IRS Issues Proposed Regulations Applicable to Qualified Foreign Pension Funds and Sovereign Wealth Funds – Publications


January 13, 2023

The Internal Revenue Service (IRS) issued proposed regulations under Sections 892 and 897 of the Internal Revenue Code of 1986, as amended, on December 29, 2022. Final regulations  under Section 897 regarding the exemption for “qualified foreign pension funds” from taxation under the Foreign Investment in Real Property Tax Act of 1980 were issued the same day.

The proposed regulations under Section 892 should benefit foreign government investors in private funds and other entities that own US real estate by making it easier for those investors to structure their holdings of those investments in a manner that preserves such investors’ eligibility for the Section 892 exemption. By contrast, the proposed regulations under Section 897 would make it more difficult for US real estate investment trusts (REITs) to qualify as “domestically controlled”.

The proposed regulations will become effective when finalized. However, the preamble to the proposed regulations indicates that taxpayers may rely on the proposed regulations under Section 892 until the final regulations are issued.


Section 892 generally exempts foreign government investors from US federal income tax on income from investments in stocks, bonds, and other securities. However, any such income that is derived from a “commercial activity” or that is derived by or from a “controlled commercial entity” is not eligible for the exemption. A “controlled entity” of a foreign government (i.e., an entity in which the foreign government owns, directly or indirectly, 50% or more of the value or voting interests or over which the foreign government otherwise has effective practical control) will be a “controlled commercial entity” if it is engaged in any “commercial activity” anywhere in the world.

Under a special rule (the Deemed Commercial Activity Rule), a “controlled…

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