G) Ownership by less than five-percent public shareholders. For 
purposes of paragraph (c)(3)(vi)(A)(3) of this section, in the case of 
any class of stock of a QIE that is regularly traded on an established 
securities market within the meaning of Sec. Sec.  1.897-1(m) and 
1.897-9T(d), all such stock owned by persons holding less than 5 
percent of that class of stock, determined without regard to paragraph 
(c)(3)(ii)(A) of this section, is treated as stock owned by a single 
non-look-through person except to the extent that the QIE has actual 
knowledge regarding the ownership of any person.
    (vii) Examples. The rules of this paragraph (c)(3) are illustrated 
by the following examples. It is assumed that each entity has a single 
class of stock or other ownership interests, that the ownership 
described existed throughout the relevant testing period and that, 
unless otherwise stated, a QIE is not a public QIE as defined under 
paragraph (c)(3)(v)(H) of this section.
    (A) Example 1: QIE stock held by public domestic C corporation--(1) 
Facts. USR is a REIT, 51 percent of the stock of which is held by X, a 
public domestic C corporation as defined in paragraph (c)(3)(v)(G) of 
this section, and 49 percent of the stock of which is held by 
nonresident alien individuals, which are foreign persons as defined in 
paragraph (k) of this section.
    (2) Analysis. Under paragraph (c)(3)(v)(M) of this section, USR is 
a QIE. Because X is a public domestic C corporation, it cannot be a 
foreign-controlled domestic corporation and, therefore, is a non-look-
through person as defined under paragraph (c)(3)(v)(D) of this section. 
Thus, under paragraph (c)(3)(ii)(A) of this section X is considered as 
holding directly or indirectly stock of USR for purposes of determining 
whether USR is a domestically controlled QIE. Under paragraph 
(c)(3)(ii)(C) of this section, the USR stock held directly or 
indirectly by X is not considered held directly or indirectly by any 
other person, including the shareholders of X. Because X is not a 
foreign person as defined in paragraph (k) of this section and holds 
directly or indirectly 51 percent of the single class of outstanding 
stock of USR, foreign persons hold directly or indirectly less than 50 
percent of the fair market value of the stock of USR, and USR therefore 
is a domestically controlled QIE under paragraph (c)(3)(i) of this 
section.
    (3) Alternative facts: QIE stock held by domestic partnership. The 
facts are the same as in paragraph (c)(3)(vii)(A)(1) of this section 
(Example 1), except that, instead of being a public domestic C 
corporation, X is a domestic partnership that is not a publicly traded 
partnership as defined in paragraph (c)(3)(v)(J) of this section. In 
addition, FC1, a foreign corporation, holds a 50 percent interest in X, 
and the remaining interests in X are held by U.S. citizens. X is not a 
non-look-through person as defined in paragraph (c)(3)(v)(D) of this 
section and, therefore, is a look-through person as defined in 
paragraph (c)(3)(v)(C) of this section. Accordingly, under paragraph 
(c)(3)(ii)(A) of this section, X is not considered as holding directly 
or indirectly stock of USR for purposes of determining whether USR is a 
domestically controlled QIE. Under paragraph (c)(3)(ii)(B) of this 
section, the stock of USR that, but for paragraph (c)(3)(ii)(A) of this 
section, is considered held by X, a look-through person, is instead 
considered held proportionately by X's partners that are non-look-
through persons. Accordingly, because FC1 and the U.S. citizen partners 
in X are non-look-through persons as defined in paragraph (c)(3)(v)(D) 
of this section, 25.5 percent of the stock of USR is considered as held 
directly or indirectly by FC1 (50% x 51%), a foreign person as defined 
in paragraph (k) of this section, and 25.5 percent (in the aggregate) 
of the stock of USR is considered as held directly or indirectly by the 
U.S. citizen partners in X (50% x 51%), who are not foreign persons as 
defined in paragraph (k) of this section. Foreign persons therefore 
hold directly or indirectly 74.5 percent of the stock of USR (49 
percent of the stock of USR held directly or indirectly by nonresident 
alien individuals, who are non-look-through persons as defined in 
paragraph (c)(3)(v)(D) of this section, plus the 25.5 percent held 
directly or indirectly by FC1), and USR is not a domestically 
controlled QIE under paragraph (c)(3)(i) of this section. The result 
described in this paragraph (c)(3)(vii)(A)(3) would be the same if, 
instead of being a domestic partnership, X were a foreign partnership.
    (4) Alternative facts: QIE stock held by a qualified foreign 
pension fund. The facts are the same as in paragraph (c)(3)(vii)(A)(3) 
of this section (Example 1), except that, instead of being a foreign 
corporation, FC1 is a qualified foreign pension fund. The analysis is 
the same as in paragraph (c)(3)(vii)(A)(3) (Example 1) regarding the 
treatment of X as a look-through person as defined in paragraph 
(c)(3)(v)(C) of this section. In addition, FC1, a foreign person under 
paragraph (c)(3)(iv)(A) of this section, is a non-look-through person 
as defined in paragraph (c)(3)(v)(D) of this section. Because FC1 and 
the U.S. citizen partners in X are non-look-through persons, 25.5 
percent of the stock of USR is considered as held directly or 
indirectly by FC1 (50% x 51%), and 25.5 percent (in the aggregate) of 
the stock of USR is considered as held directly or indirectly by the 
U.S. citizen partners in X (50% x 51%). Thus, for the same reasons 
described in paragraph (c)(3)(vii)(A)(3) (Example 1), foreign persons 
hold directly or indirectly 74.5 percent of the stock of USR, and USR 
is not a domestically controlled QIE under paragraph (c)(3)(i) of this 
section.
    (B) Example 2: QIE stock held by non-public domestic C corporation 
that is a foreign-controlled domestic corporation--(1) Facts. USR is a 
REIT, 51 percent of the stock of which is held by X, a non-public 
domestic C corporation as defined in paragraph (c)(3)(v)(E) of this 
section, and 49 percent of the stock of which is held by nonresident 
alien individuals, which are foreign persons as defined in paragraph 
(k) of this section. FC1, a foreign corporation, holds 40 percent of 
the stock of X, and Y, a nonresident alien individual, holds 15 percent 
of the stock of X. The remaining 45 percent of the stock of X is held 
by U.S. citizens.
    (2) Analysis. Under paragraph (c)(3)(v)(M) of this section, USR is 
a QIE. X, a non-public domestic C corporation, is a non-look-through 
person as defined under paragraph (c)(3)(v)(D) of this section, unless 
paragraph (c)(3)(iii)(B) of this section applies to treat X as a look-
through person because X is a foreign-controlled domestic corporation. 
FC1, Y, and the U.S. citizen shareholders of X are non-look-through 
persons as defined under paragraph (c)(3)(v)(D).

