[Federal Register Volume 90, Number 238 (Monday, December 15, 2025)]
[Proposed Rules]
[Pages 57928-57937]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-22775]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-101952-24]
RIN 1545-BR10
Income of Foreign Governments and of International Organizations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations relating to the
taxation of the income of foreign governments from investments in the
United States. In particular, these proposed regulations provide
guidance for determining when an acquisition of debt by a foreign
government is considered to be commercial activity, and when a foreign
government has effective control of an entity engaged in commercial
activities. These proposed regulations will affect foreign governments
that derive income from sources within the United States.
DATES: Written or electronic comments and requests for a public hearing
must be received by February 13, 2026.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-101952-24) 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eRulemaking Portal, comments cannot be edited or withdrawn.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-101952-24),
Room 5503, Internal Revenue Service, P.O. Box 7604, Ben Franklin
Station, Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Jack Zhou at (202) 317-6938; concerning submissions of comments,
requests for a public hearing, and access to a public hearing,
Publication and Regulations Section at (202) 317-6901 (not toll-free
numbers) or by email to [email protected] (preferred).
SUPPLEMENTARY INFORMATION:
[[Page 57929]]
Authority
This document contains proposed amendments to the Income Tax
Regulations (26 CFR part 1) under section 892 of the Internal Revenue
Code (Code). These regulations are issued under the express delegations
of authority under sections 892(c) and 7805(a) of the Code.
Background
I. Overview
This document contains proposed amendments to the Income Tax
Regulations (26 CFR part 1) under section 892 of the Code relating to
income of foreign governments (proposed regulations). Any terms used
but not defined in this preamble have the meanings given to them in the
proposed regulations.
Section 892(a)(1) provides that income of foreign governments
received from investments in the United States in stocks, bonds, or
other domestic securities owned by the foreign governments, or
financial instruments held in the execution of governmental financial
or monetary policy, or interest on deposits in banks in the United
States of moneys belonging to the foreign governments, is not included
in gross income and is exempt from taxation under subtitle A of the
Code. Section 892(a)(2)(A) provides that section 892(a)(1) does not
apply to any income that is (1) derived from the conduct of any
commercial activity (whether within or outside the United States), (2)
received by a controlled commercial entity (CCE) or received (directly
or indirectly) from a CCE, or (3) derived from the disposition of any
interest in a CCE.
Section 892(a)(2)(B) provides that, for purposes of section
892(a)(2)(A), a CCE means any entity engaged in commercial activities
(whether within or outside the United States) if the foreign government
holds (directly or indirectly) any interest in the entity which (by
value or voting interest) is 50 percent or more of the total of the
interests in the entity, or holds (directly or indirectly) any other
interest in the entity which provides the foreign government with
effective control of the entity. Section 892(c) authorizes the
Secretary to prescribe such regulations as may be necessary or
appropriate to carry out the purposes of section 892.
II. Regulations Addressing the Application of Section 892
On June 27, 1988, the Treasury Department and the IRS published in
the Federal Register a notice of proposed rulemaking (53 FR 24100)
(1988 proposed regulations) with a cross-reference to temporary
regulations under section 892 (TD 8211, 53 FR 24060) (1988 temporary
regulations) to provide guidance under section 892.
On August 1, 2002, the Treasury Department and the IRS published
Sec. 1.892-5(a)(3) in the Federal Register (TD 9012, 67 FR 49864) to
provide that the term ``entity'' for purposes of section 892(a)(2)(B)
(defining ``controlled commercial entity'') includes partnerships (2002
final regulations).
On November 3, 2011, the Treasury Department and the IRS published
in the Federal Register a notice of proposed rulemaking (76 FR 68119)
that would provide additional guidance for determining when a foreign
government is engaged in commercial activities (2011 proposed
regulations). On December 29, 2022, the Treasury Department and the IRS
published in the Federal Register a notice of proposed rulemaking (87
FR 80097) that would make changes to Sec. 1.892-5T(b)(1) to provide
exceptions to the general rule that a United States real property
holding corporation (USRPHC), as defined in section 897(c)(2), which
may include a foreign corporation, is treated as engaged in commercial
activity and, therefore, is a CCE if the requirements of Sec. 1.892-
5T(a)(1) or (2) are satisfied (2022 proposed regulations).
The rules in the 2011 proposed regulations and the 2022 proposed
regulations are finalized, with modifications, in the Final Rules
section of this issue of the Federal Register (2025 final regulations).
The 2025 final regulations also finalized proposed Sec. 1.892-3(a)(4)
(definition of financial instrument) of the 1988 proposed regulations.
Explanation of Provisions
I. Definition of Controlled Entity
Section 892 does not define the term ``foreign government.'' The
1988 temporary regulations define a foreign government to consist only
of integral parts and controlled entities of a foreign sovereign.
Section 1.892-2T(a)(3) defines ``controlled entity'' to mean an entity
that is separate in form from a foreign sovereign or otherwise
constitutes a separate juridical entity if it satisfies certain
requirements, including that it is wholly owned and controlled by a
single foreign sovereign directly or indirectly through one or more
controlled entities. The flush language of Sec. 1.892-2T(a)(3) states
``[a] controlled entity does not include partnerships or any other
entity owned and controlled by more than one foreign sovereign.''
The Treasury Department and the IRS are aware that the flush
language of Sec. 1.892-2T(a)(3) may be interpreted by taxpayers as
referring only to partnerships owned by more than one foreign
sovereign. The Treasury Department and the IRS are of the view,
however, the better reading of this flush language is that
partnerships, including ones wholly owned and controlled by a single
foreign sovereign (including indirectly through controlled entities),
are not included in the term ``controlled entity'' for purposes of
Sec. 1.892-2T(a)(3). The concept of a controlled entity was developed
to address the question of whether an entity separate from a foreign
sovereign and otherwise subject to Federal income tax could be exempt
from such tax under section 892.\1\ Since an entity treated as a
partnership for Federal tax purposes generally is not subject to such
tax, without regard to the exemption under section 892, the question
addressed by the concept of a controlled entity does not arise in the
case of a partnership.\2\ Therefore, the proposed regulations would
clarify that a partnership for Federal tax purposes is not a controlled
entity within the meaning of Sec. 1.892-2T(a)(3). The proposed
regulations would remove the flush language following Sec. 1.892-
2T(a)(3) and replace it with proposed Sec. 1.892-2(a)(4), which would
provide that a controlled entity, within the meaning of Sec. 1.892-
2T(a)(3), does not include any partnership for Federal tax purposes.
