[Federal Register Volume 87, Number 249 (Thursday, December 29, 2022)]
[Proposed Rules]
[Pages 80097-80108]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-27971]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-100442-22]
RIN 1545-BQ36


Guidance on the Foreign Government Income Exemption and the 
Definition of Domestically Controlled Qualified Investment Entities

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations regarding the 
treatment of certain entities, including qualified foreign pension 
funds, for purposes of the exemption from taxation afforded to foreign 
governments (the ``proposed regulations''). The proposed regulations 
also address the determination of whether a qualified investment entity 
is domestically controlled, including the treatment of qualified 
foreign pension funds for this purpose.

DATES: Written or electronic comments and requests for a public hearing 
must be received by February 27, 2023.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically. Submit electronic submissions via the Federal 
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-100442-
22) by following the online instructions for submitting comments. Once 
submitted to the Federal eRulemaking Portal, comments cannot be edited 
or withdrawn. The Department of the Treasury and the IRS will publish 
for public availability any comments submitted electronically and 
comments submitted on paper to its public docket. Send hard copy 
submissions to: CC:PA:LPD:PR (REG-100442-22), Room 5203, Internal 
Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 
20044.

FOR FURTHER INFORMATION CONTACT: Concerning Sec.  1.892-5, Joel Deuth 
at (202) 317-6938; concerning Sec.  1.897-1, Arielle Borsos at (202) 
317-6937; concerning submissions of comments or requests for a public 
hearing, Regina Johnson at (202) 317-5177 (not toll-free numbers) or 
[email protected].

SUPPLEMENTARY INFORMATION:

Background

I. Section 892

    Section 892(a)(1) of the Internal Revenue Code (the ``Code'') 
exempts from U.S. taxation certain income derived by a foreign 
government. This exemption, however, does not apply to income that is 
(1) derived from the conduct of a commercial activity (whether within 
or outside the United States), (2) received by a controlled commercial 
entity or received (directly or indirectly) from a controlled 
commercial entity, or (3) derived from the disposition of an interest 
in a controlled commercial entity. Section 892(a)(2)(A).
    Section 892(a)(2)(B) provides that for purposes of section 
892(a)(2)(A), a controlled commercial entity is any entity engaged in 
commercial activities (whether within or outside the United States) and 
in which a foreign government holds (directly or indirectly) interests 
according to specified thresholds. The term ``entity'' in section 
892(a)(2)(B) means a corporation, a partnership, a trust, and an 
estate. See Sec.  1.892-5(a)(3).
    A United States real property holding corporation (``USRPHC''), as 
defined in section 897(c)(2), or a foreign corporation that would be a 
USRPHC if it was a United States corporation, is treated as engaged in 
commercial activity and, therefore, is a controlled commercial entity 
if a foreign government meets certain ownership or control thresholds 
with respect to that USRPHC or foreign corporation. Sec.  1.892-
5T(b)(1).

II. Section 897

    Section 897(a)(1) provides that gain or loss of a nonresident alien 
individual or foreign corporation from the disposition of a United 
States real property interest (``USRPI'') is taken into account under 
section 871(b)(1) or 882(a)(1), as applicable, as if the nonresident 
alien individual or foreign corporation were engaged in a trade or 
business within the United States during the taxable year and such gain 
or loss were effectively connected with that trade or business.
    Subject to certain exceptions, section 897(c)(1)(A) defines a USRPI 
as an interest in real property (including an interest in a mine, well, 
or other natural deposit) located in the United States or the Virgin 
Islands, and any interest (other than solely as a creditor) in any 
domestic corporation unless the taxpayer establishes that such 
corporation was at no time a USRPHC during the period set forth in 
section 897(c)(1)(A)(ii) (generally, the five-year period ending on the 
date of the disposition of the interest). Under section 897(c)(2), a 
USRPHC is generally any corporation if the fair market value of its 
USRPIs equals or exceeds 50 percent of the aggregate fair market value 
of its USRPIs, its interests in real property located outside the 
United States, plus any other of its assets that are used or held for 
use in a trade or business.
    Section 897(h)(1) provides that any distribution by a qualified 
investment entity (``QIE'') to a nonresident alien individual, a 
foreign corporation, or other QIE, to the extent attributable to gain 
from sales or exchanges by the QIE of USRPIs, is treated as gain 
recognized by such nonresident alien individual, foreign corporation, 
or other QIE from the sale or exchange of a USRPI, subject to certain 
exceptions. Section 897(h)(4)(A) defines a QIE as any (i) real estate 
investment trust (``REIT''), and (ii) any regulated investment company 
(``RIC'') which is a USRPHC or which would be a USRPHC if the 
exceptions in section 897(c)(3) and 897(h)(2) did not apply to 
interests in any REIT or RIC.

[[Page 80098]]

