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April 30, 2024

US Treasury finalizes regulations on domestically controlled QIEs, modifying the "domestic corporation look-through rule" and providing a transition rule for certain existing QIEs

  • The final regulations (T.D. 9992, the Final Regulations) provide guidance as to when a qualified investment entity (QIE) is considered domestically controlled, narrowing the application of the domestic corporation look-through rule to privately held domestic C corporations where more than 50% of the fair market value of stock is owned, directly or indirectly, by foreign persons (rather than 25%, as in the proposed regulations).
  • The Final Regulations retain the proposed regulations' treatment of qualified foreign pension funds (QFPFs), qualified controlled entities (QCEs) and international organizations (IOs) as foreign persons for purposes of the domestically controlled QIE exception.
  • A transition rule relieves taxpayers of the application of the domestic corporation look-through rule for certain pre-existing QIEs for 10 years only if acquisitions of new US real property interests (USRPIs) are limited to 20% or less of the fair market value (FMV) of all USRPIs as of April 24, 2024, and no significant ownership changes (more than 50 percentage points) occur.

Executive Summary

On April 24, 2024, the United States (US) Treasury Department (Treasury) and Internal Revenue Service (IRS) issued Final Regulations providing guidance as to when QIEs, which include real estate investment trusts (REITs) and certain regulated investment companies (RICs), are considered domestically controlled for the purposes of the Foreign Investment in Real Property Tax Act rules of IRC Section 897.

The Final Regulations retain the general approach and structure of proposed regulations published on December 29, 2022 (the Proposed Regulations), with certain modifications. For additional discussion of the Proposed Regulations, see EY Tax Alert 2023-0059.

This Tax Alert describes the key clarifications and changes made to the Proposed Regulations by the Final Regulations.

Detailed discussion

Domestically controlled QIEs


Under IRC Section 897, gain derived by a nonresident alien or foreign corporation from the sale or other disposition of a USRPI is taxed as US-sourced income effectively connected with a US trade or business. A USRPI includes stock or equity interests in a US real property holding corporation (USRPHC), which is any corporation for which the FMV of its USRPIs equals or exceeds 50% of the FMV of its USRPIs, non-US real property interests, and assets that are used or held for use in a trade or business. Under IRC Sections 897(h)(2) and (h)(4)(B), a USRPI excludes interests in a QIE that is domestically controlled (the domestically controlled QIE exception). A QIE is considered domestically controlled if less than 50% of the value of its stock is held, directly or indirectly, by foreign persons at all times during a lookback or "testing" period that is the shorter of a five-year period ending on the date of disposition or the period of the QIE's existence.

While the term "held directly or indirectly" is not explicitly defined, Treas. Reg. Section 1.897-1(c)(2)(i) requires the actual owners of stock, as determined under Treas. Reg. Section 1.857-8, to be taken into account. IRC Section 897(h)(4)(E) provides limited rules for classifying holders of QIE stock as US or foreign entities, treating a QIE shareholder that is itself a QIE as a foreign person in certain circumstances and QIE stock held by another, publicly traded QIE as held by a foreign or US person based on whether the QIE is domestically controlled. IRC Section 897(h)(4)(E) also treats QIE stock owned by another, privately held QIE, as held by a US person only in proportion to the stock of the other QIE held by a US person.

Final Regulations

Increase in the domestic corporation look-through rule's foreign ownership threshold from 25% or more to more than 50%

The Proposed Regulations introduced "general" and "special" look-through rules to determine whether a QIE's stock is "indirectly" held by foreign persons for purposes of the domestically controlled QIE exception. The general look-through rule would only allow "non-look-through persons" to be considered direct or indirect owners of a QIE's stock. "Non-look-through persons" would include individuals, certain domestic C corporations, tax-exempt holders, foreign corporations, publicly traded partnerships, public RICs, IOs, QFPFs or any part thereof, or QCEs. Ownership through intermediate "look-through persons" would be attributed (proportionally) to ultimate owners that are non-look-through persons. Intermediate "look-through persons" would be any person other than a non-look-through person, including a RIC that is not a public RIC, a REIT that is not a public QIE, an S corporation, a non-publicly traded partnership, a trust, or a domestic C corporation treated as a look-through person. The special look-through rules would have treated certain non-public domestic C corporations as look-through persons if 25% or more of the FMV of the corporation's outstanding stock were held, directly or indirectly, by a foreign person(s) (the domestic corporation look-through rule). For this purpose, any person holding less than 5% of US publicly traded QIE stock would be treated as a US person that is a non-look-through person unless the QIE has actual knowledge that the holder is not a US person. In addition, a publicly traded QIE would be treated as a foreign person that is a non-look-through person, unless it is domestically controlled.

