The final regulations provide guidance on the definition of a domestically controlled qualified investment entity (DCQIE) under section 897(l) of the Internal Revenue Code. This guidance is important for determining whether a foreign person's gain or loss from the disposition of a U.S. real property interest is subject to tax under section 897. The regulations also provide rules for determining whether a foreign person is a related person with respect to a DCQIE.
The U.S. Treasury Department and IRS today released final regulations (T.D. 9992) regarding when foreign persons, including qualified foreign pension funds, are considered to directly or indirectly hold stock in a qualified investment entity (QIE) for purposes of determining whether a QIE is domestically controlled and thus not treated as a United States real property interest (USRPI) under section 897.
The final regulations finalize portions of proposed regulations (REG-100442-22) published on December 29, 2022 (read TaxNewsFlash), other than those portions addressing the section 892 exemption for foreign governments which will be addressed in a separate rulemaking.
The final regulations retain the general approach and structure of the proposed regulations, with certain revisions. The domestic corporation look-through rule was not withdrawn, but its scope was narrowed. In particular, the amount of foreign ownership required to look through a non-public domestic C corporation was increased from 25% or more to more than 50%. In addition, the final regulations adopt a transition rule for existing QIE structures.
The final regulations are effective April 25, 2024.
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