    Section 897(h)(2) provides that a USRPI does not include an 
interest in a domestically controlled QIE (``DC-QIE exception''). 
Accordingly, gain or loss on the disposition of stock in a domestically 
controlled QIE is not subject to section 897(a) (other than to the 
extent provided in section 897(h)(1)). Section 897(h)(4)(B) provides 
that a QIE is domestically controlled if less than 50 percent of the 
value of its stock is held directly or indirectly by foreign persons at 
all times during the testing period prescribed in section 897(h)(4)(D) 
(generally, the five-year period ending on the date of the 
disposition). The legislative history accompanying the enactment of 
section 897 indicates that Congress intended for the DC-QIE exception 
to apply to entities controlled by United States persons. See H.R. 
Conf. Rep. No. 96-1479, at 188 (1980) (``In the case of REITs which are 
controlled by U.S. persons, sales of the REIT shares by foreign 
shareholders would not be subject to tax (other than in the case of 
distribution by the REIT).''). Section 1.897-9T(c) defines ``foreign 
person'' for purposes of section 897 as a nonresident alien individual 
(including an individual subject to the provisions of section 877), a 
foreign corporation (as defined in Sec.  1.897-1(l)), a foreign 
partnership, a foreign trust, or a foreign estate, as such persons are 
defined respectively by Sec.  1.871-2 and by section 7701 and the 
regulations thereunder.\1\ Under Sec.  1.897-1(l), the term ``foreign 
corporation'' generally has the meaning ascribed to it in section 
7701(a)(3) and 7701(a)(5) and Sec.  301.7701-5.
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    \1\ Section 1.897-9T(a) provides that Sec.  1.897-9T(c) (the 
definition of ``foreign person'') would appear as Sec.  1.897-1(k) 
if and when Sec.  1.897-9T is adopted as a final regulation.
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    Section 897(h)(3) provides that in the case of a domestically 
controlled QIE, rules similar to those in section 897(d) (which 
prescribes rules requiring the recognition of gain on the distribution 
of a USRPI by a foreign corporation) apply to the foreign ownership 
percentage of any gain. Section 897(h)(4)(C) provides that the term 
``foreign ownership percentage'' means the percentage of QIE stock that 
was held (directly or indirectly) by foreign persons at the time during 
the testing period (as defined in section 897(h)(4)(D)) during which 
the direct and indirect ownership of stock by foreign persons was 
greatest.
    Section 1.897-1(c)(2)(i), which was issued when section 897(h) 
addressed only domestically controlled REITs, defines domestically 
controlled REITs (rather than QIEs) and otherwise restates the rule in 
section 897(h)(2).\2\ Section 1.897-1(c)(2)(i) does not address the 
determination of whether stock of a REIT is considered ``held directly 
or indirectly by foreign persons'' under section 897(h)(4)(B) and 
provides only that, for purposes of determining the ownership of the 
REIT's stock, actual ownership under Sec.  1.857-8 must be taken into 
account. Section 1.857-8(b) states that the actual owner of stock of a 
REIT is the person who is required to include in gross income in his 
return the dividends received on the stock and is generally the 
shareholder of record of the REIT.
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    \2\ Section 897(h) did not apply to RICs when the regulations 
were finalized. Section 411 of the American Jobs Creation Act of 
2004, Public Law 108-357 (2004), amended section 897(h) to apply to 
certain RICs in addition to REITs and introduced the term QIE to 
include such entities.
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    Section 897(h)(4)(E), which was added to the Code 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''), provides special 
ownership rules for determining the holder of QIE stock under section 
897(h)(4)(B) and 897(h)(4)(C). Section 897(h)(4)(E)(i) states that, in 
the case of any class of stock of the QIE that is regularly traded on 
an established securities market in the United States (``U.S. publicly 
traded QIE stock''), a person holding less than five percent of such 
class of stock at all times during the testing period is treated as a 
United States person unless the QIE has actual knowledge that such 
person is not a United States person. Section 897(h)(4)(E)(ii) provides 
that any stock in the QIE held by another QIE (i) any class of stock of 
which is regularly traded on an established securities market, or (ii) 
which is a RIC that issues redeemable securities within the meaning of 
section 2 of the Investment Company Act of 1940 (an entity described in 
(i) or (ii), a ``public QIE'') is treated as held by a foreign person, 
except that if the public QIE is domestically controlled (determined 
after the application of section 897(h)(4)(E)), such stock is treated 
as held by a United States person. Finally, section 897(h)(4)(E)(iii) 
provides that any stock in the QIE held by a QIE that is not a public 
QIE (``non-public QIE'') is only treated as held by a United States 
person in proportion to the stock of the non-public QIE that is (or is 
treated under section 897(h)(4)(E)(ii) or 897(h)(4)(E)(iii) as) held by 
a United States person.
    Section 897(l) provides an exception to the application of section 
897(a) for certain foreign pension funds and their wholly owned 
subsidiaries. Section 897(l) was added to the Code in section 323(a) of 
the PATH Act. As originally enacted, 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 qualified foreign pension fund (``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 101(q) 
of the Tax Technical Corrections Act of 2018, Public Law 115-141, div. 
U (the ``Technical Corrections Act''). As amended in the Technical 
Corrections Act, 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. Section 897(l)(3) provides the Secretary with the 
authority to ``prescribe such regulations as may be necessary or 
appropriate to carry out the purposes of this subsection.''
    On June 7, 2019, the Department of the Treasury (``Treasury 
Department'') and the IRS published proposed regulations in the Federal 
Register (84 FR 26605) (the ``2019 proposed regulations'') under 
sections 897(l), 1441, 1445 and 1446. The 2019 proposed regulations 
contained rules relating to qualification for the exception under 
section 897(l), as well as rules relating to withholding requirements 
under sections 1441, 1445 and 1446, for dispositions of USRPIs by, and 
distributions described in section 897(h) received by, QFPFs and 
entities that are wholly owned by one or more QFPFs (``qualified 
controlled entities,'' or ``QCEs''). The 2019 proposed regulations are 
finalized in the Final Rules section of this issue of the Federal 
Register.

Explanation of Provisions

I. Coordination of Exemption Under Section 897(l) With Section 892

    The exemption from U.S. taxation provided to foreign governments by 
section 892 does not apply to income derived from the conduct of a 
commercial activity, or income received by a controlled commercial 
entity or received (directly or indirectly) from a controlled 
commercial entity. Section 1.892-4T(a). Section 1.892-5T(b)(1) treats a 
USRPHC (or a foreign corporation that would be a USRPHC if it was a 
United States corporation) as engaged in commercial activity and, 
therefore, a controlled commercial entity if it is controlled by a 
foreign government pursuant to Sec.  1.892-5T(a).

[[Page 80099]]