In the preamble to the Final Regulations (Preamble), Treasury and the IRS discuss comments received from stakeholders requesting the domestic corporation look-through rule be withdrawn, or if retained, narrowed. While the Final Regulations do not adopt any of the specific stakeholder recommendations for modifying the domestic corporation look-through rule, Treasury agreed that the scope of the rule should be narrowed to mitigate compliance burdens and appropriately limit the rule to situations in which significant indirect ownership of a domestic C corporation by foreign persons is indicative of foreign control.

Accordingly, the Final Regulations increase the foreign ownership threshold required to treat a non-public domestic C corporation as a look-through person from 25% or more to more than 50% of the FMV of the corporation's outstanding stock. To reflect this change, the Final Regulations apply look-through treatment with respect to a "foreign-controlled domestic corporation" rather than a "foreign-owned domestic corporation."

Treatment of QFPFs, QCEs and IOs as foreign persons

Consistent with the Proposed Regulations, the Final Regulations treat QFPFs, QCEs and IOs as foreign persons for purposes of the domestically controlled QIE exception.

Treatment of public RICs as non-look-through persons

The Final Regulations generally treat a public RIC as a non-look-through person. A public RIC is generally defined as a RIC that is not a QIE and whose shares are (i) regularly traded on an established securities market or (ii) common stock that is continuously offered pursuant to a public offering and held by at least 500 shareholders. To the extent the QIE being tested for domestically controlled status has actual knowledge that the RIC is foreign-controlled, however, the RIC will instead be treated as a non-public domestic C corporation (i.e., a look-through person) for purposes of the domestically controlled QIE exception.

Expanding the "actual knowledge" exception to the non-look-through rules for less-than-5% holders of public QIEs and to publicly traded corporations and partnerships

As described above, under the Proposed Regulations, any person holding less than 5% of US publicly traded QIE stock is treated as a US person that is a non-look-through person unless the QIE has actual knowledge that the holder is not a US person. The Final Regulations expand this rule by providing that non-look-through treatment of the less-than-5% holder also does not apply if the QIE has actual knowledge that the holder is foreign-controlled (i.e., that more than 50% of the FMV of the holder is directly or indirectly owned by foreign persons, regardless of whether the holder is a corporation or a partnership). In such cases, the QIE stockholder will be treated as a non-public domestic C corporation subject to the domestic corporation look-through rule.

In addition, the Final Regulations allow non-look-through treatment for public domestic C corporations and publicly traded partnerships, generally defined as entities with stock or interests traded on established markets. However, similar to the treatment for RICs discussed above, the Final Regulations will not treat a domestic C corporation or partnership as a public domestic C corporation or a publicly traded partnership, respectively, if the QIE being tested for domestically controlled status has actual knowledge that the entity is foreign-controlled; in that case, the entity will instead be treated as a look-through person.

Applicability dates and transition rules

The Final Regulations are effective April 25, 2024, and apply to transactions occurring after June 18, 1980. The rules for domestically controlled QIEs, including the determination of the foreign ownership percentage and certain definitions, but excluding the transition rules (discussed below), apply to transactions occurring on or after April 25, 2024. This includes transactions resulting from an entity classification election under Treas. Reg. Section 301.7701-3 that is effective on or before April 25, 2024, but filed on or after April 25, 2024. For transactions occurring before April 25, 2024, the applicable definitions for domestically controlled REITs, foreign corporations, and foreign persons in Treas. Reg. Sections 1.897-1(c)(2)(i), 1.897-1(l), and 1.897-9T(c) respectively, apply.

