[Federal Register Volume 90, Number 201 (Tuesday, October 21, 2025)]
[Proposed Rules]
[Pages 48422-48426]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-19625]
[[Page 48422]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-109742-25]
RIN 1545-BR60
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 that would modify
existing regulations on the determination of whether a qualified
investment entity is domestically controlled by removing a rule that
looks to the shareholders of certain domestic corporations in
determining whether foreign persons hold directly or indirectly stock
in a qualified investment entity. The proposed regulations would
primarily affect foreign persons that own stock in a qualified
investment entity that would be a United States real property interest
if the qualified investment entity were not domestically controlled.
DATES: Written or electronic comments and requests for a public
hearing must be received by December 22, 2025.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-109742-25) by following the
online instructions for submitting comments. Requests for a public
hearing must be submitted as prescribed in the ``Comments and Requests
for a Public Hearing'' section. Once submitted to the Federal
eRulemaking Portal, comments cannot be edited or withdrawn. The
Department of the Treasury (Treasury Department) and the IRS will
publish for public availability any comments submitted to the IRS's
public docket. Send paper submissions to: CC:PA:01:PR (REG-109742-25),
Room 5503, Internal Revenue Service, P.O. Box 7604, Ben Franklin
Station, Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Andrew F. Gordon (or any other staff member in the Office of the
Associate Chief Counsel (International)) at (202) 317-3800 (not a toll-
free number); concerning submissions of comments, requests for a public
hearing, and access to a public hearing, Publications and Regulations
Section at (202) 317-6901 (not toll-free numbers) or by email to
[email protected] (preferred).
SUPPLEMENTARY INFORMATION:
Background
Section 897(a)(1) of the Internal Revenue Code (Code) provides that
gain or loss of a nonresident alien individual or foreign corporation
from the disposition of a United States real property interest (USRPI)
is taken into account under section 871(b)(1) or section 882(a)(1), as
applicable, as if the nonresident alien individual or foreign
corporation were engaged in a trade or business within the United
States during the taxable year and such gain or loss were effectively
connected with that trade or business.
Subject to certain exceptions, section 897(c)(1)(A) defines a USRPI
as an interest in real property (including an interest in a mine, well,
or other natural deposit) located in the United States or the Virgin
Islands, and any interest (other than solely as a creditor) in any
domestic corporation unless the taxpayer establishes that such
corporation was at no time a United States real property holding
corporation (USRPHC) during the period set forth in section
897(c)(1)(A)(ii) (generally, the five-year period ending on the date of
the disposition of the interest). Under section 897(c)(2), a USRPHC is
generally any corporation if the fair market value of its USRPIs equals
or exceeds 50 percent of the total fair market value of its USRPIs, its
interests in real property located outside the United States, plus any
other of its assets that are used or held for use in a trade or
business.
Section 897(h)(1) provides that any distribution by a qualified
investment entity (QIE) to a nonresident alien individual, a foreign
corporation, or other QIE, to the extent attributable to gain from
sales or exchanges by the QIE of USRPIs, is treated as gain recognized
by such nonresident alien individual, foreign corporation, or other QIE
from the sale or exchange of a USRPI, subject to certain exceptions.
Section 897(h)(4)(A) defines a QIE as any (i) real estate investment
trust (REIT), and (ii) any regulated investment company (RIC) which is
a USRPHC or which would be a USRPHC if the exceptions in section
897(c)(3) and (h)(2) did not apply to interests in any REIT or RIC.
Section 897(h)(2) provides that a USRPI does not include an
interest in a domestically controlled QIE (DC-QIE exception).
Accordingly, gain or loss on the disposition of stock in a domestically
controlled QIE is not subject to section 897(a). Section 897(h)(4)(B)
provides that a QIE is domestically controlled if less than 50 percent
of the value of its stock is held directly or indirectly by foreign
persons at all times during the testing period prescribed in section
897(h)(4)(D) (generally, the five-year period ending on the date of the
disposition).