    A QFPF would be a controlled commercial entity for section 892 
purposes if it qualified as a USRPHC within the meaning of Sec.  1.892-
5T(b)(1) and if it were controlled by a foreign government pursuant to 
Sec.  1.892-5T(a). In such case, none of the income, including, for 
example, from investments in the United States in stocks or securities, 
received by the foreign government from that QFPF would be eligible for 
the section 892 exemption. A comment to the 2019 proposed regulations 
noted that Sec.  1.892-5T(b)(1) incentivizes a government-controlled 
QFPF to reduce its USRPIs to preserve the exemption provided by section 
892. In addition, the comment noted that Sec.  1.892-5T(b)(1) may 
necessitate that such a QFPF monitor its USRPIs for section 892 
purposes despite being exempt from the application of section 897(a). 
The comment recommended that a QFPF and a QCE be excluded from the 
application of Sec.  1.892-5T(b)(1) or that Sec.  1.892-5T(b)(1) be 
withdrawn.
    Although these proposed regulations do not withdraw the rule 
entirely, the Treasury Department and the IRS agree that the rule in 
Sec.  1.892-5T(b)(1) should not apply to a QFPF or a QCE, and these 
proposed regulations therefore adopt that recommendation. Proposed 
Sec.  1.892-5(b)(1)(ii)(A). In addition, the proposed regulations 
exclude certain other USRPHCs from the application of Sec.  1.892-
5T(b)(1). Proposed Sec.  1.892-5(b)(1)(ii)(B). Excluding certain other 
USRPHCs from the application of Sec.  1.892-5T(b)(1) is consistent with 
the policy of section 892 with respect to deemed commercial activities. 
For example, in general, a foreign government under section 892 
currently is not treated as engaging in commercial activities by reason 
of investing in stocks, bonds, and other securities. Sec.  1.892-
4T(c)(1)(i).\3\ The proposed regulations add another category by 
excluding from the application of Sec.  1.892-5T(b)(1) a corporation 
that is a USRPHC solely by reason of its direct or indirect ownership 
interest in one or more other corporations that are not controlled by 
the foreign government. Thus, for example, if a foreign government 
controls a USRPHC whose only assets are minority interests in REITs, 
the proposed regulations would not treat that corporation as a 
controlled commercial entity pursuant to Sec.  1.892-5T(b)(1). The 
changes to Sec.  1.892-5T(b)(1) made by the proposed regulations do not 
affect the analysis of whether the income itself is exempt from U.S. 
taxation under section 892.\4\
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    \3\ Regulations proposed under section 892 in 2011 would also 
extend the policy embodied by Sec.  1.892-4T(c)(1)(i) with respect 
to deemed commercial activities by providing that investments in 
financial instruments will not be treated as commercial activities 
for purposes of section 892, irrespective of whether such financial 
instruments are held in the execution of governmental financial or 
monetary policy. See proposed Sec.  1.892-4(e)(1)(i). See also 
proposed Sec. Sec.  1.892-4(e)(1)(iv) and 1.892-5(d)(5)(iii), which 
provide relief from being treated as engaged in certain deemed 
commercial activities.
    \4\ See, for example, proposed Sec.  1.892-4(e)(1)(iv), which 
provides that gain derived from a disposition of a USRPI defined in 
section 897(c)(1)(A)(i) will not qualify for exemption from taxation 
under section 892 even though a disposition (including a deemed 
disposition under section 897(h)(1)) of a USRPI, by itself, does not 
constitute the conduct of a commercial activity.
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    The proposed regulations also clarify Sec.  1.892-5T(b)(1) by 
replacing the phrase ``or a foreign corporation that would be a United 
States real property holding corporation if it was a United States 
corporation'' with ``which may include a foreign corporation'' when 
referencing section 897(c)(2) to define a USRPHC. Proposed Sec.  1.892-
5(b)(1)(i). Section 897(c)(2) defines a USRPHC as including ``any 
corporation'', whether domestic or foreign.\5\ Thus, the phrase ``or a 
foreign corporation that would be a United States real property holding 
corporation if it was a United States corporation'' when referencing 
the definition in section 897(c)(2) is unnecessary.
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    \5\ In contrast, section 897(c)(1)(A)(ii) defines a USRPI by 
reference to an interest in a USRPHC that is a domestic corporation.
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II. Effect of Section 897(l) on DC-QIE Exception

    A comment received in response to the 2019 proposed regulations 
recommended that regulations clarify that a QFPF is treated as a 
domestic person for purposes of the DC-QIE exception. The comment 
reasoned that section 897(l)(1) states that a QFPF shall not be treated 
as a nonresident alien individual or foreign corporation for purposes 
of all of section 897, which includes the DC-QIE exception. The comment 
also noted that such a rule would be easily administrable for open-
ended investment funds and would provide certainty to such funds and 
their investors that section 897(a) would not apply to the disposition 
of interests in open-ended investment funds which have QFPFs as 
significant investors. Another comment, however, stated that it is not 
clear that the intent behind section 897(l) was to provide that a QIE 
is domestically controlled if it is majority owned by QFPFs, as there 
was no indication that Congress intended that result. The comment 
recommended that regulations provide how QFPFs are to be treated for 
purposes of the DC-QIE exception but did not recommend a specific 
result.
    Section 897(a) generally applies with respect to the gain or loss 
of ``a nonresident alien individual or a foreign corporation.'' In 
addition, section 897(h)(1) applies to any distribution by a QIE to a 
nonresident alien individual or a foreign corporation (or other QIE). 
Section 897(l) provides that, for purposes of section 897, a QFPF shall 
not be treated as ``a nonresident alien individual or a foreign 
corporation.'' The reference to ``a nonresident alien individual or a 
foreign corporation'' in section 897(l) therefore is consistent with 
the same class of persons subject to tax under section 897(a) and 
897(h)(1). Thus, under the statute, when a QFPF disposes of a USRPI, 
section 897(a) does not apply to any gain or loss from the disposition 
because section 897(l) treats the QFPF as neither a nonresident alien 
individual nor a foreign corporation. Similarly, when a QFPF receives a 
distribution from a QIE that is attributable to gain from the sale or 
exchange of a USRPI, the look-through rule under section 897(h)(1), and 
the general rule under section 897(a) do not apply because section 
897(l) treats the QFPF as neither a nonresident alien individual nor a 
foreign corporation.
    In contrast, the ownership test in section 897(h)(4)(B) for the DC-
QIE exception (which predates the enactment of section 897(l)) uses the 
term ``foreign persons'' and not ``nonresident individuals or foreign 
corporations.'' The DC-QIE exception applies to scenarios where a 
nonresident alien individual or foreign corporation disposes of stock 
in a QIE, but because the QIE is less than 50 percent owned by 
``foreign persons,'' the stock disposed of is not considered a USRPI. 
Although section 897(l) provides that a QFPF is not treated as a 
nonresident alien individual or a foreign corporation for purposes of 
section 897, it does not expressly provide that a QFPF or QCE is not 
treated as a foreign person for purposes of the separate ownership test 
of the DC-QIE exception.
    There is no indication that Congress intended for section 897(l) to 
provide that QFPFs and QCEs are not treated as foreign persons for 
purposes of applying the DC-QIE exception to other foreign persons that 
are neither QFPFs nor QCEs. As originally enacted in the PATH Act, 
section 897(l) provided that section 897 did not apply to USRPIs held, 
and REIT distributions received, by a QFPF and a QCE but did not alter 
the status of the QFPF or QCE. As a result, as originally enacted 
section

[[Page 80100]]

