On August 19, 2025, the US Department of Treasury (Treasury) and the Internal Revenue Service (IRS) released Notice 2025-45 (Notice) announcing their intent to issue proposed regulations under IRC Section 897(d) and (e) (FIRPTA). These proposed regulations would apply to certain inbound asset reorganizations under IRC Section 368(a)(1)(F) (F Reorganization) involving transfers of US real property interests (USRPI). Specifically, the Notice addresses transfers and distributions that occur in an F reorganization where the transferor corporation is a publicly traded foreign corporation and the resulting corporation is a publicly traded domestic corporation (Covered Inbound F Reorganization). Treasury and the IRS also announced their intent to issue proposed regulations revising certain rules under Treas. Reg. Section 1.368-2(m) relating to the qualification of a transaction as an F Reorganization.

The Notice indicates that the existing Treasury regulations on the interaction of the corporate nonrecognition provisions with the FIRPTA rules may act as an impediment for publicly traded foreign companies seeking to redomicile into the United States in a transaction that may otherwise qualify as a tax-free F Reorganization. The current rules on these interactions are contained in Treas. Reg. Sections 1.897-5T(c)(4) and 1.897-6T(a), as modified by Notices 89-85 and 2006-46.

The Notice anticipates that the forthcoming proposed regulations will apply to distributions, transfers, or exchanges occurring on or after August 19, 2025. Taxpayers may rely on the guidance in the Notice with respect to Covered Inbound F Reorganizations before the proposed regulations are published, provided the rules are applied in their entirety and consistently. Taxpayers also may rely on the guidance under Treas. Reg. Section 1.368-2(m) before the proposed regulations are published. Comments on the Notice are due by October 20, 2025.

Background

IRC Section 897 generally

IRC Section 897 generally treats gain or loss of a nonresident alien individual or a foreign corporation from the disposition of any USRPI as income that is effectively connected with the conduct of a US trade or business (ECI), and thus, subject to US federal income tax on a net basis at graduated rates. Under IRC Section 897(c), a USRPI includes interests in US real property, and interests (other than solely as a creditor) in any domestic corporation, unless the taxpayer demonstrates that the corporation was not a US real property holding corporation (USRPHC) during the shorter of the taxpayer's holding period or the five-year period preceding the disposition (the testing period).

A USRPHC is a corporation the fair market value of whose USRPIs equals or exceeds 50 percent of the aggregate fair market value of its USRPIs, its foreign real property interests, and its trade or business assets. IRC Section 897(c)(3) provides that a class of stock that is regularly traded on an established securities market is not a USRPI unless a person holds (applying certain constructive ownership rules) more than 5% of the class at any time during the testing period (the Regularly Traded-Stock Exception).

Nonrecognition transactions

IRC Section 897(d) and (e) render inapplicable nonrecognition provisions with respect to a foreign person's distribution or transfer of a USRPI, unless certain requirements (discussed below) are satisfied. For purposes of IRC Section 897, a nonrecognition provision means any provision of the Code which provides that realized gain or loss is not recognized.

Under IRC Section 897(d), the gain foreign corporations generally recognize on a distribution (including in liquidation or redemption) of a USRPI in a nonrecognition transaction is equal to the excess of the USRPI's fair market value over its adjusted tax basis. There is an exception from gain recognition if (1) at the time of the distribution, (a) the distributee would be subject to US tax on a later disposition of the USRPI, and (b) its basis in the USRPI does not exceed the USRPI's adjusted basis before the distribution, increased by any gain recognized by the distributing corporation, or (2) nonrecognition treatment is provided for under the IRC Section 897(e)(2) regulations.

IRC Section 897(e) and Treas. Reg. Section 1.897-6T(a) generally provide that a nonrecognition provision will apply to a transaction if: (1) the property that the transferor receives in the exchange is a USRPI (the USRPI-for-USRPI Requirement); (2) immediately following the exchange, the transferor would be subject to US tax on a subsequent disposition of the replacement property received in the exchange (the Subject to US Tax Requirement); and (3) the transferor complies with filing requirements in Treas. Reg. Section 1.897-5T(d)(1)(iii), as amended by Notice 89-57 (the FIRPTA Filing Requirement).

Distributions of USRPHC stock in connection with certain inbound asset reorganizations

Treas. Reg. Section 1.897-5T(c)(4) generally requires a foreign corporation to recognize gain when it distributes (or is deemed to distribute) stock of a USRPHC to its shareholders in an IRC Section 361(c) exchange in connection with certain asset reorganizations, including an F Reorganization. However, gain is not recognized if IRC Section 897(d) and Treas. Reg. Section 1.897-5T(c)(4) requirements, as modified by Notices 89-85 and 2006-46, are met. Under Notice 89-85, a foreign corporation is not required to recognize gain on the distribution of stock of a USRPHC under IRC Section 361(c) if (1) it pays an amount equal to the hypothetical IRC Section 897 tax that would have been imposed on all foreign persons that disposed of interests in the foreign corporation had it been a US corporation (the Toll Charge), (2) the distributee (i.e., the shareholder exchanging stock in the IRC Section 354 exchange) would be subject to US tax on any subsequent disposition of the stock of the USRPHC (the Modified Subject to US Tax Requirement), and (3) the FIRPTA Filing Requirement is met. Notice 2006-46 limits the Toll Charge calculation to a 10-year lookback period.