The proposed regulations also would revise the concluding sentence of
the flush language following Sec. 1.892-2T(a)(3) to clarify that the
rule is not confined to ``foreign financial organizations'' and to make
other drafting changes.
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\1\ See Rev. Rul. 75-298, 1975-2 C.B. 290 (providing criteria to
determine whether an organization will be considered part of a
foreign government for purposes of qualifying for exemption from
Federal income tax pursuant to section 892), obsoleted by Rev. Rul.
2003-99, 2003-2 C.B. 388, and revoking Rev. Rul. 66-73, 1966-1 C.B.
174 (examining whether an organization constitutes a corporation for
purposes of section 892).
\2\ See section 701, which was enacted in 1954 and states that
``[a] partnership as such shall not be subject to the income tax
imposed by this chapter.'' Section 701 refers to ``this chapter''
(chapter 1) while section 892(a)(1) states that certain income of
foreign governments is exempt ``under this subtitle.'' However, the
taxes for which section 892 provides an exemption (section
892(a)(1)) are described in chapter 1 of the subtitle.
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II. Acquisition of Debt
A. In General
Proposed Sec. 1.892-4(e)(1)(i) of the 2011 proposed regulations
would provide in part, under the heading titled ``investments,'' that
subject to the
[[Page 57930]]
provisions of proposed Sec. 1.892-4(e)(1)(ii) and (iii) (rules on
trading activities and investments made by a banking, financing, or
similar business), loans and investments in stocks, bonds, and other
securities are not commercial activities. Proposed Sec. 1.892-
4(e)(1)(iii) would provide that investments (including loans) made by a
banking, financing, or similar business constitute commercial
activities, even if the income derived from those investments is not
considered to be income effectively connected to the active conduct of
a banking, financing, or similar business in the United States by
reason of the application of Sec. 1.864-4(c)(5). A comment to the 2011
proposed regulations stated that there is uncertainty as to the
circumstances in which loan origination is commercial activity. The
Treasury Department and the IRS acknowledged the comment when
finalizing proposed Sec. 1.892-4(e)(1)(i) and (ii) in the 2025 final
regulations and stated that the issue will be addressed by these
proposed regulations.
The Treasury Department and the IRS are of the view that whether
the activity of lending or otherwise acquiring debt, including at
original issuance, qualifies as investment rather than commercial
activity under section 892 is highly fact-dependent, so that a
consideration of all facts and circumstances is needed to determine the
appropriate characterization. Accordingly, the Treasury Department and
the IRS are proposing these regulations to provide a framework for
determining when acquiring any debt, including at original issuance,
qualifies as investment for purposes of section 892.
The proposed regulations would provide as a general rule that all
acquisition of debt is treated as commercial activity unless the
acquisition is characterized as investment for purposes of section 892
under either of two safe harbors or under a facts-and-circumstances
test. See proposed Sec. 1.892-4(c)(1)(ii)(A). The term ``debt'' means
an obligation treated as debt for Federal tax purposes, regardless of
its legal form. Accordingly, proposed Sec. 1.892-4(c)(1)(ii) would
also apply to a financial instrument, within the meaning of Sec.
1.892-3(a)(4), that is treated as debt. An acquisition of debt
undertaken as a dealer, as defined in Sec. 1.864-2(c)(2)(iv)(a), would
be treated in any event as commercial activity.
The proposed regulations' framework would constitute the exclusive
set of rules for determining whether acquiring debt, including at
original issuance, is treated as investment and thus not as commercial
activity for purposes of section 892. Whether debt acquisition is
investment for purposes of section 892 would be, unless otherwise
provided, determined without regard to whether the debt acquisition is
treated as a trade or business for Federal tax purposes. Thus, no
inference is intended from the proposed regulations as to the
circumstances in which acquiring debt, including at original issuance,
would or would not be a trade or business for other purposes of the
Code, including section 864, section 162, or section 166 of the Code.
B. Debt Acquisition Safe Harbors
Proposed Sec. 1.892-4(c)(1)(ii)(B) would provide two safe harbors
that treat debt acquired in a registered offering or in a qualified
secondary market acquisition as investment for purposes of Sec. 1.892-
4(c)(1)(i) and, thus, not subject to the general rule of proposed Sec.
1.892-4(c)(1)(ii)(A).
The first safe harbor would treat acquisitions of bonds or other
debt securities acquired in an offering registered under the Securities
Act of 1933, as amended (Securities Act), as investment provided that
the underwriters of the offering are not related to the acquirer within
the meaning of sections 267(b) and 707(b). Although the first safe
harbor would except only offerings of debt securities registered under
the Securities Act, the Treasury Department and the IRS recognize that
the securities laws of some foreign countries may provide a regulatory
framework for debt offerings sufficiently similar to the Securities Act
such that this exception may appropriately apply in those
circumstances. Comments are requested regarding the circumstances, if
any, in which the safe harbor should be extended to offerings
registered under foreign securities laws in addition to the Securities
Act.
The second safe harbor would treat a qualified secondary market
acquisition of debt as investment for purposes of Sec. 1.892-
4(c)(1)(i). This generally would include acquisitions of debt traded on
an established securities market provided that the acquirer is not
purchasing from the issuer or participating in negotiation of the terms
or issuance of the debt. A qualified secondary market acquisition must
not be from a person that is under common management or control with
the acquirer, unless that person acquired the debt as investment within
the meaning of Sec. 1.892-4(c)(1)(i). Comments are requested on this
safe harbor, including the circumstances, if any, in which it should
apply to an acquisition of debt that is not traded on an established
securities market.
C. Qualification as Investment Based on All Facts and Circumstances
Proposed Sec. 1.892-4(c)(1)(ii)(C) would provide that debt
acquisitions that do not satisfy the safe harbors of proposed Sec.