897(l) turned off the application of section 897(a) to the QFPF or QCE.
    In the same legislation, Congress also amended the rules in the DC-
QIE exception. See PATH Act secs. 133 and 322.\6\ Certain amendments to 
the DC-QIE exception deem ownership in a QIE as ownership by a United 
States or foreign person depending on whether certain conditions are 
met. See section 897(h)(4)(E)(i), 897(h)(4)(E)(ii). These amendments 
demonstrate that Congress knows how to directly identify the deemed 
classification of investors as foreign persons or United States persons 
and did so in one part of the PATH Act through amendments to the DC-QIE 
exception. Congress could have made a similar modification to the DC-
QIE exception for QFPFs and QCEs in the same legislation but did not do 
so.
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    \6\ Those amendments did not relate to the new rules in section 
897(l) and are described separately in the Joint Committee on 
Taxation's General Explanation. See STAFF OF THE JOINT COMM. ON 
TAX'N, General Explanation of Tax Legislation Enacted in 2015 (JCS-
1-16) (General Explanation) 155, 280-83 (2016) (``PATH Act General 
Explanation'').
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    The Technical Corrections Act modified the language of section 
897(l). In particular, the modified language specifies that a QFPF and 
a QCE are not treated as nonresident alien individuals or foreign 
corporations for purposes of section 897. The Joint Committee on 
Taxation explanation of the technical correction for section 897(l) 
states that the revised language was merely intended to clarify the 
language specifying which entities qualified for the benefit provided 
by the new subsection. See STAFF OF THE JOINT COMM. ON TAX'N, General 
Explanation of Tax Legislation Enacted in the 115th Congress (JCS-2-19) 
(General Explanation) 145 (2019) (``2019 General Explanation''). 
Although the 2019 General Explanation does not specify the technical 
error with the PATH Act language that was corrected by the 2018 
amendment, when comparing the technical correction to the PATH Act 
formulation, the correction clearly allows a QFPF and QCE to jointly 
own a USRPI and qualify for section 897(l) with respect to their 
partial interests in it, whereas the PATH Act formulation used ``or'' 
between QFPF and QCE, which suggested that all of the USRPI had to be 
owned by a single entity. Additionally, the change clarified that the 
exception applied to distributions from all QIEs and not just REITs. 
Lastly, by shifting the focus of section 897(l) from applying to the 
USRPI in the PATH Act formulation (``[T]his section shall not apply to 
any United States real property interest held by . . .'') to instead 
applying to the QFPF in the Technical Corrections Act formulation 
(``[F]or purposes of this section, a qualified foreign pension fund 
shall not be treated as . . .''), the technical correction aligned the 
section 897(l) exception with the operative provision in section 
897(a), which modifies the tax treatment of the entity receiving income 
via disposition or distribution (the QFPF or QCE), not the tax 
treatment of the USRPI itself.
    Ultimately, as a technical correction, the modification to section 
897(l) cannot expand on the policy Congress intended to enact in the 
PATH Act. A technical correction is a change that clarifies existing 
law, such as through correcting errors, rather than one that 
fundamentally or substantively changes the law. 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). Both the PATH Act General 
Explanation and the 2019 General Explanation make clear that the intent 
of section 897(l), as originally enacted and as corrected, was to 
provide that ``in determining the U.S. income tax of a qualified 
foreign pension fund, section 897 does not apply.'' See 2019 General 
Explanation, at 145. This intent was also clear in the original 
language of section 897(l) and could not have been expanded by the 
modifications in the Technical Corrections Act. Additionally, because 
section 897(l) already specifically excludes QFPF and QCEs from the 
application of section 897(a), treating them as not being a foreign 
person for purposes of the DC-QIE exception would serve only to benefit 
other foreign investors in the same QIE. Nothing in the statute or 
legislative history indicates that majority ownership of a QIE by a 
QFPF or QCE should allow other investors to avoid section 897, and such 
treatment does not follow from the policy of either section 897(l) or 
the DC-QIE exception as expressed in the legislative history of those 
provisions. Further, if Congress had intended for a QFPF to not be 
treated as a ``foreign person,'' which is a different and broader 
characterization beyond section 897(l)'s treatment as not ``a 
nonresident alien individual or a foreign corporation,'' which is 
needed to turn off section 897(a) as to the QFPF or QCE, Congress 
presumably would have expressly provided for that result. Cf. section 
1445(f)(3)(B) (solely for purposes of section 1445, providing that an 
entity that is exempt under section 897(l) is not a foreign person) and 
section 897(h)(4)(E) (as discussed, treating certain QIE investors as 
foreign persons (even if in fact a domestic corporation)).
    Accordingly, proposed Sec.  1.897-1(c)(3)(iv)(A) provides that a 
QFPF (including any part of a QFPF) or a QCE is a foreign person for 
purposes of the DC-QIE exception. See parts III and IV of this 
Explanation of Provisions for a discussion of the definition of 
domestically controlled QIE in proposed Sec.  1.897-1(c)(3). The IRS 
may challenge contrary positions before the issuance of any final 
regulations regarding the treatment of a QFPF or QCE for purposes of 
the DC-QIE exception.
    The proposed regulations make related changes to the definitions 
provided in Sec.  1.897-1. Proposed Sec.  1.897-1(k) and (l) revise the 
definition of ``foreign person'' (as provided in Sec.  1.897-9T(c)) and 
``foreign corporation'' to remove references that are no longer 
applicable and to add cross references to the rule in proposed Sec.  
1.897-1(c)(3)(iv)(A).

III. QIE Stock Held Directly or Indirectly Under Section 897(h)(4)(B)

A. Overview
    The proposed regulations provide guidance for determining whether 
stock of a QIE is considered ``held directly or indirectly'' by foreign 
persons for determining whether a QIE is domestically controlled under 
section 897(h)(4)(B). The proposed regulations define stock that is 
held ``indirectly'' by taking into account stock of the QIE held 
through certain entities under a limited ``look-through'' approach. The 
look-through approach balances the policies of the DC-QIE exception 
with 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. It is also

[[Page 80101]]