Overview of F Reorganizations

An F Reorganization is defined as a mere change in the identity, form or place of organization of a corporation, which may include a transaction involving an actual or deemed transfer of property by the transferor corporation to the resulting corporation (as defined in Treas. Reg. Section 1.368-2(m)(1)). For example, a transaction in which a foreign corporation migrates its jurisdiction of organization or its tax residence to the United States may qualify as an F Reorganization.

Treas. Reg. Section 1.368-2(m) sets out the scope and requirements for an F Reorganization, including an "identity of stock ownership" requirement. Under this rule, and subject to certain exceptions set forth in the regulations, the same person(s) must own all the stock of (i) the transferor corporation immediately before the potential F Reorganization, and (ii) the resulting corporation immediately after the reorganization, in identical proportions (the Identity of Stock Ownership Requirement).

Notice 2025-45

The Notice generally revises the rules that apply to transfers or distributions of USRPIs occurring in Covered Inbound F Reorganizations. The Notice also clarifies the application of the Identity of Stock Ownership Requirement of an F Reorganization with respect to transfers of stock that are not part of the reorganization plan but that occur in close temporal proximity to the F Reorganization.

Covered Inbound F Reorganizations

As described above, a Covered Inbound F Reorganization is defined as an F Reorganization where the transferor corporation is a publicly traded foreign corporation and the resulting corporation is a publicly traded domestic corporation.

A foreign transferor corporation is considered a publicly traded foreign corporation if the principal class of its stock was regularly traded on an established securities market throughout the three-year period immediately preceding the completion of the F Reorganization. Similarly, a domestic resulting corporation is considered a publicly traded domestic corporation if its principal class of stock is regularly traded on an established securities market for the one-year period immediately following the completion of the F Reorganization.

The term "principal class of stock" generally means the class (or combination of classes) of common stock representing a majority of the corporation's aggregate vote and value. A principal class of stock is considered "regularly traded" if trades meet certain duration and volume thresholds outlined in Treas. Reg. Section 1.897-9T(d)(1). "Established securities market" refers to a national securities exchange or a foreign exchange officially recognized or supervised by a governmental authority.

A Covered Inbound F Reorganization excludes a transaction that would otherwise qualify as a Covered Inbound F Reorganization if, pursuant to a plan or series of related transactions, the resulting domestic corporation transfers property (other than money) to any of its shareholders. A plan is presumed to exist if such transfers occur within one year of the F Reorganization. An exception applies for de minimis cases where the total fair market value of non-cash property transferred is less than 1% of the foreign transferor corporation's total assets at the time of the F Reorganization.

Proposed modifications to the conditions for nonrecognition treatment of a Covered Inbound F Reorganization

The Notice resolves certain discrete issues in the context of the Regularly Traded-Stock Exception in IRC Section 897(c)(3) and its interaction with the conditions for nonrecognition treatment described in Notices 89-85 and 2006-46 as an exception to Treas. Reg. Section 1.897-5T(c)(4)(i) (which otherwise requires the recognition of gain under IRC Section 897(a)).

The proposed regulations would establish that, in a Covered Inbound F Reorganization, the Toll Charge computation would take into account the Regularly Traded-Stock Exception (including the constructive ownership rules). Here, the applicability of the Regularly Traded-Stock Exception would depend on whether the foreign transferor corporation knows or has reason to know that a person held more than 5% of the relevant class of stock at any time during the 10-year lookback period set forth in Notice 2006-46. The transferor must make reasonable efforts, including reviewing public information, to confirm. The Notice illustrates this rule with an example of a nonresident individual disposing of stock in a foreign transferor corporation in a Covered Inbound F Reorganization during the 10-year lookback period, where the Regularly Traded-Stock Exception would treat that stock as non-USRPI. In this case, the Notice concludes that no amount would be owed by the transferor foreign corporation with respect to the above disposition provided the other conditions for nonrecognition treatment are satisfied (i.e., the Modified Subject to US Tax Requirement and FIRPTA Filing Requirement).

Further, under the proposed regulations, in a Covered Inbound F Reorganization, a distributee of the resulting domestic corporation stock that qualifies for the Regularly Traded-Stock Exception at the time of the distribution would be deemed to satisfy the Modified Subject to US Tax Requirement.