1.892-4(c)(1)(ii)(B) may be an investment based on consideration of all
relevant facts and circumstances. In general, facts and circumstances
would be relevant to the extent they indicate that the entity's
expected return from acquiring the debt is exclusively a return on its
capital rather than including a return on activities it conducts. The
proposed regulations provide a non-exclusive list of relevant factors,
in proposed Sec. 1.892-4(c)(1)(ii)(C)(1) through (8), that would apply
in determining whether a debt acquisition is investment for purposes of
Sec. 1.892-4(c)(1)(i). Under this proposed analysis, all factors would
be taken into account and, depending on the particular case, the weight
given to each relevant factor (including factors not listed in the
proposed regulations) may vary.
Comments are requested on whether proposed Sec. 1.892-
4(c)(1)(ii)(C) should include additional factors or examples of
transactions undertaken by foreign government investors. In particular,
comments are requested on the circumstances, if any, in which
acquisitions of distressed debt, broadly syndicated loans, revolving
credit facilities, and delayed-draw debt obligations should be treated
as investment rather than commercial activities for purposes of section
892.
D. Other Changes
The proposed regulations would retain the exception for investments
in ``other securities'' (which follows the reference to stocks and
bonds) and retain the definition of ``other securities'' as ``any note
or other evidence of indebtedness'' which includes loans. See proposed
Sec. Sec. 1.892-4(c)(1)(i) and 1.892-3T(a)(3). Accordingly, the
proposed regulations would remove ``loans'' from the list of
investments in Sec. 1.892-4(c)(1)(i) of the 2025 final regulations
that are not treated as commercial activities.
Additionally, the proposed regulations would withdraw the rule on
banking, financing, or similar businesses in Sec. 1.892-4T(c)(1)(iii).
This is a conforming change given that the proposed regulations'
framework would constitute the exclusive set of rules for determining
whether acquiring debt, including at original issuance, is treated as
investment and thus not as
[[Page 57931]]
commercial activity for purposes of section 892.
The proposed regulations also would remove the phrase ``or from an
investment in net leases on real property'' from the parentheses that
follow ``the holding of real property which is not producing income''
in Sec. 1.892-4(c)(1)(i). The clause that would be removed is
duplicative of ``the holding of net leases on real property,'' which is
another activity identified in Sec. 1.892-4(c)(1)(i) that is not a
commercial activity. Thus, no substantive change to Sec. 1.892-
4(c)(1)(i) is intended by this removal. An additional non-substantive
change is made in proposed Sec. 1.892-4(c)(1)(i) that would add ``the
transfer of securities under a loan agreement which meets the
requirements of section 1058'' to the list of activities that are not
commercial activities, rather than setting off that activity in its own
sentence.
III. Defining Effective Control
Section 892(a)(2)(B) defines a CCE as any entity engaged in
commercial activities (whether within or outside the United States) if
the government (i) holds (directly or indirectly) any interest in such
entity which (by value or voting interest) is 50 percent or more of the
total of such interests in such entity, or (ii) holds (directly or
indirectly) any other interest in the entity which provides the foreign
government with effective control of the entity.
The 1988 temporary regulations provide that an entity that is
engaged in commercial activities is a CCE if the foreign government has
``effective practical control'' of the entity. See Sec. 1.892-
5T(a)(2). The 1988 temporary regulations explain that effective
practical control may be achieved through a minority interest which is
sufficiently large to achieve effective control, or through creditor,
contractual, or regulatory relationships which, together with ownership
interests held by the foreign government, achieve effective control.
For example, an entity engaged in commercial activities may be treated
as a CCE if a foreign government, in addition to holding a minority
interest (by value or voting power), is also a substantial creditor of
the entity or controls a strategic natural resource which the entity
uses in the conduct of its trade or business, providing the foreign
government effective practical control over the entity. See Sec.
1.892-5T(c)(2). Thus, under the 1988 temporary regulations, the term
``other interest'' in section 892(a)(2)(B)(ii) includes business
relationships, and an interest in the entity for purposes of an
analysis of effective control may exist when the foreign government has
the ability to exert influence over the entity. A comment to the 2011
proposed regulations suggested that the regulations should be expanded
to provide a more thorough definition of effective practical control
with more specific examples. The Treasury Department and the IRS
acknowledged the comment in the 2025 final regulations and stated that
the issue will be addressed by these proposed regulations.
The proposed regulations would revise Sec. 1.892-5T(c)(2) to
provide further guidance on what constitutes effective control under
section 892(a)(2)(B)(ii). The Treasury Department and the IRS are of
the view that it is necessary and appropriate to define the terms
``other interest'' and ``effective control'' broadly to include
circumstances in which a foreign government would have control over
either the operational, managerial, board-level, or investor-level
decisions of an entity. The proposed regulations would provide that,
generally, effective control is achieved by any interest in the entity
that, either separately or in combination, results in control over the
operational, managerial, board-level, or investor-level decisions of
the entity. All of the facts and circumstances related to the interests
would be considered in determining effective control. Interests may
include equity interests, voting power in the entity, debt interests,
contractual rights in or arrangements with the entity or with holders
of equity or other interests in the entity, certain business
relationships with the entity or with other interest holders in the
entity, regulatory authority over the entity, or any other arrangement
or relationship that provides influence over the entity's operational,
managerial, board-level, or investor-level decisions. (Although the
1988 temporary regulations provide guidance under section 892(a)(2)(B)
using the term ``effective practical control,'' the proposed
regulations use the term ``effective control'' to be consistent with
section 892(a)(2)(B)(ii) and the 2025 final regulations.)
For example, a foreign government would have effective control of
an entity in a case in which it owns a minority equity interest in the
entity that entitles that foreign government to appoint only one out of
several directors of the entity, if that one director has the sole
power to unilaterally appoint or dismiss the entity's manager. See
proposed Sec. 1.892-5(c)(2)(iii)(E) (Example 4). In contrast, a
foreign government that holds only a minority interest by value and
voting power in an entity, and no other interest, would not have
effective control of the entity if the foreign government lacks the
power (directly or indirectly through other arrangements) to
unilaterally elect the entity's board, choose its management, or
otherwise direct the entity's operational, managerial, board-level, or
investor-level decisions. See proposed Sec. 1.892-5(c)(2)(iii)(B)
(Example 1).
