On May 29, 2026, the Department of the Treasury and the Internal Revenue Service (IRS) issued proposed regulations under section 892 of the Internal Revenue Code, which would revise applicability dates under previously proposed regulations issued in December 2025 to provide transition relief for certain existing investments by foreign governments and their controlled entities. As discussed in previous coverage, section 892 generally exempts foreign governments and their controlled entities from U.S. federal income tax on certain income from passive U.S. investments but not from income derived from commercial activities or received by, from, or through a controlled commercial entity (a CCE). The December 2025 proposed regulations would provide rules for when the acquisition of debt qualifies as a commercial activity, rather than an investment for which the section 892 exemption may apply, and rules for determining when a foreign government has "effective control" of an entity engaged in commercial activity (in which case that entity qualifies as a CCE). These rules were proposed to apply to taxable years beginning on or after the date the proposed regulations were published as final regulations in the Federal Register. However, commentators questioned whether, and if so how, the December 2025 proposed regulations would affect existing investments. The May 2026 proposed regulations address those concerns. 

The May 2026 proposed regulations clarify that the government did not intend for the new rules, when finalized, to apply retroactively to investments that were acquired in years prior to the applicability date. The preamble explains that "it is the acquisition of debt, and not the mere holding of debt, that is potentially treated as commercial activity for purposes of section 892." See 91 FR 32366, at 32367. Thus, under the new proposed regulations, the debt-acquisition and effective-control rules would apply after the later of (i) 90 days after the final regulations are published in the Federal Register, or (ii) the first day of the relevant foreign government or acquirer's first taxable year beginning on or after the publication date. In addition, the regulations include a transition rule that provides that debt acquired, and entity interests held, before that applicability date – including debt or interests acquired pursuant to a binding commitment entered before that date – would remain subject to existing section 892 provisions (although the effective-control rules could apply if the foreign government acquires a new interest in an entity after the applicability date that, by itself, confers effective control). The May 2026 proposed regulations withdraw the relevant proposed applicability dates in the earlier proposed guidance. The government continues to consider comments received on the substantive changes contained in the December 2025 proposed regulations.

For more information, please contact:

Layla J. Asali, lasali@milchev.com, 202-626-5866

Rocco V. Femia, rfemia@milchev.com, 202-626-5823

Chadwick Rowland, crowland@milchev.com, 202-626-1589

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