[[Page 31630]]

Under paragraph (c)(3)(v)(B)(1) of this section, FC1, Y, and the U.S. 
citizen shareholders are all considered as holding directly or 
indirectly stock of X for purposes of determining whether X is a 
foreign-controlled domestic corporation. Under paragraph 
(c)(3)(v)(B)(1) of this section, the stock held directly or indirectly 
by FC1, Y, and the U.S. citizen shareholders is not considered held 
directly or indirectly by any other person. Because FC1 and Y, both 
foreign persons as defined in paragraph (k) of this section, hold 
directly or indirectly 40 percent and 15 percent of the stock of X, 
respectively, foreign persons hold directly or indirectly more than 50 
percent of the fair market value of the stock of X, and X is a foreign-
controlled domestic corporation under paragraph (c)(3)(v)(B) of this 
section. Accordingly, under paragraph (c)(3)(iii)(B) of this section, X 
is a look-through person as defined in paragraph (c)(3)(v)(C) of this 
section and, therefore, under paragraph (c)(3)(ii)(A) of this section 
is not considered as holding directly or indirectly stock of USR for 
purposes of determining whether USR is a domestically controlled QIE. 
Under paragraph (c)(3)(ii)(B) of this section, the stock of USR that, 
but for paragraph (c)(3)(ii)(A), is considered held by X, a look-
through person, is instead considered held proportionately by X's 
shareholders that are non-look-through persons. Accordingly, because 
FC1, Y, and the U.S. citizen shareholders of X are non-look-through 
persons, 20.4 percent of the stock of USR is considered as held 
directly or indirectly by FC1 (40% x 51%), 7.65 percent of the stock of 
USR is considered as held directly or indirectly by Y (15% x 51%), and 
22.95 percent (in the aggregate) of the stock of USR is considered as 
held directly or indirectly by the U.S. citizen shareholders (45% x 
51%). Foreign persons therefore hold directly or indirectly 77.05 
percent of the stock of USR (49 percent of the stock of USR held 
directly by nonresident alien individuals, who are foreign persons and 
non-look-through persons as defined in paragraph (c)(3)(v)(D), plus the 
20.4 percent and 7.65 percent held indirectly by FC1 and Y, 
respectively), and USR is not a domestically controlled QIE under 
paragraph (c)(3)(i) of this section. The result described in this 
paragraph (c)(3)(vii)(B)(2) would be different if Y were a U.S. citizen 
instead of a nonresident alien individual, in which case X would be a 
non-look-through person because it is not a foreign-controlled domestic 
corporation under paragraph (c)(3)(v)(B) (the only foreign non-look-
through person to hold directly or indirectly stock in X is FC1, which 
holds a 40-percent interest). Consequently, USR would be a domestically 
controlled QIE under paragraph (c)(3)(i) of this section because 
foreign persons hold directly or indirectly less than 50 percent of the 
stock of USR.
    (C) Example 3: QIE stock held by public QIE that is a domestically 
controlled QIE--(1) Facts. USR2 is a REIT, 51 percent of the stock of 
which is held by USR1, a REIT that is a public QIE as defined in 
paragraph (c)(3)(v)(H) of this section, and 49 percent of the stock of 
which is held by nonresident alien individuals, which are foreign 
persons as defined in paragraph (k) of this section. The stock of USR1 
is U.S. publicly traded QIE stock as defined in paragraph (c)(3)(v)(O) 
of this section. FC1 and FC2, both foreign corporations, each hold 20 
percent of the stock of USR1. The remaining 60 percent of the stock of 
USR1 is held by persons that each hold less than 5 percent of the stock 
of USR1 and with respect to which USR1 has no actual knowledge that 
such person is not a United States person or is foreign controlled (as 
determined under paragraph (c)(3)(v)(B) of this section by treating any 
person that is not a non-public domestic C corporation as if it were a 