A foreign government would be deemed to have effective control of
an entity if the foreign government is, or under Sec. 1.892-5(a)(1)
controls an entity that is, a managing partner or managing member of
such entity, or holds or controls an entity that holds an equivalent
role with respect to such entity under local law applicable to the
entity. The Treasury Department and the IRS are of the view that these
roles inherently carry control over an entity so that the facts-and-
circumstances test is unnecessary to determine whether a foreign
government has effective control of the entity. On the other hand, the
mere right to be consulted with respect to operational, managerial,
board-level, or investor-level decisions of an entity will not alone
give rise to effective control.
Additionally, a foreign government would not need to hold any
particular amount of (or any) equity in an entity to have effective
control of the entity. For example, if a foreign government is a
creditor of an entity with sufficient creditor rights to give it
effective control, then that entity would be a CCE of the foreign
government, and any interest payments (or other payments) made by the
debtor entity to the foreign government would not qualify for the
exemption under section 892. See proposed Sec. 1.892-5(c)(2)(iii)(I)
(Example 8) (finding effective control when creditor's rights generally
included veto rights over the debtor's capital transactions and
operating budget).
With respect to related foreign government entities, the proposed
regulations would provide that the principles of Sec. 1.892-
5T(c)(1)(i) (attributing an interest owned directly or indirectly by an
integral part or controlled entity to the foreign sovereign) apply for
purposes of an effective control analysis. For example, if two
controlled entities (within the meaning of Sec. 1.892-2T(a)(3)) of the
same foreign sovereign have direct or indirect equity or non-equity
interests in a corporation, all of those interests would be considered
together for purposes of the effective control analysis with respect to
either controlled entity. Comments are requested as to the
circumstances, if any, in which a
[[Page 57932]]
determination could be made that controlled entities (within the
meaning of Sec. 1.892-2T(a)(3)) are functionally independent of one
another and therefore may be appropriately considered separately for
purposes of an effective control analysis.
Comments are also requested as to the circumstances, if any, in
which the holder of a minority equity interest in an entity should not
be treated as having effective control (or as having at least 50
percent of voting power) of the entity if managerial or board-level
decisions of the entity are subject to veto or ``blocking'' rights of
the holder and other holders (for example, through consent rights,
supermajority requirements, or otherwise).
Applicability Dates
These regulations are proposed to apply to taxable years beginning
on or after the date of publication of the Treasury decision adopting
these rules as final regulations in the Federal Register (the
finalization date). A foreign government within the meaning of
Sec. Sec. 1.892-2 and 1.892-2T may choose to apply Sec. 1.892-
2(a)(4), once finalized, to a taxable year of its directly or
indirectly wholly-owned entities beginning before the finalization date
if the period of limitations on assessment of the taxable year is open
under section 6501, and provided that the foreign government
consistently applies the rule in its entirety to the taxable year and
all succeeding taxable years of its directly or indirectly wholly-owned
entities beginning before the finalization date.
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
These 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) 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
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that this rulemaking will not have a significant
economic impact on a substantial number of small entities within the
meaning of section 601(6) of the Regulatory Flexibility Act. This
certification is based on the fact that the proposed regulations affect
foreign governments, including their controlled entities, with income
from sources within the United States. Accordingly, the entities
affected by the proposed regulations are not considered small entities,
and a regulatory flexibility analysis under the Regulatory Flexibility
Act is not required.
IV. Section 7805(f)
Pursuant to section 7805(f) of the Code, these proposed regulations
will be submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on their impact on small business.
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 and do not impose substantial direct compliance
costs on State and local governments or preempt State law within the
meaning of the Executive order.
Comments and Requests for Public Hearing
Before the 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 https://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 authors of the proposed regulations are Jack Zhou of
the Office of Associate Chief Counsel (International), and Joel Deuth,
formerly of the Office of Associate Chief Counsel (International).
However, other personnel from the Treasury Department and the IRS
participated in their development.
Statement of Availability of IRS Documents
IRS guidance cited in this preamble is published in the Internal
Revenue Bulletin and is available from the Superintendent of Documents,
U.S. Government Publishing Office, Washington, DC 20402, or by visiting
the IRS website at https://www.irs.gov.
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 for Sec. 1.892-2 in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.892-2 also issued under 26 U.S.C. 892(c).
* * * * *
0
Par. 2. Section 1.892-2 is added to read as follows:
Sec. 1.892-2 Foreign government defined.
(a) Foreign government--(1) Definition. For further guidance, see
Sec. 1.892-2T(a)(1).
(2) Integral part. For further guidance, see Sec. 1.892-2T(a)(2).
[[Page 57933]]
(3) Controlled entity. For further guidance, see Sec. 1.892-
2T(a)(3).
(4) Exceptions. A controlled entity, within the meaning of
paragraph (a)(3) of this section, does not include any partnership for
Federal tax purposes. A controlled entity also does not include any
entity owned and controlled by more than one foreign sovereign. Thus, a
foreign entity organized and wholly owned and controlled by multiple
foreign sovereigns to invest jointly, or to foster economic, financial,
and/or technical cooperation, is not a controlled entity for purposes
of paragraph (a)(3) of this section.
(b) Inurement to the benefit of private persons. For further
guidance, see Sec. 1.892-2T(b).
(1) through (2) [Reserved]
(c) Pension trusts--(1) In general. For further guidance, see Sec.
1.892-2T(c)(1) introductory text through (c)(1)(iv).
(i) through (v) [Reserved]
(2) Illustrations. For further guidance, see Sec. 1.892-2T(c)(2).
(d) Political subdivision and transnational entity. For further
guidance, see Sec. 1.892-2T(d).
(e) Applicability date. Paragraph (a)(4) of this section applies to
taxable years beginning on or after [DATE OF PUBLICATION OF FINAL
RULE]. However, a foreign government within the meaning of Sec. Sec.
1.892-2 and 1.892-2T may choose to apply paragraph (a)(4) of this
section to a taxable year of its directly or indirectly wholly-owned
entities beginning before [DATE OF PUBLICATION OF FINAL RULE] if the
period of limitations on assessment of the taxable year is open under
section 6501, and provided that the foreign government consistently
applies the rule in its entirety to the taxable year and all succeeding
taxable years of its directly or indirectly wholly-owned entities
beginning before [DATE OF PUBLICATION OF FINAL RULE].
0
Par. 3. Section 1.892-2T is amended by:
0
a. Removing the undesignated text under paragraph (a)(3)(iv); and
0
b. Adding paragraph (a)(4).