intended to prevent the use of intermediary entities to achieve results 
contrary to the purposes of the DC-QIE exception.
    Questions have arisen as to whether the reference to stock held 
``indirectly'' in section 897(h)(4)(B) could be interpreted to require 
looking through all entities, including, for example, all domestic and 
foreign corporations, to determine the extent to which the ultimate 
individual shareholders of a QIE are foreign or domestic. In its 
broadest sense, the statute refers to stock held ``indirectly'' by 
foreign persons, which could encompass ownership by a foreign 
individual through multiple tiers of entities of any type. However, the 
Treasury Department and the IRS have concluded that the term 
``indirectly'' should not be interpreted so broadly given the policy 
underlying section 897(h)(4). Section 897(h)(4)(B) indicates that the 
determination of whether a QIE is domestically controlled looks to 
ownership of QIE stock by ``foreign persons,'' not just individuals. In 
addition, such a broad interpretation of ``indirectly'' mandating the 
look-through of all entity types, including through multiple tiers of 
entities, would likely be difficult for taxpayers to comply with, and 
for the IRS to administer, particularly with respect to publicly traded 
entities.
    Notwithstanding that a complete look-through approach is 
inappropriate, the Treasury Department and the IRS are issuing proposed 
Sec.  1.897-1(c)(3) based on the conclusion that a look-through 
approach in determining ``indirect'' ownership of a QIE should still 
apply in specified circumstances to QIE stock held by intermediary 
entities. The proposed regulations thus address the treatment of QIE 
stock held by certain intermediary entities, such as domestic 
partnerships. For example, assume USR, a REIT, holds a USRPI as its 
sole asset. Nonresident alien individuals hold 49 percent of USR's 
single class of stock. PRS, a domestic partnership 50 percent of the 
interests of which are held by each of two foreign corporations, holds 
the remaining 51 percent of the USR stock. If USR stock is disposed of, 
taxpayers may assert that the stock is not a USRPI under the DC-QIE 
exception, and therefore not subject to section 897(a), because PRS is 
a United States person and, consequently, foreign persons could be 
viewed as directly or indirectly holding less than 50 percent of USR's 
stock by value. Taxpayers may assert this position even though, taking 
into account the USR stock held by the foreign corporations through 
their interests in PRS, foreign persons hold directly or indirectly all 
of USR's outstanding stock. In support of this position, taxpayers may 
point to Sec.  1.897-1(c)(2)(i) and its reference to Sec.  1.857-8 as 
suggesting that the inclusion of the dividends received on QIE stock in 
gross income on a domestic partnership's tax return, without regard to 
stock held indirectly by another person, establishes the partnership 
not only as the actual owner of QIE stock but, as a result of such 
actual ownership, as the only relevant person for determining whether a 
QIE is domestically controlled. Taxpayers may take this position even 
though the determination of actual ownership pursuant to Sec.  1.857-8 
is only intended to ensure the beneficial owner of stock is taken into 
account when different from the shareholder of record, and Sec.  1.897-
1(c)(2)(i) does not state or otherwise suggest that the actual owners 
of QIE stock as determined under Sec.  1.857-8 are the only relevant 
persons for determining whether a QIE is domestically controlled or 
provide any guidance on the meaning of ``held directly or indirectly by 
foreign persons.''
    The Treasury Department and the IRS have concluded that the 
interpretation of the DC-QIE exception described in the preceding 
paragraph is incorrect because it would permit nonresident alien 
individuals and foreign corporations to dispose of USRPIs held 
indirectly through certain intermediate entities, such as domestic 
partnerships, to avoid taxation under section 897(a). To prevent this 
result, entities such as partnerships that are generally not subject to 
U.S. Federal income tax should not, subject to certain limited 
exceptions, be treated as holders of QIE stock for purposes of 
determining whether a QIE is domestically controlled. This type of 
look-through analysis is consistent with section 897(h)(4)(B), which 
references ``indirect'' ownership in determining the shareholders of a 
QIE that should be taken into account in applying the DC-QIE exception.
B. General Look-Through Approach
    Consistent with the reference to stock held ``indirectly'' by 
foreign persons in section 897(h)(4)(B), the determination of whether a 
QIE is domestically controlled under the proposed regulations generally 
applies a ``look-through'' approach to stock of a QIE that is held 
through certain entities. Thus, in determining whether a QIE is 
domestically controlled, only a ``non-look-through person'' is treated 
as holding directly or indirectly stock of a QIE, and stock of a QIE 
held by or through one or more intervening ``look-through persons'' is 
treated as held proportionately by the look-through person's ultimate 
owners that are non-look-through persons. Proposed Sec.  1.897-
1(c)(3)(ii)(A) and (B).
    Proposed Sec.  1.897-1(c)(3)(ii)(C) provides that 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. Under 
this rule, for example, if stock of a QIE is held directly or 
indirectly by a domestic C corporation (that is not a foreign-owned 
domestic corporation), it is treated as held directly or indirectly 
only by that domestic C corporation and is not treated as held directly 
or indirectly by non-look-through shareholders of the domestic C 
corporation (or any other person).
    Subject to a special look-through rule for foreign-owned domestic 
corporations and the special ownership rules in section 897(h)(4)(E), 
discussed in parts III.C and III.D of this Explanation of Provisions, 
respectively, the proposed regulations define a ``non-look-through 
person'' to include persons such as individuals, ``domestic C 
corporations'' (defined as a domestic corporation other than an S 
corporation, a REIT or a RIC) and foreign corporations (including, for 
the avoidance of doubt, foreign governments pursuant to section 
892(a)(3)). Proposed Sec.  1.897-1(c)(3)(v)(D). The definition of a 
non-look-through person also includes ``nontaxable holders'' (defined 
to include tax-exempt entities under section 501(a) or the United 
States, a State, a U.S. territory, an Indian tribal government or any 
subdivision of the foregoing) because they generally do not have owners 
to which the look-through approach could apply. For the same reason, 
the definition of a ``non-look-through person'' includes international 
organizations (as defined in section 7701(18)). In addition, a non-
look-through person includes publicly traded partnerships (domestic or 
foreign) because it may be difficult to look-through such entities and 
it is unlikely that these entities could be affirmatively used as 
intermediary entities to create a domestically controlled QIE. Finally, 
a non-look-through person includes a QFPF (including any part of a 
QFPF) or QCE, which ensures that such entities are taken into account 
as foreign persons for purposes of section 897(h)(4)(B) as provided 
under proposed Sec.  1.897-1(c)(3)(iv)(A).
    A ``look-through person'' is defined as any person that is not a 
non-look-through person and includes, for example, a REIT or a RIC 
(subject to the

[[Page 80102]]