The Final Regulations include a transition rule that exempts preexisting QIEs from the domestic corporation look-through rule for 10 years, but only to the extent the QIE:

  1. Qualifies as "domestically controlled" at all times on or after April 24, 2024, taking into account all provisions of the Final Regulations, except the domestic corporation look-through rule
  2. Does not directly or indirectly acquire new USRPIs exceeding 20% of the aggregate FMV of its USRPIs held directly or indirectly as of April 24, 2024 (determined using the figures from the quarterly tests in IRC Section 851(b)(3) or 856(c)(4), as applicable, for the most recent quarter closing preceding April 24, 2024)
  3. Does not undergo a significant change in direct or indirect ownership by non-look-through persons (i.e., a direct or indirect increase of over 50 percentage points in share ownership by non-look-through persons) compared to ownership on April 24, 2024

Any non-pro-rata issuance or redemption of stock counts towards reaching the 50-percentage point threshold.

For publicly traded QIEs, the Final Regulations simplify the ownership change assessment by disregarding transfers by any person (regardless of whether a non-look-through person or not) owning less than 5% of the QIE, unless the QIE has actual knowledge of that person's ownership. In addition, an exception applies for acquisitions of a USRPI or QIE interest pursuant to a written agreement that was binding before April 24, 2024, including a tender offer announced before April 24, 2024.1

The transition rule remains effective until the earlier of April 24, 2034, or the day immediately following the date on which the QIE no longer meets the requirements due to acquisitions of USRPIs or changes in ownership. After this point, the domestic corporation look-through rule will apply to determine if a QIE is domestically controlled. The Final Regulations also clarify that the domestic corporation look-through rule is prospective only and does not apply to any part of a testing period during which the transition rule was in effect for a QIE.

Section 1445 withholding on dispositions of USRPI

The Final Regulations clarify the rules for certifying the non-USRPI status of interests in a domestically controlled QIE.

Treas. Reg. Section 1.1445-2 provides the circumstances in which a transferee is not required to withhold under IRC Section 1445(a) because the transferor is not a foreign person, the property is not a USRPI, or an exception to withholding applies. Specifically, Treas. Reg. Section 1.1445-2(c)(3) states that no withholding is required on the acquisition of an interest in a domestic corporation if the transferor provides the transferee with a copy of a statement issued by the corporation under Treas. Reg. Section 1.897-2(h), certifying that the interest is not a USRPI. Treas. Reg. Section 1.897-2(h)(3) provides that the requirements of Treas. Reg. Section 1.897-2(h) do not apply to domestically controlled QIEs, although they may voluntarily attach a statement to their tax return informing the IRS that they are not a USRPHC.

The Preamble explains that the availability of the procedures in Treas. Reg. Section 1.1445-2(c)(3) to holders of stock in a domestically controlled QIE is unclear, given the reference to a statement provided under Treas. Reg. Section 1.897-2(h), a requirement expressly inapplicable to domestically controlled QIEs. To address this issue, the Final Regulations revise the rules in Treas. Reg. Sections 1.897-2(h)(3) and 1.1445-2(c)(3), by allowing a domestic corporation to voluntarily provide a statement to a transferor, upon request, certifying that its interest is not a USRPI because the corporation is a domestically controlled QIE (thus no withholding is required). The transferor may then furnish this statement to the transferee, provided that the statement otherwise complies with the requirements of Treas. Reg. Section 1.897-2(h).


The Final Regulations present significant considerations for investment structures that include REITs and RICs. The adoption of the domestic corporation look-through rule makes understanding and tracking the ultimate ownership of domestic corporations critical, even though the Final Regulations have increased the foreign ownership threshold that triggers look-through treatment from 25% to more than 50%.

While the Final Regulations provide 10-year transition relief for preexisting structures, this relief is contingent upon meeting specific requirements that may in practice prove challenging for many structures, although the relief may be beneficial for some (e.g., single-asset REITs). Understanding these provisions and ensuring that existing QIEs that wish to rely on the transition rule comply with the limits for USRPI acquisitions or ownership changes is essential. However, it may not be clear how the limitations in the transition rule would apply to certain fact patterns. As a result, QIEs should monitor investment structures closely for any significant direct or indirect acquisitions of USRPIs or changes in direct or indirect ownership that might subject QIEs to the domestic corporation look-through rule before the expiration of the 10-year maximum transition period.

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1 Subject to Section 14(e) of the Securities Exchange Act of 1934 (15 U.S.C. 78n(e)) and Regulation 14E (17 CFR 240.14e-1 to 240.14e-8).

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Contact Information

For additional information concerning this Alert, please contact:

International Tax and Transactions Services

Global Compliance & Reporting

Business Tax Advisory

Published by NTD’s Tax Technical Knowledge Services group; Jennifer A Brittenham, legal editor

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.


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