The addition reads as follows:
Sec. 1.892-2T Foreign government defined (temporary regulations).
(a) * * *
(4) Exceptions. For further guidance, see Sec. 1.892-2(a)(4).
* * * * *
0
Par. 4. Section 1.892-4, as amended in a final rule published elsewhere
in this issue of the Federal Register, effective December 15, 2025, is
amended by:
0
a. Revising paragraphs (c)(1)(i) through (iii); and
0
b. Adding a sentence after the first sentence of paragraph (d).
The revisions and addition read as follows:
Sec. 1.892-4 Commercial activities.
* * * * *
(c) * * *
(1) * * *
(i) In general. Subject to the provisions of this paragraph
(c)(1)(i) and paragraphs (c)(1)(ii) through (c)(7) of this section, the
following are not commercial activities: investments in stocks, bonds,
and other securities (as defined in Sec. 1.892-3T(a)(3)); investments
in financial instruments (as defined in Sec. 1.892-3(a)(4)); the
holding of partnership equity interests; the holding of net leases on
real property; the holding of real property which is not producing
income (other than on its sale); the holding of deposits in any
currency in banks; and the transfer of securities under a loan
agreement which meets the requirements of section 1058. An activity
will not cease to be an investment solely because of the volume of
transactions of that activity or because of other unrelated activities.
(ii) Acquisition of debt--(A) In general. An acquisition of debt is
considered a commercial activity for purposes of paragraph (b) of this
section notwithstanding any other provision of this section, unless the
acquisition qualifies as investment under the rules of paragraph
(c)(1)(ii)(B) or (C) of this section. For purposes of this paragraph
(c)(1)(ii), the term debt means an obligation treated as debt for
Federal tax purposes. For purposes of applying paragraphs (c)(1)(ii)(B)
and (C) of this section, actions by an agent or a person otherwise
acting on behalf of the acquirer are treated as the actions of the
acquirer. An acquisition of debt undertaken as a dealer, as defined in
Sec. 1.864-2(c)(2)(iv)(a), constitutes commercial activity without
regard to paragraphs (c)(1)(ii)(B) and (C) of this section.
(B) Safe harbors. An acquisition of debt that satisfies paragraph
(c)(1)(ii)(B)(1) or (2) of this section is treated as investment and
not commercial activity for purposes of paragraph (c)(1)(i) of this
section.
(1) Registered offerings. An acquisition of bonds or other debt
securities in an offering registered under the Securities Act of 1933,
as amended (15 U.S.C. 77a, et seq.), (the Securities Act), provided
that the underwriters of the offering are not related to the acquirer
within the meaning of sections 267(b) and 707(b).
(2) Qualified secondary market acquisitions. An acquisition of debt
traded on an established securities market, within the meaning of Sec.
1.7704-1(b), provided that--
(i) The acquirer does not acquire the debt from the debt issuer or
participate in the negotiation of the terms or issuance of the debt;
and
(ii) The acquisition is not from a person that is under common
management or control with the acquirer, unless that person acquired
the debt as investment within the meaning of paragraph (c)(1)(i) of
this section.
(C) Investments in debt. An acquisition of debt that does not
satisfy either paragraph (c)(1)(ii)(B)(1) or (2) of this section may be
an investment for purposes of paragraph (c)(1)(i) of this section based
on all relevant facts and circumstances, including the following:
(1) Whether the acquirer solicited prospective borrowers, or
otherwise held itself out as willing to make loans or otherwise acquire
debt at or in connection with its original issuance;
(2) Whether the acquirer materially participated in negotiating or
structuring the terms of the debt;
(3) Whether the acquirer is entitled to compensation (whether or
not labelled as a fee) that is not treated as interest (including
original issue discount) for Federal tax purposes;
(4) The form of the debt and the issuance process, including, for
example, whether the debt is a bank loan or instead a privately placed
debt security pursuant to Regulation S or Rule 144A under the
Securities Act;
(5) The percentage of the debt issuance acquired by the acquirer
relative to the percentages acquired by other purchasers;
(6) The percentage of equity in the debt issuer held or to be held
by the acquirer;
(7) The value of that equity relative to the amount of the debt
acquired; and
(8) If debt is deemed to be acquired in a debt-for-debt exchange as
a result of a significant modification under Sec. 1.1001-3, whether
there was, at the time of acquisition of the original unmodified debt,
a reasonable expectation, based on objective evidence, such as a
decline in the financial condition or credit rating of the debt issuer
between original issuance and the time of the acquisition of the
original unmodified debt, that the original unmodified debt would
default.
(D) Examples--(1) Assumed facts. The rules of this paragraph
(c)(1)(ii) are illustrated by the examples in this paragraph
(c)(1)(ii)(D). Except as otherwise stated, the following facts are
assumed for purposes of paragraphs
[[Page 57934]]
(c)(1)(ii)(D)(2) through (6) of this section (Examples 1 through 5):
(i) FC is a foreign entity organized under the laws of country X
and is treated as a corporation for Federal tax purposes; FC is a
controlled entity of the government of country X under Sec. 1.892-
2T(a)(3);
(ii) FC has neither engaged in, nor has been attributed, any
conduct of commercial activities for purposes of section 892;
(iii) FC has not previously acquired any debt; and
(iv) FC is not a dealer as defined in Sec. 1.864-2(c)(2)(iv)(a).
(2) Example 1: Isolated debt financing as commercial activity--(i)
Facts. In year 1, representatives of FC offered, on behalf of FC, to
provide debt financing to a foreign corporation. FC's representatives
structured and negotiated the terms of that debt financing, and FC made
a loan to the foreign corporation pursuant to those terms in year 1. FC
does not own any equity in that corporation. The debt was not issued in
a registered offering. All of the activities occurred outside the
United States in year 1.