special ownership rule in proposed Sec.  1.897-1(c)(3)(iii)(C)), an S 
corporation, a non-publicly traded partnership (domestic or foreign), 
and a trust (domestic or foreign). Proposed Sec.  1.897-1(c)(3)(v)(C).
C. Special Look-Through Rule for Foreign-Owned Domestic Corporations
    Even though domestic C corporations are generally treated as non-
look-through persons, the Treasury Department and the IRS are issuing 
proposed Sec.  1.897-1(c)(3)(iii)(B) based on the conclusion that a 
limited look-through approach should apply to non-publicly traded 
domestic C corporations in which foreign persons hold a meaningful 
ownership interest. This rule would, for example, prevent the use of 
intermediary domestic C corporations by foreign investors to create 
domestically controlled QIEs that could exempt from the application of 
section 897 QIE stock held directly by those or other foreign 
investors. In such cases, the ownership of the domestic C corporation 
by foreign persons should be ascertainable and taken into account in 
determining the ``indirect'' ownership of the QIE by foreign persons in 
applying section 897(h)(4)(B).
    Accordingly, in determining whether a QIE is domestically 
controlled, the proposed regulations treat a domestic C corporation 
whose stock is not regularly traded on an established securities market 
(``non-public domestic C corporation'') as a look-through person, but 
only if the non-public domestic C corporation is a foreign-owned 
domestic corporation. Proposed Sec.  1.897-1(c)(3)(iii)(B). For this 
purpose, a ``foreign-owned domestic corporation'' is any non-public 
domestic C corporation if foreign persons hold directly or indirectly 
25 percent or more of the fair market value of the corporation's 
outstanding stock. Proposed Sec.  1.897-1(c)(3)(v)(B). Whether a non-
public domestic C corporation is a foreign-owned domestic corporation 
is determined by, in general, applying the same look-through rules that 
apply in determining whether a QIE is domestically controlled. Thus, 
for example, stock of the domestic corporation held by look-through 
persons would be treated as held directly or indirectly by the look-
through person's shareholders, partners, or beneficiaries for this 
purpose.
D. Special Ownership Rules in Section 897(h)(4)(E)
    The proposed regulations incorporate the special ownership rules in 
section 897(h)(4)(E)(i) and 897(h)(4)(E)(ii). These rules treat a 
person that holds stock in a QIE as a non-look-through person to the 
extent required to ensure the treatment of such person as a foreign or 
United States person as prescribed under section 897(h)(4)(E)(i) and 
897(h)(4)(E)(ii). Thus, a person holding less than five percent of U.S. 
publicly traded QIE stock that section 897(h)(4)(E)(i) deems to be a 
United States person (absent actual knowledge by the QIE that such 
person is not a United States person) is treated under the proposed 
regulations as a non-look-through person with respect to that stock. 
Proposed Sec.  1.897-1(c)(3)(iii)(A). Stock of a QIE held by a public 
QIE that, under section 897(h)(4)(E)(ii), is treated as held by a 
foreign or United States person based on whether the public QIE is a 
domestically controlled QIE is similarly treated under the proposed 
regulations as held by a non-look-through person (even though the 
general definition of a non-look-through person excludes QIEs). 
Proposed Sec.  1.897-1(c)(3)(iii)(C).
    For QIE stock held by a non-public QIE, whose ownership should be 
more readily ascertainable, the general look-through rules in the 
proposed regulations are consistent with the approach in section 
897(h)(4)(E)(iii) that looks to the proportionate ownership of the non-
public QIE to determine the QIE stock held by United States persons.
    The rule in proposed Sec.  1.897-1(c)(3)(iii)(A) regarding U.S. 
publicly traded QIE stock applies notwithstanding any other provision 
under proposed Sec.  1.897-1(c)(3) (rules regarding domestically 
controlled QIEs). Thus, for example, a QFPF that holds less than five 
percent of U.S. publicly traded QIE stock at all times during the 
testing period (and absent actual knowledge that the person is not a 
United States person), is treated as a United States person that is a 
non-look through person with respect to that stock even though the QFPF 
would otherwise be treated as a foreign person under proposed Sec.  
1.897-1(c)(3)(iv)(A). The Treasury Department and the IRS have 
determined that this priority rule is appropriate due to the 
administrative and compliance difficulties that could result in 
determining whether other rules would, absent the application of the 
U.S publicly traded QIE rule, treat less-than-five-percent holders of 
U.S. publicly traded QIE stock as foreign persons.

IV. QIE Stock Held Directly or Indirectly Under Section 897(h)(4)(C)

    As noted in the Background section of this preamble, section 
897(h)(4)(C) provides that the term ``foreign ownership percentage'' 
means the percentage of QIE stock that was held (directly or 
indirectly) by foreign persons at the time during the testing period 
during which the direct and indirect ownership of stock by foreign 
persons was greatest. The Treasury Department and the IRS have 
concluded that the determination of QIE stock held ``directly or 
indirectly'' in section 897(h)(4)(C) should be interpreted in the same 
manner as such phrase is interpreted in the definition of a 
domestically controlled QIE in section 897(h)(4)(2). Accordingly, 
proposed Sec.  1.897-1(c)(4) provides that for purposes of calculating 
the foreign ownership percentage, the determination of the QIE stock 
that was held directly or indirectly by foreign persons is made under 
the rules that apply for purposes of determining whether a QIE is 
domestically controlled.

V. Other Rules and Modifications

    The proposed regulations treat international organizations (as 
defined in section 7701(18)) as foreign persons for purposes of 
determining whether a QIE is domestically controlled. Proposed Sec.  
1.897-1(c)(3)(iv)(B). Notwithstanding that international organizations 
are generally not treated as foreign persons for section 897 purposes 
under Sec.  1.897-9T(e), the Treasury Department and the IRS believe 
that, for reasons similar to those described in part II of this 
Explanation of Provisions regarding QFPFs and QCEs, and because 
international organizations would not otherwise constitute United 
States persons under section 7701(a)(30), international organizations 
should be treated as foreign persons in applying the DC-QIE exception.
    The proposed regulations do not retain the reference to Sec.  
1.857-8 in Sec.  1.897-1(c)(2)(i), which is not necessary given the 
rules provided in the proposed regulations for determining whether 
stock of a QIE is considered to be held directly or indirectly. The 
look-through rules set forth in proposed Sec.  1.897-1(c)(3) apply only 
with respect to determining whether a QIE is domestically controlled 
under section 897(h)(4)(B) and do not apply with respect to any other 
provision, including section 897(c)(3).
    Finally, the proposed regulations revise the definition of 
domestically controlled REIT in Sec.  1.897-1(c)(2)(i) to reflect 
amendments to section 897(h) made after those regulations were issued 
that extended the application of section 897(h) to certain RICs. 
Accordingly, the proposed regulations replace the

[[Page 80103]]

definition of ``domestically controlled REIT'' in Sec.  1.897-
1(c)(2)(i) by defining a ``domestically controlled QIE'' in proposed 
Sec.  1.897-1(c)(3).

Applicability Dates

    The regulations under section 892 are proposed to apply to taxable 
years ending on or after December 28, 2022. Taxpayers may rely on the 
proposed regulations under section 892 until the date of publication of 
the Treasury decision adopting the regulations as final in the Federal 
Register.
    Subject to a special rule for entity classification elections, the 
regulations under section 897 are proposed to apply to transactions 
occurring on or after the date these regulations are published as final 
regulations in the Federal Register; however, rules applicable for 
determining whether a QIE is domestically controlled may be relevant 
for determining QIE ownership during periods before the date these 
regulations are published as final regulations in the Federal Register 
to the extent the testing period related to a transaction that occurs 
after the date these regulations are published as final regulations in 
the Federal Register includes periods before that date. The IRS may 
challenge positions contrary to proposed Sec.  1.897-1(c)(3) and (4) 
before the issuance of final regulations relating to the topics 
addressed in those proposed rules.

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    The Administrator of the Office of Information and Regulatory 
Affairs (OIRA), Office of Management and Budget, has determined that 
this proposed rule is not a significant regulatory action, as that term 
is defined in section 3(f) of Executive Order 12866. Therefore, OIRA 
has not reviewed this proposed rule pursuant to section 6(a)(3)(A) of 
Executive Order 12866 and the April 11, 2018, Memorandum of Agreement 
between the Treasury Department and the Office of Management and Budget 
(``OMB'').

II. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) 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. There are no additional information collection requirements 
associated with these proposed regulations.

