Today, the Treasury Department and IRS published long-awaited final regulations (TD 10042), along with temporary and proposed regulations (REG-101952-24), under IRC Section 892. Proposed regulations on these topics were issued in 2011 and 2022 (see Tax Alert 2023-0059).

These regulations provide guidance on determining when a foreign government is engaged in "commercial activity" and when an entity is a "controlled commercial entity." As a general matter, foreign governments are exempt from US income taxation on certain qualified income, but the exemption does not apply to income derived from commercial activity or received from a controlled commercial entity.

The final regulations retain the general approach and structure of the 2011 proposed regulations regarding when a foreign government is considered engaged in commercial activity, with certain revisions and clarifications.

The final regulations include additional examples of when a foreign government is considered to have effective control over an entity and when its ownership of a partnership interest will be considered engagement in commercial activities. In addition, the final regulations introduce the term "qualified partnership interest exception" in lieu of the 2011 proposed regulations' "limited partner exception."

The proposed regulations provide specific guidance for determining when (1) the acquisition of debt by a foreign government is considered to be commercial activity and (2) a foreign government has effective control of an entity engaged in commercial activities.

A Tax Alert is forthcoming.