(ii) Analysis. FC's debt acquisition activity is commercial
activity under this paragraph (c)(1)(ii), unless the acquisition
qualifies as investment under paragraph (c)(1)(ii)(B) or (C) of this
section. The debt acquisition does not qualify as investment under
either of the safe harbors in paragraph (c)(1)(ii)(B) of this section
because the debt was not issued in an offering registered under the
Securities Act, and because FC materially participated in negotiating
the terms of the debt through its representatives and acquired the debt
at original issuance from the issuer. This debt acquisition also does
not qualify as investment under paragraph (c)(1)(ii)(C) of this section
because, through its representatives, FC held itself out as a lender
and solicited, structured, negotiated, and funded the debt at original
issuance, and because FC acquired the debt in the form of a loan and
did not own any equity in the debt issuer. Although FC made only one
loan in year 1, the number of loans does not change the determination
that the acquisition is commercial activity under this paragraph
(c)(1)(ii), regardless of whether FC is treated as engaged in a trade
or business for purposes of section 162, section 166, or section
864(b).
(3) Example 2: Debt financing as investment when combined with
certain equity investments--(i) Facts. In year 1, FC owned 80 percent
of a foreign corporation's equity interests, which had a total value of
$100 million. During year 1, FC lent $50 million to the foreign
corporation to finance the foreign corporation's activities. FC's
management structured the terms of the debt in the form of a loan
between FC and the foreign corporation. FC acquired the debt at
original issuance without a registered offering. All of the activities
occurred outside the United States in year 1.
(ii) Analysis. FC's debt acquisition activity is a commercial
activity under this paragraph (c)(1)(ii), unless the acquisition
qualifies as investment under paragraph (c)(1)(ii)(B) or (C) of this
section. The debt acquisition does not qualify as investment under
either of the safe harbors in paragraph (c)(1)(ii)(B) of this section
because the debt was not issued in an offering registered under the
Securities Act and because FC acquired the debt at original issuance
from the issuer. Nonetheless, taking into account all relevant facts
and circumstances, including those under paragraph (c)(1)(ii)(C) of
this section, FC's acquisition of the foreign corporation's debt is
investment for purposes of paragraph (c)(1)(i) of this section. FC did
not hold itself out as a lender or solicit borrowers. Even though FC
structured the terms of the debt and acquired the debt in the form of a
loan, FC owned a substantial percentage of the equity interests in the
debt issuer and acquired an amount of debt that is not significant
relative to the value of FC's equity investment in the debt issuer.
Accordingly, taking into account all relevant facts and circumstances,
FC's debt acquisition qualifies as investment for purposes of paragraph
(c)(1)(i) of this section, and therefore is not commercial activity
under this paragraph (c)(1)(ii).
(4) Example 3: Private placement of debt securities and U.S.
Treasury securities as investment--(i) Facts. In year 1,
representatives of FC met with financial institutions unrelated to FC
that were serving as placement agents for the debt of a number of
domestic corporations. At those meetings, FC's representatives
communicated FC's interest in purchasing privately placed debt of U.S.
corporate issuers and communicated the terms on which FC would be
willing to purchase that debt. Based on those discussions, in the same
year, FC purchased, at original issuance, ten privately placed debt
securities of several domestic corporations. Each of the debt
securities was offered by the placement agents under Regulation S
through a private placement memorandum. FC purchased less than one-
third by principal amount of each debt offering and at least one other
unrelated purchaser purchased a larger percentage of each debt offering
than FC. In addition, in the same year, FC purchased U.S. Treasury debt
securities at original issuance in a public auction.
(ii) Analysis. FC's debt acquisition activities are commercial
activities under this paragraph (c)(1)(ii), unless the acquisitions
qualify as investments under paragraph (c)(1)(ii)(B) or (C) of this
section. Because FC acquired the debt at original issuance from the
issuers and not in offerings registered under the Securities Act, the
acquisitions do not qualify for either of the safe harbors under
paragraph (c)(1)(ii)(B) of this section. Nonetheless, taking into
account all relevant facts and circumstances, including those under
paragraph (c)(1)(ii)(C) of this section, FC's acquisitions of privately
placed debt securities and of U.S. Treasury debt securities are
investments for purposes of paragraph (c)(1)(i) of this section. The
corporate debt was structured on behalf of the issuers by financial
institutions unrelated to FC that were serving as placement agents. The
U.S. Treasury debt securities were offered with terms and conditions
set by the Treasury Department. FC did not hold itself out as a lender,
solicit borrowers, or materially participate in structuring or
negotiating the terms of the debt. Although FC did communicate to the
placement agents for the corporate debt before issuance the terms on
which FC would be willing to acquire the debt and bid in the auction of
U.S. Treasury debt securities, these activities do not indicate
material participation in the structuring or negotiation of the terms
of the debt. Moreover, the corporate debt was offered to FC in the form
of a privately placed security, and FC was not the largest purchaser of
any debt offering based on principal amount. Accordingly, taking into
account all relevant facts and circumstances, FC's debt acquisitions
qualify as investments for purposes of paragraph (c)(1)(i) of this
section, and therefore are not commercial activities under this
paragraph (c)(1)(ii).
(5) Example 4: Debt modification as investment--(i) Facts. In year
1, FC purchased debt of a foreign issuer, X, in secondary market
acquisitions that qualify as investments under paragraph
(c)(1)(ii)(B)(2) of this section (the X Debt). At the time of FC's
acquisitions, the X Debt was not in default, and there were no
objective indications at the time of the purchase of the X Debt, such
as a declining trend in X's financial condition or credit rating, that
X would default on the X Debt. In year 4, due to unexpected changes in
market conditions, X defaulted on the X Debt. A committee of creditors
of X, acting on behalf of all holders of the X Debt,
[[Page 57935]]
negotiated with X to modify the terms of the X Debt, including
extensions of maturity, deferral of interest payments, and changes in
interest rates. FC did not participate in the creditors' committee,
thus was not involved in any negotiations between the committee and X,
and did not directly negotiate with X on any aspect of the X Debt. The
modifications to the X Debt were significant modifications within the
meaning of Sec. 1.1001-3, and FC was deemed to acquire a new debt from
X (the Modified X Debt) in exchange for the unmodified X Debt.