In connection with the FIRPTA Filing Requirement, the proposed regulations would also provide that, for a Covered Inbound F Reorganization, the declaration described in Treas. Reg. Section 1.897-5T(d)(1)(iii)(H) would only be required with respect to distributees of resulting domestic corporation stock that the foreign transferor corporation knows or has reason to know (after making reasonable efforts to determine, including through public information) do not qualify for the Regularly Traded-Stock Exception at the time of the distribution.

As noted above, IRC Section 897(e)(1) and Treas. Reg. Section 1.897-6T(a)(1) generally provide that a nonrecognition provision applies to a foreign person's transfer of a USRPI if three requirements are satisfied: the USRPI-for-USRPI Requirement, the Subject to US Tax Requirement and the FIRPTA Filing Requirement. The proposed regulations would establish that nonrecognition treatment under IRC Section 361(a) applies, in a Covered Inbound F Reorganization, to a foreign transferor corporation's transfer of a USRPI to a resulting domestic corporation in exchange for stock of the resulting domestic corporation. This would be the case even if that stock is not a USRPI and regardless of whether the foreign transferor corporation would be subject to US taxation on its disposition of the stock of the resulting domestic corporation received in the exchange. This rule would effectively eliminate the USRPI-for-USRPI Requirement and the Subject to US Tax Requirement in the case of a Covered Inbound F Reorganization.

Subject to the exception in Notice 89-57, the Notice clarifies that the FIRPTA Filing Requirement in Treas. Reg. Section 1.897-6T(a)(1) would still apply, except for the requirement to provide the information set forth under Treas. Reg. Section 1.897-5T(d)(1)(iii)(C) and (H) (a description of USRPI received in exchange and a certain signed declaration, respectively). The FIRPTA filing must include a statement that any USRPI transferred is pursuant to a Covered Inbound F Reorganization.

Identity of ownership

As mentioned earlier, Treas. Reg. Section 1.368-2(m) sets forth the requirements a transaction must satisfy to qualify as an F Reorganization. Those requirements include the Identity of Stock Ownership Requirement. The Notice states that Treasury and the IRS have received requests to clarify the application of the Identity of Stock Ownership Requirement when sales, exchanges or other dispositions of transferor or resulting corporation stock occur in the middle of transactions that collectively constitute the F Reorganization.

The Notice proposes amending Treas. Reg. Section 1.368-2(m)(1)(ii) by clarifying that transfers of stock in the transferor or resulting corporation would not affect the Identity of Stock Ownership Requirement if the transfers were not part of the plan of reorganization. The proposed regulations would include an example illustrating the above treatment. In that example, P, a publicly traded foreign corporation, forms a domestic corporation (US Corp.), contributing nominal capital, with the intent that US Corp. will serve as the resulting corporation in a potential F Reorganization. To implement the potential F Reorganization, US Corp. forms a merger subsidiary that merges into P, with US Corp becoming the new public company and P becoming a wholly owned subsidiary of US Corp. (the Merger). Three days after the Merger, P elects to be treated as a disregarded entity for US tax purposes (the Liquidation). During the short period between the Merger and the Liquidation, some shareholders of US Corp. sell their shares to new investors who were not shareholders before the sale. The sale of the US Corp. stock is not part of the plan of reorganization. The example concludes that because these stock sales are not part of the plan, they do not affect satisfaction of the Identity of Stock Ownership Requirement under Treas. Reg. Section 1.368-2(m)(1)(ii).

Implications

The Notice gives taxpayers helpful guidance, easing the application of nonrecognition provisions under IRC Section 897 for Covered Inbound F Reorganizations involving the redomiciliation of publicly traded foreign corporations. Treasury and the IRS acknowledge that these transactions do not raise policy concerns under IRC Section 897 and that current rules may discourage redomiciliation into the United States and impose significant compliance burdens on transactions that would otherwise qualify for nonrecognition.

The Notice favorably addresses the concern that distributees of USRPHC stock, particularly in transactions involving the public, might not meet the Modified Subject to US Tax Requirement, by providing that those who qualify for the Regularly Traded-Stock Exception at the time of distribution are treated as meeting the Modified Subject to US Tax Requirement. More specific guidance on what constitutes "reasonable efforts to determine" — such as reliance on information reported on a Schedule 13G — would be helpful, and taxpayers should consider whether to provide input on this or other issues during the comment period, which ends on October 20, 2025.

The Notice also provides relief by removing both the USRPI-for-USRPI Requirement and the Subject to US Tax Requirement for Covered Inbound F Reorganizations. The relief represents a significant development for taxpayers wishing to (re)domicile into the United States at a time when becoming US-parented is increasingly attractive, particularly with US-headquartered companies potentially being exempt from the income inclusion rule and the undertaxed profits rule under the OECD Pillar Two regime.

Finally, clarification of the Identity of Stock Ownership Requirement is a welcome development, as it provides greater certainty to taxpayers that experience incidental sales or exchanges of stock during the transactions that constitute the F Reorganization. If not part of the reorganization plan, such sales or exchanges should not jeopardize qualification as an F Reorganization.