non-public domestic C corporation for this purpose) (USR1 less than 
five-percent public shareholders).
    (2) Analysis. Under paragraph (c)(3)(v)(M) of this section, USR2 
and USR1 are QIEs. Under paragraph (c)(3)(iii)(A) of this section, each 
of the USR1 less than five-percent public shareholders is treated as a 
United States person that is a non-look-through person. Consequently, 
under paragraph (c)(3)(i) of this section USR1 is a domestically 
controlled QIE because FC1 and FC2, each a foreign person as defined in 
paragraph (k) of this section that is a non-look-through person under 
paragraph (c)(3)(v)(D) of this section, together hold directly or 
indirectly only 40 percent of the stock of USR1 and, thus, foreign 
persons hold directly or indirectly less than 50 percent of the fair 
market value of the stock of USR1. In addition, the USR2 stock held by 
USR1 is treated as held directly or indirectly by a United States 
person that is a non-look-through person under paragraph (c)(3)(iii)(C) 
of this section. Because USR1 holds directly or indirectly 51 percent 
of the stock of USR2, foreign persons hold directly or indirectly less 
than 50 percent of the fair market value of the stock of USR2, and USR2 
is a domestically controlled QIE under paragraph (c)(3)(i) of this 
section.
    (3) Alternative facts: QIE stock held by public QIE that is not a 
domestically controlled QIE. The facts are the same as in paragraph 
(c)(3)(vii)(C)(1) of this section (Example 3), except that 25 percent 
of the stock of USR1 is held by each of FC1 and FC2, with the remaining 
50 percent of the stock of USR1 held by the USR1 less than five-percent 
public shareholders. Regardless of the treatment of the USR1 less than 
five-percent public shareholders, USR1 is not a domestically controlled 
QIE under paragraph (c)(3)(i) of this section because FC1 and FC2, each 
a foreign person as defined in paragraph (k) of this section that is a 
non-look-through person under paragraph (c)(3)(v)(D) of this section, 
together hold directly or indirectly 50 percent of the stock of USR1 
and, thus, foreign persons do not hold directly or indirectly less than 
50 percent of the fair market value of the stock of USR1. In addition, 
the USR2 stock held by USR1 is treated as held by a foreign person that 
is a non-look-through person under paragraph (c)(3)(iii)(C) of this 
section. Because USR1 holds directly or indirectly 51 percent of the 
stock of USR2, foreign persons do not hold directly or indirectly less 
than 50 percent of the fair market value of the stock of USR2, and USR2 
is not a domestically controlled QIE under paragraph (c)(3)(i) of this 
section.
    (D) Example 4: QIE stock held by non-public QIE--(1) Facts. USR2 is 
a REIT, 49 percent of the stock of which is held by nonresident alien 
individuals, and 51 percent of the stock of which is held by USR1, a 
REIT. USR1 is not a public QIE as defined in paragraph (c)(3)(v)(H) of 
this section. U.S. citizens hold 50 percent of the stock of USR1. The 
remaining 50 percent of the stock of USR1 is held by PRS, a domestic 
partnership, 50 percent of the interests in which are held by DC, a 
public domestic C corporation as defined in paragraph (c)(3)(v)(G) of 
this section, and 50 percent of the interests in which are held by 
nonresident alien individuals.
    (2) Analysis. Under paragraph (c)(3)(v)(M) of this section, USR2 
and USR1 are QIEs. USR1 is not treated as a non-look-through person 
under paragraph (c)(3)(iii)(C) of this section because USR1 is not a 
public QIE as defined in paragraph (c)(3)(v)(H) of this section. Each 
of USR1 and PRS is a look-through person as defined in paragraph 
(c)(3)(v)(C) of this section that is not treated as holding directly or 
indirectly stock in USR2 for purposes of determining whether USR2 is a 
domestically controlled QIE under paragraph (c)(3)(ii)(A) of this 
section.