(ii) Analysis. FC's debt acquisition activity is commercial
activity under this paragraph (c)(1)(ii), unless the acquisition
qualifies as investment under paragraph (c)(1)(ii)(B) or (C) of this
section. FC's deemed acquisition of the Modified X Debt does not
qualify for either of the safe harbors under paragraph (c)(1)(ii)(B) of
this section because FC is deemed to have acquired the Modified X Debt
at original issuance from the issuer and not in an offering registered
under the Securities Act. However, taking into account all relevant
facts and circumstances, including those under paragraph (c)(1)(ii)(C)
of this section, FC's acquisition of the Modified X Debt qualifies as
investment for purposes of paragraph (c)(1)(i) of this section because
the X Debt was not in default at the time of FC's acquisition, at that
time there was no expectation, based on objective indications, that X
would default on the X Debt, and because FC did not participate in the
creditors' committee which negotiated the terms of the Modified X Debt.
Accordingly, FC's deemed acquisition of the Modified X Debt qualifies
as investment for purposes of paragraph (c)(1)(i) of this section, and
therefore is not treated as commercial activity under this paragraph
(c)(1)(ii).
(6) Example 5: Debt restructuring as commercial activity--(i)
Facts. The facts are the same as in paragraph (c)(1)(ii)(D)(5) of this
section (Example 4), except that FC was a member of the creditors'
committee of X, which materially participated in negotiating and
structuring the terms of the Modified X Debt.
(ii) Analysis. In contrast to the acquisition in paragraph
(c)(1)(ii)(D)(5) of this section (Example 4), FC's acquisition of the
Modified X Debt is commercial activity under this paragraph (c)(1)(ii).
Taking into account all relevant facts and circumstances, the
acquisition does not qualify as investment under paragraph (c)(1)(i) of
this section because FC was a member of the creditors' committee and,
as a result, presumed to have materially participated in negotiating
and structuring the terms of the Modified X Debt.
(iii) [Reserved]
* * * * *
(d) Applicability date. * * * Paragraph (c)(1) of this section
applies to taxable years beginning on or after [DATE OF PUBLICATION OF
FINAL RULE]. * * *
0
Par. 5. Section 1.892-4T is amended by revising paragraph (c)(1)(iii)
to read as follows:
Sec. 1.892-4T Commercial activities (temporary regulations).
* * * * *
(c) * * *
(1) * * *
(iii) [Reserved]
* * * * *
0
Par. 6. Section 1.892-5, as amended in a final rule published elsewhere
in this issue of the Federal Register, effective December 15, 2025, is
amended by:
0
a. Revising paragraph (c)(2); and
0
b. Adding a sentence after the second sentence of paragraph (e).
The revision and addition read as follows:
Sec. 1.892-5 Controlled commercial entity.
* * * * *
(c) * * *
(2) Effective control--(i) Rule. An entity engaged in commercial
activity is a controlled commercial entity under paragraph (a)(1)(ii)
of this section if a foreign government (within the meaning of Sec.
1.892-2T(a)) has effective control of the entity. Except as provided in
paragraph (c)(2)(ii) of this section, effective control is achieved by
any interest in the entity that, directly or indirectly, either
separately or in combination with other interests, results in control
of the operational, managerial, board-level, or investor-level
decisions of the entity. However, mere consultation rights with respect
to operational, managerial, board-level, or investor-level decisions of
an entity (such as extending the term of the entity's investment
period, change in control of the entity, or liquidation of the entity)
do not alone give rise to effective control. The determination of
effective control is made considering all of the facts and
circumstances related to the interests in an entity. Interests in an
entity may include, for example:
(A) Equity interests;
(B) Debt interests;
(C) Voting rights in the entity, including the power to appoint
directors or managers, and to veto decisions;
(D) Contractual rights in or arrangements with the entity, or with
other interest holders in the entity;
(E) Business relationships with the entity, or with other interest
holders in the entity, including as a major customer or a supplier
having control over a strategic natural resource used in the entity's
business;
(F) Regulatory authority over the entity; or
(G) Any other interest in or other relationship with the entity
that may provide influence over decisions relating to the entity's
operations, management, board-level, or investor-level matters.
(ii) Special rule. A foreign government is deemed to have effective
control of an entity if the foreign government is, or under paragraph
(a)(1) of this section controls an entity that is, a managing partner
or managing member of such entity, or holds or controls an entity that
holds an equivalent role with respect to such entity under local law
applicable to the entity.
(iii) Examples--(A) Assumed facts. The application of this
paragraph (c)(2) is illustrated by the examples in this paragraph
(c)(2)(iii). Except as otherwise stated, the following facts are
assumed for purposes of paragraphs (c)(2)(iii)(B) through (I) of this
section (Examples 1 through 8):
(1) FX is a foreign entity organized under the laws of country C
and is treated as a corporation for Federal tax purposes; FX is a
controlled entity of the government of country C under Sec. 1.892-
2T(a)(3);
(2) Corp 1 is a corporation for Federal tax purposes that is
engaged in commercial activities;
(3) Corp 1 has a single class of equity interest and, unless
otherwise stated, Corp 1's governing documents or local law require
that more than 50 percent of its equity holders approve the election of
its directors, the selection of its officers, and certain major
corporate decisions;
(4) FX owns less than 50 percent of the value or voting power in
Corp 1 under paragraph (a)(1)(i) of this section and whether Corp 1 is
a controlled commercial entity with respect to FX is determined under
paragraphs (a)(1)(ii) and (c)(2)(i) of this section based on all of the
facts and circumstances; and
(5) The remaining equity interests of Corp 1 are owned by several
other investors unrelated to FX, none of which has control of Corp 1
within the meaning of paragraph (a)(1)(i) of this section.
(B) Example 1--(1) Facts. FX owns 40 percent of the equity in Corp
1. Two other investors each own 30 percent of
[[Page 57936]]
the equity in Corp 1. FX is not a party to any arrangement with other
equity holders or holders of other interests in Corp 1 that would give
FX the right to elect a majority of Corp 1's directors or to appoint or
replace officers of Corp 1. Under Corp 1's governing documents and
local law, FX does not have the power to unilaterally authorize or veto
a corporate action or appoint a majority of Corp 1's directors or
officers, and FX does not hold any other interest in Corp 1, including
by reason of any business relationship that provides it with influence
over Corp 1.
(2) Analysis. Because FX holds only a minority equity interest in
Corp 1, is not a party to any arrangement with other equity or other
interest holders of Corp 1, does not have sufficient voting power to
unilaterally authorize or veto Corp 1's actions or to appoint a
majority of Corp 1's directors or officers, and does not otherwise hold
any other interest in Corp 1, FX is not treated as having effective
control of Corp 1. Accordingly, Corp 1 is not a controlled commercial
entity with respect to FX.