III. Regulatory Flexibility Act

    When an agency issues a rulemaking proposal, the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) (``RFA'') requires the agency ``to 
prepare and make available for public comment an initial regulatory 
flexibility analysis'' that will ``describe the impact of the proposed 
rule on small entities.'' See 5 U.S.C. 603(a). Section 605 of the RFA 
provides an exception to this requirement if the agency certifies that 
the proposed rulemaking will not have a significant economic impact on 
a substantial number of small entities. A small entity is defined as a 
small business, small nonprofit organization, or small governmental 
jurisdiction. See 5 U.S.C. 601(3) through (6).
    The Treasury Department and the IRS do not expect that proposed 
Sec.  1.892-5(b)(1) will have a significant economic impact on a 
substantial number of small entities within the meaning of sections 
601(3) through 601(6) of the RFA. Proposed Sec.  1.892-5(b)(1) provides 
guidance regarding whether certain foreign government-controlled 
entities may be treated as controlled commercial entities within the 
meaning of section 892. Proposed Sec.  1.892-5(b)(1) does not impose 
any new costs on these entities. Consequently, the Treasury Department 
and the IRS do not expect that proposed Sec.  1.892-5(b)(1) will have a 
significant economic impact on a substantial number of small entities.
    Because there is a possibility, however, 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, 
an initial regulatory flexibility analysis for the proposed regulations 
is provided below. The Treasury Department and the IRS request comments 
from the public on the number of small entities that may be impacted 
and whether that impact will be economically significant.
A. Reasons Why Action Is Being Considered
    As discussed in part II of the Explanation of Provisions, 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.
    As discussed in part III of the Explanation of Provisions, 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.
B. Objectives of and Legal Basis for the Proposed Regulations
    These regulations clarify the treatment of QFPFs and QCEs for two 
purposes: the first is for purposes of the section 892 exemption from 
taxation for foreign governments, and the second is the DC-QIE 
exception. The rules are intended to ensure the following: (1) foreign 
government-controlled QFPFs (and QCEs) that qualify for the exemption 
under section 897(l) (and certain other foreign government entities) 
are not treated as controlled commercial entities for section 892 
purposes by reason of qualifying as a USRPHC, and (2) 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 892(c), 897(l) and 7805.
C. 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. 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 initial 
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.

[[Page 80104]]

D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements
    These regulations do not impose additional reporting or 
recordkeeping obligations.
E. Duplicate, Overlapping, or Relevant Federal Rules
    The Treasury Department and the IRS are not aware of any Federal 
rules that duplicate, overlap, or conflict with these regulations.
F. Alternatives Considered
    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, or for 
the rule relating to QFPFs, QCEs, or certain other foreign government 
entities under section 892.
    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-owned domestic corporations discussed in part III.C of the 
Explanation of Provisions section of this preamble). However, the 
Treasury Department and the IRS concluded that the look-through 
approach in the proposed rules 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). As noted in part III.C of the 
Explanation of Provisions section of this preamble, the purpose of the 
special rule for foreign-owned domestic corporations is to prevent the 
use of intermediary domestic C corporations by foreign investors to 
create domestically controlled QIEs that could exempt from the 
application of section 897 QIE stock held directly by those or other 
foreign investors.
    The proposed rules 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.

IV. Section 7805(f)

    Pursuant to section 7805(f) of the Code, the proposed regulations 
have been submitted to the Chief Counsel for Advocacy of the Small 
Business Administration for comment on their impact on small 
businesses.

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 
proposed 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 proposed 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.

Comments and Requests for Public Hearing

    Before the proposed amendments are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ADDRESSES section. 
The Treasury Department and the IRS request comments on all aspects of 
the proposed regulations, including the definitions of look-through 
person and non-look-through person, and whether special treatment for 
particular entities, such as cooperatives, may be warranted. Any 
electronic and paper comments submitted will be made available at 
www.regulations.gov or upon request.
    A public hearing will be scheduled if requested in writing by any 
person who timely submits electronic or written comments. Requests for 
a public hearing are also encouraged to be made electronically. If a 
public hearing is scheduled, notice of the date and time for the public 
hearing will be published in the Federal Register. Announcement 2020-4, 
2020-17 IRB 1, provides that until further notice, public hearings 
conducted by the IRS will be held telephonically. Any telephonic 
hearing will be made accessible to people with disabilities.

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 authors of these regulations are Arielle Borsos and 
Joel Deuth of the 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.

Proposed Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS propose to amend 
26 CFR part 1 as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry in numerical order to read in part as follows:

    Authority:  26 U.S.C. 7805 * * *
* * * * *
    Section 1.897-1 also issued under 26 U.S.C. 897(l)(3).
* * * * *
0
Par. 2. Section 1.892-5, as proposed to be amended in 76 FR 68119 
(November 3, 2011), is further amended by revising paragraphs (b) 
through (d) to read as follows:


Sec.  1.892-5  Controlled commercial entity.

* * * * *
    (b) Entities treated as engaged in commercial activity--(1) United 
States real property holding corporations--(i) General rule. Except as 
provided in paragraph (b)(1)(ii) of this section, a

[[Page 80105]]

United States real property holding corporation as defined in section 
897(c)(2), which may include a foreign corporation, is treated as 
engaged in commercial activity and, therefore, is a controlled 
commercial entity if the requirements of Sec.  1.892-5T(a)(1) or (2) 
are satisfied.
    (ii) Exceptions. Paragraph (b)(1)(i) of this section does not apply 
to the following--
    (A) A foreign corporation that is a qualified holder under Sec.  
1.897(l)-1(d); or
    (B) A corporation that is a United States real property holding 
corporation, as defined in section 897(c)(2), solely by reason of its 
direct or indirect ownership interest in one or more other corporations 
that are not controlled by the foreign government (as determined under 
Sec.  1.892-5T(a)).
    (iii) Applicability date. This paragraph (b)(1) applies to taxable 
years ending on or after December 28, 2022. For rules that apply to 
taxable years ending before December 28, 2022, see Sec.  1.892-
5T(b)(1), as contained in 26 CFR part 1, revised as of April 1, 2022.
    (b)(2) through (d)(4). For further guidance, see Sec.  1.892-
5T(b)(2) through (d)(4).
* * * * *
0
Par. 3. Section 1.892-5T is amended by revising paragraph (b)(1) to 
read as follows:


Sec.  1.892-5T  Controlled commercial entity (temporary regulations).