On December 29, 2022, the Treasury Department and the IRS published
proposed regulations (REG-100442-22) in the Federal Register (87 FR
80097) that set forth rules for determining whether stock of a QIE is
considered ``held directly or indirectly'' by foreign persons for
purposes of defining a domestically controlled QIE under section
897(h)(4)(B) (2022 proposed regulations). The 2022 proposed regulations
defined stock in a QIE that is held ``indirectly'' by taking into
account stock of the QIE held through certain entities under a limited
``look-through'' approach. Under that approach, only a ``non-look-
through person'' is treated as holding directly or indirectly stock of
a QIE, and stock of a QIE held by or through one or more intervening
``look-through persons'' is treated as held proportionately by the
look-through person's ultimate owners that are non-look-through
persons.
The 2022 proposed regulations generally treated a ``domestic C
corporation,'' defined as any domestic corporation other than a RIC,
REIT, or an S corporation, as a non-look-through person. However, the
2022 proposed regulations treated certain ``non-publicly traded
domestic C corporations'' as look-through persons if foreign persons
hold a 25 percent or greater interest (by value) in the stock of the
corporation (domestic corporation look-through rule).
On April 24, 2024, the Treasury Department and the IRS published TD
9992 in the Federal Register (89 FR 31618) (2024 final regulations),
which finalized the 2022 proposed regulations. The 2024 final
regulations retained the general approach and structure of the 2022
proposed regulations with certain revisions. In particular, under the
2024 final regulations the domestic corporation look-through rule
applies if foreign persons hold a more than 50 percent interest (by
value) in the stock of the corporation. See Sec. 1.897-1(c)(3)(iii)(B)
and (c)(3)(v)(B). The 2024 final regulations also include a transition
rule that exempts existing QIEs from the application of the domestic
corporation look-through rule for a 10-year period, provided that there
is not a significant change in the USRPIs held by the QIE or in the
QIE's ownership. See Sec. 1.897-1(c)(3)(vi).
[[Page 48423]]
Explanation of Provisions
I. Removal of Domestic Corporation Look-Through Rule
Following the publication of the 2024 final regulations, the
Treasury Department and the IRS received feedback from taxpayers
recommending the withdrawal of the domestic corporation look-through
rule, focusing on the practical difficulty of tracing upstream
ownership, often without access to reliable data, resulting in legal
uncertainty, operational complexity, and potentially chilling effects
on investment in U.S. real estate. The Treasury Department and the IRS
share these concerns.
In addition, taxpayers argued that the domestic corporation look-
through rule is inconsistent with the statute and conflicts with
congressional intent. They noted that within the domestically
controlled QIE provisions, section 897(h)(4)(B) does not contain
explicit corporate look-through rules and that Congress enacted rules
in 2015 providing for look-through treatment for certain corporate
owners of QIEs, but only in the specific circumstances described in
section 897(h)(4)(E). They argued that the presence of the look-through
rules in section 897(h)(4)(E) (and in other areas under section 897)
indicates that the absence of a similar rule in section 897(h)(4)(B)
was intentional, and that interpreting section 897(h)(4)(B) to include
corporate look-through rules would render the section 897(h)(4)(E)
look-through rules surplus. The recommendations emphasized that the
term ``indirectly'' can have meanings in the Code other than look-
through treatment of domestic corporations. They further argued that
the interests held by a domestic corporation are subject to U.S.
corporate income tax and therefore the objective of section 897 is
satisfied without looking through a domestic corporation.
In response to the feedback received, the Treasury Department and
the IRS have further considered whether the interpretation of
``indirectly'' reflected in the domestic corporation look-through rule
is consistent with the statutory text and purpose of the DC-QIE
exception, which Congress intended to be available for QIEs that are
controlled by United States persons. In light of this further
consideration, the Treasury Department and the IRS are of the view that
imposing look-through treatment under the domestic corporation look-
through rule with respect to an entity that is subject to U.S. taxation
based on a strict 50-percent foreign ownership threshold is not the
construction that should be given to the text of section 897(h)(4)(B),
as informed by the traditional tools of statutory construction,
including evaluation of the provision's purpose.