[[Page 31631]]

Because the U.S. citizens who hold USR1 stock are non-look-through 
persons as defined in paragraph (c)(3)(v)(D) of this section, those 
U.S. citizens are treated under paragraph (c)(3)(ii)(B) of this section 
as holding directly or indirectly 25.5 percent of the stock of USR2 
through their USR1 stock interest (50% x 51%) in accordance with 
paragraph (c)(3)(ii)(A) of this section. Similarly, because DC and the 
nonresident alien partners in PRS are non-look-through persons, each is 
treated under paragraph (c)(3)(ii)(B) of this section as holding 
directly or indirectly the stock of USR2 through its interest in PRS 
and PRS's interest in USR1. Thus, DC is treated as holding directly or 
indirectly 12.75 percent of the stock of USR2 (50% x 50% x 51%) and the 
nonresident alien individual partners, which are foreign persons as 
defined in paragraph (k) of this section, are treated as directly or 
indirectly holding a 12.75 percent aggregate interest in the stock of 
USR2 (50% x 50% x 51%). Foreign persons therefore hold directly or 
indirectly 61.75 percent of the stock of USR2 (the 49 percent stock in 
USR2 directly held by nonresident alien individuals, who are foreign 
persons and non-look-through persons as defined in paragraph 
(c)(3)(v)(D), plus the 12.75 percent in stock indirectly held by the 
nonresident alien individual partners in PRS), and USR2 is not a 
domestically controlled QIE under paragraph (c)(3)(i) of this section.
    (E) Example 5: Transition rule asset requirement--(1) Facts. USR is 
a REIT formed on January 1, 2018. From formation, 51 percent of the 
stock of USR is held by X, a non-public domestic C corporation as 
defined in paragraph (c)(3)(v)(E) of this section, 25 percent of the 
stock of USR is held by FC1, a foreign corporation, and 24 percent of 
the stock of USR is held by nonresident alien individuals. FC2, a 
foreign corporation, and FC3, also a foreign corporation, each hold 50 
percent of the stock of X. On April 24, 2024, USR's only property is 
Asset 1, a United States real property interest. The value of Asset 1, 
calculated under section 856(c)(4) as of the most recent quarter of 
USR's taxable year before 24, is $100x. On January 1, 2026, USR borrows 
$30x and acquires Asset 2, a United States real property interest, for 
$30x.
    (2) Analysis. As of April 24, 2024, USR is a domestically 
controlled QIE under paragraph (c)(3)(i) of this section, because, as 
determined without regard to paragraph (c)(3)(iii)(B) of this section, 
X is a non-look-through person and, consequently, foreign persons hold 
directly or indirectly less than 50 percent of the stock of USR. 
Accordingly, USR satisfies the requirement under paragraph 
(c)(3)(vi)(A)(1) of this section. USR also satisfies the requirements 
under paragraphs (c)(3)(vi)(A)(2) and (3) of this section, 
respectively, as of such date, because USR has not acquired directly or 
indirectly any United States real property interests, and the ownership 
of stock of USR has not changed. Thus, as of April 24, 2024, USR 
qualifies for the transition relief under paragraph (c)(3)(vi)(A) of 
this section. However, on January 1, 2026, USR no longer meets the 
requirement for transition relief in paragraph (c)(3)(vi)(A)(2) of this 
section because the fair market value of Asset 2, $30x, is 30 percent 
(which is more than 20 percent) of $100x, which (as calculated in 
accordance with paragraphs (c)(3)(vi)(A)(2) and (c)(3)(vi)(D) of this 
section) is the fair market value of USR's United States real property 
interests, namely Asset 1, as of April 24, 2024. Therefore, under 
paragraph (c)(3)(vi)(B)(1) of this section the transition rule ceases 
to apply to USR and, thus, paragraph (c)(3)(iii)(B) applies for 
purposes of determining whether USR is domestically controlled with 
respect to transactions occurring after January 1, 2026. Because FC2 