* * * * *
    (b) * * *
    (1)(i) For further guidance, see Sec.  1.892-5(b)(1)(i).
    (ii) For further guidance, see Sec.  1.892-5(b)(1)(ii).
* * * * *
0
Par 4. Section 1.897-1 is amended by:
0
a. Revising paragraph (a)(2);
0
b. Removing and reserving paragraph (c)(2)(i);
0
c. Adding paragraphs (c)(3) and (4);
0
d. Adding paragraph (k);
0
e. Removing the language ``or section 897(k) and Sec.  1.897-4'' in the 
second sentence and adding two sentences to the end of paragraph (l); 
and
0
f. Adding paragraph (n).
    The revision and additions read as follows:


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

    (a) * * *
    (2) Effective date. Except as otherwise provided in this paragraph 
(a)(2), the regulations set forth in Sec. Sec.  1.897-1 through 1.897-4 
are effective for transactions occurring after June 18, 1980. 
Paragraphs (c)(3) and (4), (k), and (l) of this section apply to 
transactions occurring on or after [the date these regulations are 
published as final regulations in the Federal Register] and 
transactions occurring before [the date these regulations are published 
as final regulations in the Federal Register] resulting from an entity 
classification election under Sec.  301.7701-3 of this chapter that was 
effective on or before [the date these regulations are published as 
final regulations in the Federal Register] but was filed on or after 
[DATE OF PUBLICATION OF FINAL RULE]. For transactions occurring before 
[DATE OF PUBLICATION OF FINAL RULE], see paragraphs (c)(2)(i) and (l) 
of this section and Sec.  1.897-9T(c) as in effect and contained in 26 
CFR part 1, as revised April 1, 2022.
* * * * *
    (c) * * *
    (3) Domestically controlled QIE--(i) In general. An interest in a 
domestically controlled 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 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 applies to such shareholders, 
partners, or beneficiaries as if they 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--(A) Certain 
holders of U.S. publicly traded QIE stock. Notwithstanding any other 
provision of paragraph (c)(3) of this section, a person holding less 
than five percent of U.S. publicly traded QIE stock 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. For an example illustrating the application of this paragraph 
(c)(3)(iii)(A), see paragraph (c)(3)(vi)(C) of this section.
    (B) Certain foreign-owned domestic C corporations. A non-public 
domestic C corporation is treated as a look-through-person if it is a 
foreign-owned domestic corporation. For an example illustrating the 
application of this paragraph (c)(3)(iii)(B), see paragraph 
(c)(3)(vi)(B) of this section.
    (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 paragraph (c)(3) of this section, determined after the application 
of this paragraph (c)(3)(iii)(C), 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)(vi)(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 
paragraph (c)(3) of this section, 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)(vi)(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 paragraph (c)(3) of 
this section, an international organization (as defined in section 
7701(a)(18)) is treated as a foreign person. See Sec.  1.897-

[[Page 80106]]

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 
paragraph (c)(3) of this section:
    (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-owned domestic corporation is any non-public domestic 
C corporation if foreign persons hold directly or indirectly 25 percent 
or more 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-owned 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-owned 
domestic corporation under paragraph (c)(3)(v)(B) of this section is 
treated as a look-through person for purposes of determining whether 
any other non-public domestic C corporation is a foreign-owned 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 
RIC, a REIT, an S corporation, a non-publicly traded partnership 
(domestic or foreign), 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.
    (D) A non-look-through person is an individual, a domestic C 
corporation (other than a foreign-owned 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), 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).
    (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 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).
    (J) A qualified controlled entity has the meaning set forth in 
Sec.  1.897(l)-1(e)(9).
    (K) A qualified foreign pension fund has the meaning set forth in 
Sec.  1.897(l)-1(c).
    (L) A QIE is a qualified investment entity, as defined in section 
897(h)(4)(A).
    (M) Testing period has the meaning set forth in section 
897(h)(4)(D).
    (N) 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) Examples. The rules of this paragraph (c)(3) are illustrated 
by the following examples. It is presumed 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)(L) of this section, USR is 
a QIE. X 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)(vi)(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)(I) 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 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) 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

[[Page 80107]]

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)(vi)(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)(vi)(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)(vi)(A)(3) of this section regarding the 
treatment of X as a look-through person as defined in paragraph 
(c)(3)(v)(C) of this section. 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%). 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 
foreign persons and 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.
    (B) Example 2: QIE stock held by non-public domestic C corporation 
that is a foreign-owned 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 20 percent of the stock 
of X, and Y, a nonresident alien individual, holds 5 percent of the 
stock of X. The remaining 75 percent of the stock of X is held by U.S. 
citizens.
    (2) Analysis. Under paragraph (c)(3)(v)(L) of this section, USR is 
a QIE. X 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-owned 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) of this section. 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-owned 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 20 percent and 5 percent of the 
stock of X, respectively, foreign persons hold directly or indirectly 
25 percent of the fair market value of the stock of X, and X is a 
foreign-owned 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) of this section, 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, 10.2 percent of the stock of USR is considered as held 
directly or indirectly by FC1 (20% x 51%), 2.55 percent of the stock of 
USR is considered as held directly or indirectly by Y (50% x 51%), and 
38.25 percent (in the aggregate) of the stock of USR is considered as 
held directly or indirectly by the U.S. citizen shareholders (75% x 
51%). Foreign persons therefore hold directly or indirectly 61.75 
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) of this 
section, plus the 10.2 percent and 2.55 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)(vi)(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-owned domestic 
corporation under paragraph (c)(3)(v)(B) of this section and, 
consequently, USR would be a domestically controlled QIE under 
paragraph (c)(3)(i) of this section.
    (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)(N) 
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 (``USR1 small public 
shareholders'').
    (2) Analysis. Under paragraph (c)(3)(v)(L) of this section, USR2 
and USR1 are QIEs. Under paragraph (c)(3)(iii)(A) of this section, each 
of the USR1 small 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, 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

[[Page 80108]]

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)(vi)(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 small public 
shareholders. Regardless of the treatment of the USR1 small 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, 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. 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)(L) 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. Under paragraph (c)(3)(ii)(B) of this section, stock of a QIE 
that would be considered held by a look-through person but for the 
application of paragraph (c)(3)(ii)(A) of this section is considered 
held directly or indirectly proportionately by the look-through 
person's direct or indirect owners that are non-look-through persons. 
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 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 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 63.25 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) of this section, 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.
    (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 (vi) 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 6013(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) * * * For purposes of sections 897 and 6039C, however, the term 
does not include a foreign corporation with respect to 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) See Sec.  1.897-9T(d) for a definition of regularly traded for 
purposes of sections 897, 1445, and 6039C.
* * * * *
0
Par. 5. Section 1.897-9T is amended by removing and reserving paragraph 
(c) and adding a sentence after the second sentence of paragraph (e).
    The addition 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) * * * 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). * * *
* * * * *

Melanie R. Krause,
Acting Deputy Commissioner for Services and Enforcement.
[FR Doc. 2022-27971 Filed 12-28-22; 8:45 am]
BILLING CODE 4830-01-P