Treasury releases Section 897 final regulations addressing domestically controlled qualified investment entities

In brief

What happened?

Treasury and the IRS on April 24, 2024, released final regulations (TD 9992) regarding the definition of domestically controlled qualified investment entities (DC QIE) under Section 897.

The final regulations provide much needed transition rules and primarily affect foreign persons that own stock in a QIE that would be a United States real property interest (USRPI) if the QIE were not domestically controlled.

Why is it relevant? 

The final regulations finalize the proposed regulations published on December 29, 2022 (Proposed Regulations), other than the portions of the proposed regulations addressing the Section 892 exemption (which will be addressed in a separate rulemaking). The final regulations are effective April 25, 2024.

For purposes of determining the foreign ownership percentage in a QIE, the final regulations update the threshold for look-through treatment with respect to the domestic corporation look-through rule. Rather than a “foreign-owned domestic corporation,” as provided in the Proposed Regulations, the final regulations apply look-through treatment with respect to a “foreign-controlled domestic corporation,” which is defined as any non-public domestic C corporation if foreign persons hold directly or indirectly more than 50% (modified from 25% in the Proposed Regulations) of the fair market value of that corporation’s outstanding stock (the “final domestic corporation look-through rule”).

The final regulations also adopt a transition rule that, for a ten-year period, exempts existing structures from the final domestic corporation look-through rule, provided they meet certain requirements.

Actions to consider

Taxpayers that conducted a DC QIE analysis treating a US corporation as a “non-look-through” person should revisit their analysis to determine the impact of the updated look-through threshold per the final regulations.

Non-traditional real estate investment trusts (REIT) should consider undertaking a US real property holding corporation (USRPHC) analysis to the extent the final regulations cause the REIT to no longer be domestically controlled.

PwC will publish a detailed analysis of the final regulations within the coming days.