and FC3 are non-look-through persons that hold more than 50 percent of 
the stock of X, X is a foreign-controlled domestic corporation under 
paragraph (c)(3)(iii)(B), and USR will not be a domestically controlled 
QIE under paragraph (c)(3)(i) of this section as of January 2, 2026, 
because foreign non-look-through persons (FC1, 25 percent, FC2, 25.5 
percent, FC3, 25.5 percent, and the nonresident alien individuals, 24 
percent) directly or indirectly hold more than 50 percent of the stock 
of USR.
    (3) Alternative facts: transition rule ownership requirement. The 
facts are the same as in paragraph (c)(3)(vii)(E)(1) of this section 
(Example 5), except that instead of USR borrowing funds and acquiring 
Asset 2, FC3 sells its 50-percent stock interest in X to FC2 on June 1, 
2024, and, on January 1, 2026, FC1 sells its 25-percent stock interest 
in USR to FC4, a foreign corporation. Following FC3's sale of its X 
stock to FC2 on June 1, 2024, FC2's stock interest in USR has increased 
by 25.5 percentage points, from 25.5 percent on April 24, 2024 (which 
is 50 percent of 51 percent), to 51 percent. Following FC1's sale of 
its USR stock to FC4 on January 1, 2026, FC4's stock interest in USR 
has increased by 25 percentage points, from zero percent on April 24, 
2024, to 25 percent. Accordingly, in the aggregate, non-look-through 
persons have increased their ownership in USR by 50.5 percentage points 
(25.5 percent and 25 percent for FC2 and FC4, respectively), and USR no 
longer meets the requirement for transition relief in paragraph 
(c)(3)(vi)(A)(3) of this section as of January 1, 2026. Therefore, 
under paragraph (c)(3)(vi)(B)(1) of this section the transition rule 
ceases to apply to USR and, thus, paragraph (c)(3)(iii)(B) of this 
section applies for purposes of determining whether USR is domestically 
controlled with respect to transactions occurring after January 1, 
2026. Because FC2, a non-look-through person, holds more than 50 
percent of the stock of X, X is a foreign-controlled domestic 
corporation under paragraph (c)(3)(iii)(B) of this section, and USR 
will not be a domestically controlled QIE under paragraph (c)(3)(i) of 
this section because foreign non-look-through persons (FC2, 51 percent, 
FC4, 25 percent, and the nonresident alien individuals, 24 percent) 
directly or indirectly hold more than 50 percent of the stock of USR.
    (4) Foreign ownership percentage. For purposes of calculating the 
foreign ownership percentage under section 897(h)(4)(C), the 
determination of the QIE stock that was held directly or indirectly by 
foreign persons is made under the rules of paragraphs (c)(3)(ii) 
through (vii) of this section.
* * * * *
    (k) Foreign person. The term foreign person means a nonresident 
alien individual (including an individual subject to the provisions of 
section 877), a foreign corporation as defined in paragraph (l) of this 
section, a foreign partnership, a foreign trust or a foreign estate, as 
such persons are defined by section 7701 and the regulations in this 
chapter under section 7701. A resident alien individual, including a 
nonresident alien individual with respect to whom there is in effect an 
election under section 6013(g) or (h) to be treated as United States 
resident, is not a foreign person. With respect to the status of 
foreign governments and international organizations, see Sec.  1.897-
9T(e). See paragraph (c)(3)(iv)(A) of this section regarding the 
treatment of qualified foreign pension funds and qualified controlled 
entities as foreign persons for purposes of section 897(h)(4)(B).
    (l) Foreign corporation. The term foreign corporation has the 
meaning ascribed to such term in section 7701(a)(3) and (5) and Sec.  
301.7701-5. For purposes of sections 897 and 6039C, however, the term 
does not include a foreign corporation with respect to

