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On Dec. 12, the IRS issued final regulations (T.D. 10042 (PDF - 381 KB)) under Section 892, which generally exempts foreign governments from U.S. income taxation on certain qualified income received from investments in the U.S., except for certain income received from commercial activities.
The final regulations generally retain the approach and structure of the 2011 and 2022 proposed regulations, including a broad definition of commercial activities coupled with an exclusive list of exceptions. Consistent with this overall approach, the final regulations include several clarifications and targeted revisions.
The final regulations generally apply to taxable years beginning on or after the date they are published in the Federal Register, consistent with the 2011 proposed regulations. Taxpayers are permitted to apply the final regulations to their open taxable years, subject to consistency requirements.
At the same time, the IRS also issued proposed regulations (REG-101952-24) addressing 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.
Foreign governments or entities invested in by foreign governments should assess their U.S. investments under the final regulations to determine whether the income is exempt from U.S. taxation under Section 892.
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