Proposed Regs Simplify QIE Rules for Domestic Corps

Treasury and the IRS published proposed regulations to revise how domestically controlled QIEs are determined under Section 897. The proposed regulations would remove a rule that currently requires looking through certain domestic corporations to their shareholders when assessing foreign ownership of a QIE. As a result, all domestic C corporations would be treated as U.S. persons for QIE testing regardless of foreign ownership. This change is in response to taxpayer feedback highlighting the administrative burden and legal uncertainty created by the current regulations. The proposed regulations would apply to transactions occurring on or after Oct. 20, 2025, with an option for earlier adoption.

Background

Foreign persons generally are taxed on gains from disposition of U.S. real property interest (USRPI) as if they are engaged in a U.S. trade or business. USRPI includes stock in U.S. corporations that primarily invest in U.S. real estate. However, under Section 897(h)(2), an interest in a domestically controlled QIE is not a USRPI. QIEs, such as real estate investment trusts (REITs) and certain regulated investment companies (RICs), are deemed domestically controlled if less than 50% of the value of their stock is held by foreign persons. In other words, foreign shareholders are not subject to the USRPI rules if U.S. persons own 50% or more of the REIT or RIC stock.

Regulations finalized in April 2024 require QIEs to determine whether they are domestically controlled by looking through nonpublicly traded domestic C corporations in which foreign persons hold a more than 50% interest in the C corporation stock by value. This rule is intended to prevent QIEs from circumventing foreign ownership limitations through interposed domestic corporate structures. The 2024 final regulations also provide a 10-year transition rule for QIEs in existence before the publication of the final rules, exempting them from the look-through rule unless significant changes occurred in their USRPI or ownership.

In practice, the 2024 look-through provisions created significant challenges for taxpayers. Many found it difficult or impossible to accurately trace upstream ownership, particularly where reliable information about indirect foreign ownership was unavailable. This led to legal uncertainty and increased operational costs. Treasury and the IRS also received feedback stating that the look-through rule was inconsistent with the statute and congressional intent, which does not require tracing for domestic corporations except in specifically enumerated cases.

2025 proposed regulations

Treasury and the IRS responded to taxpayer feedback by eliminating the look-through requirement for domestic C corporations. The proposed regulations would remove the domestic corporation look-through rule from Section 1.897-1(c)(3) of the Treasury regulations, simplifying the analysis and aligning the regulations more closely with the statutory text. Under the proposed regulations, all domestic C corporations, regardless of their ownership, would be treated as non-look-through persons, meaning their ownership would not be traced to determine the extent of foreign control over a QIE. This change would apply to transactions occurring on or after Oct. 20, 2025, but taxpayers could elect to apply the new rules retroactively to transactions as early as April 25, 2024. Taxpayers also may rely on the proposed regulations before finalization.

Crowe observation

If the proposed rules apply, many REITs, RICs, and other QIEs no longer would need to assess whether they qualify as domestically controlled under the 2024 final regulations when foreign investors indirectly hold 50% or more of their stock through U.S. C corporations.

Even under the proposed regulations, however, the key threshold for determining whether a QIE is domestically controlled remains. A QIE is domestically controlled if, during the relevant five-year testing period, less than 50% of its value is held directly or indirectly by foreign persons. However, the removal of the domestic corporation look-through rule simplifies the determination for QIEs with domestic C corporation shareholders, as domestic C corporations always will be treated as U.S. persons for testing domestic control, regardless of their own foreign ownership.

Crowe observation

In contrast, even under the 2025 proposed rules, partnerships and other look-through entities will continue to require tracing to their ultimate owners.

Looking ahead

The proposed regulations appear to fall under the deregulation and burden reduction category of the most recent Treasury and IRS Priority Guidance Plan. Comments and requests for a public hearing are due Dec. 22, 2025, which means that these regulations could be finalized early in 2026. In the meantime, QIEs and their investors should consult their tax advisers to review their ownership structures and consider the potential benefits of early adoption.