[[Page 31632]]

which there is in effect an election under section 897(i) and Sec.  
1.897-3 to be treated as a domestic corporation. For purposes of 
section 897, the term does not include a qualified holder described in 
Sec.  1.897(l)-1(d); see paragraph (c)(3)(iv)(A) of this section 
regarding the treatment of qualified foreign pension funds and 
qualified controlled entities as foreign persons for purposes of 
section 897(h)(4)(B).
* * * * *
    (n) Regularly traded cross-reference. See Sec.  1.897-9T(d) for a 
definition of regularly traded for purposes of sections 897, 1445, and 
6039C.
* * * * *

0
Par. 3. Section 1.897-2 is amended by revising paragraph (h)(3) to read 
as follows:


Sec.  1.897-2  United States real property holding corporations.

* * * * *
    (h) * * *
    (3) Requirements not applicable. The requirements of this paragraph 
(h) do not apply to domestically-controlled qualified investment 
entities, as defined in section 897(h)(4)(B). But see Sec.  1.1445-
2(c)(3) for rules providing that no withholding is required under 
section 1445(a) in certain cases when a statement is voluntarily issued 
by the corporation and otherwise complies with the requirements of this 
paragraph (h). The requirements of this paragraph (h) also do not apply 
to a corporation any class of stock in which is regularly traded on an 
established securities market at any time during the calendar year. 
However, such a corporation may voluntarily choose to comply with the 
requirements of paragraph (h)(4) of this section.
* * * * *

0
Par. 4. Section 1.897-9T is amended by:
0
1. Removing and reserving paragraph (c); and
0
2. Revising and republishing paragraph (e).
    The revision reads as follows:


Sec.  1.897-9T  Treatment of certain interest in publicly traded 
corporations, definition of foreign person, and foreign governments and 
international organizations (temporary).

