The Department of the Treasury and the Internal Revenue Service (IRS) issued additional guidance addressing the applicability dates of recent proposed regulations under Section 892 of the Internal Revenue Code, which exempts foreign governments, including sovereign wealth funds, from tax on certain income derived from passive U.S. investments. This additional guidance provides grandfathering protection and transitional relief to foreign governments investing in the United States.
“President Trump’s economic policies continue to attract trillions of dollars in investment into the United States. Treasury and the IRS conducted thorough reviews of taxpayer and stakeholder comments on proposed technical U.S. tax rules, which informed the release of additional guidance to provide certainty on the treatment of current investments and transitional relief to sovereign investors,” said Treasury Secretary Scott Bessent. “As final regulations continue to develop, we will evaluate feedback to ensure that they strengthen the American economy, uphold established market practices, and maintain a stable environment for existing and future sovereign wealth fund investment.”
“In response to comments on the recent proposed regulations, the IRS heard the concerns of many taxpayers and decided to provide transitional relief,” said IRS Chief Executive Officer Frank J. Bisignano. “With these changes, the IRS aims to preserve established market practices, drive domestic economic growth and support current and future sovereign wealth fund investment in the United States.”
Modification to the 2025 Proposed Regulations
On December 15, 2025, Treasury and the IRS issued proposed regulations under Section 892, clarifying when an acquisition of debt by a foreign government is commercial activity and when a foreign government has effective control of an entity engaged in commercial activities, in which cases the exemption does not apply.
After taking stakeholder comments into consideration, Treasury and the IRS introduce a two-part approach in today’s guidance providing both grandfathering protection and transitional relief to sovereign investors before these proposed rules become final:
- Grandfathering rule: it proposes new applicability dates to ensure that existing foreign government interests would not be subject to the final regulations.
- Transition period: a foreign government has at least 90 days after the publication date or until the start of the first taxable year after the publication date to transition to the final regulations.
Treasury and the IRS continue to consider comments from interested parties on all aspects of the proposed regulations. Instructions for submitting comments are included in today’s guidance.