Accordingly, the proposed regulations would remove the domestic
corporation look-through rule and treat all domestic C corporations as
non-look-through persons in determining whether a QIE is domestically
controlled. The proposed regulations would also provide for various
conforming revisions to Sec. 1.897-1(c)(3) that are necessary because
of the removal of the domestic corporation look-through rule.
II. Applicability Date
The proposed regulations, upon finalization, would apply to
transactions occurring on or after October 20, 2025. However, taxpayers
may choose to apply the final regulations, once published in the
Federal Register, to transactions occurring on or after April 25, 2024
(and to 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). Taxpayers may rely on the proposed regulations
for transactions occurring before the date the proposed regulations are
finalized.
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
The proposed regulations are not subject to review under section
6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement
(July 4, 2025) between the Treasury Department and the Office of
Management and Budget (OMB) regarding review of tax regulations.
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. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a valid control number assigned by the OMB.
The existing collection of information requirement 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) also provides that the same
procedure may 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 requirements in Sec. 1.897-2(h).
The proposed regulations do not modify any existing information
collection requirements or create new or additional information
collection requirements. For purposes of the PRA, the reporting burden
associated with the collections of information in Sec. 1.1445-2(c)(3)
is reflected in the PRA submissions associated with the section 1445
regulations (OMB control number 1545-0902).
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 proposed regulations would remove the domestic corporation
look-through rule and, therefore, a domestic C corporation would be
treated as a non-look-through person in determining whether a QIE is
domestically controlled. Data on the number of small entities
potentially affected by the proposed regulations is not readily
available. Even if a substantial number of small entities would be
affected, the economic impact is not expected to be significant. The
Treasury Department and the IRS are of the view that the proposed
regulations will reduce the economic impact on small entities by
reducing compliance burdens. Accordingly, a regulatory flexibility
analysis is not required.
Notwithstanding this certification, the Treasury Department and the
IRS welcome comments about the impacts of these regulations on small
entities.
IV. Section 7805(f)
Pursuant to section 7805(f) of the Code, the proposed regulations
(REG-109742-25) have been submitted to the Chief Counsel for Advocacy
of the Small Business Administration for comment on their impact on
small businesses.
[[Page 48424]]
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 a Public Hearing
Before these proposed regulations 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 heading.
The Treasury Department and the IRS request comments on all aspects of
the proposed regulations. Any comments submitted will be made available
at http://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.
Drafting Information
The principal author of the proposed regulations is the Office of
the 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 continues to read, in
part, as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.897-1 is amended by:
0
1. Revising paragraphs (a)(2) and (c)(3)(iii)(A);
0
2. Removing paragraph (c)(3)(iii)(B) and redesignating paragraph
(c)(3)(iii)(C) as paragraph (c)(3)(iii)(B);
0
3. Revising the last sentence of newly redesignated paragraph
(c)(3)(iii)(B);
0
4. Removing the language ``see paragraph (c)(3)(vii)(A)'' in the second
sentence of paragraph (c)(3)(iv)(A) and adding ``see paragraph
(c)(3)(vi)(A)'' in its place;
0
5. Revising paragraph (c)(3)(v)(B);
0
6. Removing the last sentence in paragraph (c)(3)(v)(C);
0
7. Revising paragraph (c)(3)(v)(D);
0
8. Removing paragraph (c)(3)(v)(E) and redesignating paragraph
(c)(3)(v)(F) as paragraph (c)(3)(v)(E);
0
9. Removing paragraph (c)(3)(v)(G) and redesignating paragraphs
(c)(3)(v)(H) through (J) as paragraphs (c)(3)(v)(F) through (H);
0
10. Revising the last sentence of newly redesignated paragraphs
(c)(3)(v)(G) and (H);
0
11. Redesignating paragraphs (c)(3)(v)(K) through (O) as paragraphs
(c)(3)(v)(I) through (M);
0
12. Removing paragraph (c)(3)(vi) and redesignating paragraph
(c)(3)(vii) as paragraph (c)(3)(vi);
0
13. Revising the newly redesignated paragraph (c)(3)(vi); and
0
14. Removing the language ``paragraph (c)(3)(ii) through (vii)'' in
paragraph (c)(4) and adding ``paragraph (c)(3)(ii) through (vi)'' in
its place.
