IRS releases proposed regulations that provide clarification and transitional relief for proposed Section 892 regulations

On December 15, 2025, the US Internal Revenue Service (IRS) issued both proposed regulations and final regulations under Section 892 relating to the taxation of income of foreign governments from investments in the United States (the Proposed Regulations and Final Regulations, respectively). On June 1, the IRS issued further proposed regulations modifying the applicability dates for when these proposed regulations will take effect.

What you need to know

• The IRS has revised the applicability dates for the Proposed Regulations issued in December 2025, clarifying that they will not apply retroactively to existing foreign government holdings.
• The revised applicability dates include a transition period of at least 90 days after the publication date before the new rules will apply.

The Proposed Regulations

The Proposed Regulations included guidance on:

• determining whether an acquisition of debt is commercial activity, and
• assessing whether a foreign government has “effective control” of an entity.

Those rules were originally proposed to apply to taxable years beginning on or after the date of publication of the Treasury decision adopting the Proposed Regulations as final regulations (the publication date).

Revised applicability dates

On June 1, 2026, the IRS issued further proposed regulations modifying the applicability dates for when the Proposed Regulations, once finalized, will take effect. Specifically, the IRS has withdrawn the prior applicability dates and proposed new applicability dates, clarifying that the Proposed Regulations will not apply retroactively to existing foreign government holdings of debt and of interests in entities.

The IRS has also included additional transitional relief for the applicability of the Proposed Regulations, providing foreign governments with a transition period of at least 90 days after the publication date or until the start of the first taxable year after the publication date (whichever is later), before the new rules can apply (the transition date).

As a result of these new applicability dates:

• The Proposed Regulations will apply only to:
  • debt instruments acquired on or after the transition date; and
  • with respect to controlled commercial entity status, acquisitions of interests in an entity on or after the transition date where the new interests would themselves confer effective control over the entity (i.e., without taking into account prior interests owned by the foreign government).
• The existing regulations under Section 892 will continue to apply to:
  • debt instruments acquired prior to the transition date, and debt instruments acquired after the transition date but pursuant to a binding commitment entered before that date; and
  • with respect to controlled commercial entity status, interests acquired prior to the transition date, and interests acquired after the transition date but pursuant to a binding commitment entered before that date— taking into account all interests owned by the foreign government, regardless of when acquired.

These revised applicability dates are a welcome clarification to sovereign investors who may have previously been concerned that they would need to restructure their existing investments once the Proposed Regulations were finalized.  

The IRS has also stated that the Treasury Department and the IRS are evaluating how to revise the Proposed Regulations to address the public comments they’ve received to date, including with respect to the debt acquisition and effective control rules, although no specific timeline was provided.

For more on the key takeaways of the Proposed Regulations and Final Regulations, consult our recent bulletin.