(C) Example 2--(1) Facts. The facts are the same as in paragraph
(c)(2)(iii)(B) of this section (Example 1), except that FX and Corp 1
have an investment agreement in place when FX invests in Corp 1. The
investment agreement provides criteria for what types of investments
can be made by Corp 1, and provides no voting, operational, managerial,
or other rights to FX with respect to Corp 1.
(2) Analysis. The investment agreement between FX and Corp 1 does
not itself, or in combination with the other facts provided in
paragraph (c)(2)(iii)(B) of this section (Example 1), give FX control
of operational, managerial, board-level, or investor-level decisions of
Corp 1. Thus, for the reasons stated in paragraph (c)(2)(iii)(B) of
this section (Example 1), FX is not treated as having effective control
of Corp 1. Accordingly, Corp 1 is not a controlled commercial entity
with respect to FX.
(D) Example 3--(1) Facts. The facts are the same as in paragraph
(c)(2)(iii)(B) of this section (Example 1), except that under Corp 1's
governing documents, FX is entitled to participate in an investment
committee and has the right only to discuss acquisitions and sales of
property by Corp 1, but FX has no right to decide or execute such
acquisitions or sales and no other rights with respect to Corp 1.
(2) Analysis. FX's rights arising from the investment committee for
Corp 1 are mere consultation rights with respect to managerial
decisions of Corp 1. Such rights do not themselves, or in combination
with the other facts provided in paragraph (c)(2)(iii)(B) of this
section (Example 1), give FX control of operational, managerial, board-
level, or investor-level decisions of Corp 1. Thus, for the reasons
stated in paragraph (c)(2)(iii)(B) of this section (Example 1), FX is
not treated as having effective control of Corp 1. Accordingly, Corp 1
is not a controlled commercial entity with respect to FX.
(E) Example 4--(1) Facts. Under Corp 1's governing documents, FX is
entitled to appoint one out of three directors of Corp 1. That director
alone is authorized under Corp 1's governing documents to unilaterally
appoint or dismiss the manager, an officer of Corp 1 whose
responsibilities are to manage Corp 1's operations. FX does not
otherwise have sufficient voting power directly or through any
arrangements with holders of equity or holders of other interests in
Corp 1 to unilaterally authorize or veto any other Corp 1 action.
(2) Analysis. FX has, by reason of its equity interest, power that
allows it to appoint a director who alone has the power to unilaterally
appoint or dismiss Corp 1's manager, which provides FX with control
over decisions as to the operations and management of Corp 1.
Therefore, FX has effective control of Corp 1. Accordingly, Corp 1 is a
controlled commercial entity with respect to FX.
(F) Example 5--(1) Facts. The facts are the same as in paragraph
(c)(2)(iii)(E) of this section (Example 4), except instead of having
the right to unilaterally appoint or dismiss the manager of Corp 1,
FX's appointed director alone has rights to unilaterally veto dividend
distributions, material capital expenditures, sales of new equity
interests in Corp 1, and the operating budget of Corp 1.
(2) Analysis. The veto rights of FX's appointed director give FX
control over decisions as to the operation of Corp 1. Therefore, FX has
effective control of Corp 1. Accordingly, Corp 1 is a controlled
commercial entity with respect to FX.
(G) Example 6--(1) Facts. Under Corp 1's governing documents, FX is
entitled to appoint one out of three directors of Corp 1 and the
remaining two directors are appointed by the other unrelated investors.
However, one unrelated investor derives significant revenues from FX
through other business dealings, and, as a matter of course, causes its
appointed director to always vote in the same manner as FX's appointed
director on all board decisions. That unrelated investor's and FX's
appointed director's votes, when combined, constitute the majority of
the Corp 1 board votes. FX does not otherwise have sufficient voting
power to unilaterally authorize or veto any other Corp 1 action. FX
does not hold any other interest in Corp 1.
(2) Analysis. FX's significant business relationship with the
unrelated investor constitutes an interest in Corp 1 under paragraph
(c)(2)(i)(E) of this section. That interest indirectly provides FX,
when combined with its equity interest, with the power to control Corp
1's board. Therefore, FX has effective control of Corp 1. Accordingly,
Corp 1 is a controlled commercial entity with respect to FX.
(H) Example 7--(1) Facts. Corp 1's business consists primarily of
extracting and marketing a mineral located in country C. FC, the
government of country C, owns all rights to that mineral and regulates
all businesses engaged in its extraction.
(2) Analysis. FX, by reason of FC's ownership of the mineral rights
and the regulatory authority over the mineral's extraction, has the
ability to substantially affect Corp 1's business. For purposes of
paragraph (c)(2)(i) of this section, FC's ownership of the mineral
rights and its regulatory relationship with Corp 1's business
constitute FX's interests in Corp 1 under paragraphs (c)(2)(i)(E) and
(F) of this section. Those interests indirectly provide FX with the
power to control decisions as to the operation and management of Corp
1. Therefore, FX has effective control of Corp 1. Accordingly, Corp 1
is a controlled commercial entity with respect to FX.
(I) Example 8--(1) Facts. FX is a creditor of Corp 1. Under the
credit agreement between FX and Corp 1, Corp 1 is subject to
restrictions on the type of investments that Corp 1 can make, asset
dispositions, levels of future borrowing, and dividend distributions by
Corp 1. The credit agreement also provides FX with veto rights over
dividend and stock repurchases, additional borrowing, capital
expenditures, Corp 1's annual operating budget, and redemption of
subordinated debt.
(2) Analysis. FX's creditor interest, based on the totality of the
rights provided to FX by the terms of the credit agreement, provides FX
with control over both investor-level and operational decisions of Corp
1. Therefore, FX has effective control of Corp 1. Accordingly, Corp 1
is a controlled commercial entity with respect to FX.
* * * * *
(e) Applicability date. * * * Paragraph (c)(2) of this section
applies
[[Page 57937]]
to taxable years beginning on or after [DATE OF PUBLICATION OF FINAL
RULE]. * * *
* * * * *
Frank J. Bisignano,
Chief Executive Officer.
[FR Doc. 2025-22775 Filed 12-12-25; 8:45 am]
BILLING CODE 4831-GV-P