* * * * *
    (e) Foreign governments and international organizations. A foreign 
government shall be treated as a foreign person with respect to U.S. 
real property interests, and shall be subject to sections 897, 1445, 
and 6039C on the disposition of a U.S. real property interest except to 
the extent specifically otherwise provided in the regulations in this 
chapter issued under section 892. An international organization (as 
defined in section 7701(a)(18)) is not a foreign person with respect to 
U.S. real property interests, and is not subject to sections 897, 1445, 
and 6039C on the disposition of a U.S. real property interest. See 
Sec.  1.897-1(c)(3)(iv)(B) regarding the treatment of international 
organizations as foreign persons for purposes of section 897(h)(4)(B). 
Buildings or parts of buildings and the land ancillary thereto 
(including the residence of the head of the diplomatic mission) used by 
the foreign government for a diplomatic mission shall not be a U.S. 
real property interest in the hands of the respective foreign 
government.
* * * * *

0
Par. 5. Section 1.1445-2 is amended by:
0
1. Revising paragraph (c)(3)(i); and
0
2. Adding two sentences at the end of paragraph (e).
    The revision and additions read as follows:


Sec.  1.1445-2  Situations in which withholding is not required under 
section 1445(a).

* * * * *
    (c) * * *
    (3) * * *
    (i) In general. No withholding is required under section 1445(a) 
upon the acquisition of an interest in a domestic corporation, if the 
transferor provides the transferee with a copy of a statement, issued 
by the corporation pursuant to Sec.  1.897-2(h), certifying that the 
interest is not a U.S. real property interest, or if the transferor 
provides the transferee with a statement certifying that the 
corporation is a domestically controlled qualified investment entity 
(as determined under Sec.  1.897-1(c)(3)) that is voluntarily issued by 
the corporation but otherwise complies with the requirements of Sec.  
1.897-2(h). In general, a corporation may issue such a statement only 
if the corporation was not a U.S. real property holding corporation at 
any time during the previous five years (or the period in which the 
interest was held by its present holder, if shorter), the corporation 
is a domestically controlled qualified investment entity (as determined 
under Sec.  1.897-1(c)(3)), or if interests in the corporation ceased 
to be United States real property interests under section 897(c)(1)(B). 
(A corporation may not provide such a statement based on its 
determination that the interest in question is an interest solely as a 
creditor.) See Sec.  1.897-2(f) and (h). The corporation may provide 
such a statement directly to the transferee at the transferor's 
request. The transferor must request such a statement before the 
transfer, and shall, to the extent possible, specify the anticipated 
date of the transfer. A corporation's statement may be relied upon for 
purposes of this paragraph (c)(3) only if the statement is dated not 
more than 30 days before the date of the transfer. A transferee may 
also rely upon a corporation's statement that is voluntarily provided 
by the corporation in response to a request from the transferee, if 
that statement otherwise complies with the requirements of this 
paragraph (c)(3) and Sec.  1.897-2(h).
* * * * *
    (e) * * * Paragraph (c)(3)(i) of this section applies with respect 
to dispositions of U.S. real property interests, and distributions 
described in section 897(h), occurring on or after April 25, 2024. For 
dispositions of U.S. real property interests, and distributions 
described in section 897(h), occurring before April 25, 2024, see Sec.  
1.1445-2(c)(3)(i), as contained in 26 CFR part 1, revised as of April 
1, 2024.

Douglas W. O'Donnell,
Deputy Commissioner.

    Approved: April 2, 2024.
Aviva Aron-Dine,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2024-08267 Filed 4-24-24; 8:45 am]
BILLING CODE 4830-01-P