The revisions 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. Paragraphs (c)(3) and (4) of this section apply to
transactions occurring on or after October 20, 2025. For transactions
occurring before October 20, 2025, see paragraphs (c)(3) and (4) of
this section contained in 26 CFR part 1, as revised April 1, 2025. With
respect to transactions occurring before October 20, 2025, taxpayers
may apply paragraphs (c)(3) and (4) of this section for 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. Paragraphs (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) * * *
(iii) * * *
(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 a look-
through person that is a foreign-controlled entity. For an example
illustrating the application of this paragraph (c)(3)(iii)(A), see
paragraph (c)(3)(vi)(B) of this section (Example 2).
(B) * * * For an example illustrating the application of this
paragraph (c)(3)(iii)(B), see paragraph (c)(3)(vi)(B) of this section
(Example 2).
* * * * *
(v) * * *
(B) A foreign-controlled entity is any entity in which foreign
persons hold directly or indirectly more than 50 percent of the fair
market value of the entity's outstanding interests. For purposes of
determining whether an entity is a foreign-controlled entity, the rules
of paragraphs (c)(3)(ii)(A) through (C), (c)(3)(iii)(A) and (B), and
(c)(3)(iv) of
[[Page 48425]]
this section apply (treating the entity as if it were a QIE for this
purpose).
* * * * *
(D) A non-look-through person is an individual, a domestic C
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 (B) of this section.
* * * * *
(G) * * * 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 a foreign-
controlled entity.
(H) * * * 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 a foreign-controlled entity.
* * * * *
(vi) 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)(F) of this section.
(A) Example 1: QIE stock held by domestic C corporation--(1) Facts.
USR is a REIT, 51 percent of the stock of which is held by X, a
domestic C corporation as defined in paragraph (c)(3)(v)(A) 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)(K) of this section, USR is
a QIE. Because X is a domestic C corporation it 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 domestic C corporation, X
is a domestic partnership that is not a publicly traded partnership as
defined in paragraph (c)(3)(v)(H) 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)(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, 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. 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)(vi)(A)(3) of this section, 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 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)(F) of this section. The remaining 49 percent of the
stock of USR2 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)(M) 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 (USR1 less than five-percent public shareholders)
and with respect to which USR1 has no actual knowledge that such person
is not a United States person or is a look-through person that is a
foreign-controlled entity (as determined under paragraph (c)(3)(v)(B)
of this section by treating any entity as if it were a QIE for this
purpose).
(2) Analysis. Under paragraph (c)(3)(v)(K) 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
[[Page 48426]]
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)(B) 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)(vi)(B)(1) of this section (Example 2), 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)(B) 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.
(C) Example 3: 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)(F) 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
domestic C corporation as defined in paragraph (c)(3)(v)(A) of this
section, and 50 percent of the interests in which are held by
nonresident alien individuals.
(2) Analysis. Under paragraph (c)(3)(v)(K) of this section, USR2
and USR1 are QIEs. USR1 is not treated as a non-look-through person
under paragraph (c)(3)(iii)(B) of this section because USR1 is not a
public QIE as defined in paragraph (c)(3)(v)(F) 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. 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 as
defined in paragraph (c)(3)(v)(D) of this section, 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) 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.
* * * * *
Jarod J. Koopman,
Acting Chief Tax Compliance Officer.
[FR Doc. 2025-19625 Filed 10-20-25; 8:45 am]
BILLING CODE 4831-GV-P