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The Treasury Department and IRS on December 15, 2025, issued long-awaited final regulations (TD 10042) (final regulations), along with temporary and proposed regulations (REG-101952-24) (proposed IRC Section 892 regulations), under IRC Section 892. The final regulations clarify when income of a foreign government is considered to be from commercial activity or a controlled commercial entity (CCE) and thus not exempt under IRC Section 892, versus income from passive investment activity, which is exempt.
The proposed IRC Section 892 regulations include new rules on when (1) the acquisition of debt by a foreign government is considered investment activity instead of commercial activity, and (2) a foreign government is considered to have "effective control" over an entity for purposes of determining whether that entity is a CCE.
These final and proposed regulations will impact foreign governments — including central banks, foreign government-sponsored pension funds, sovereign wealth funds and others — that invest in the United States through various means, including securities, real estate investment trusts, regulated investment funds, private equity funds, derivatives and debt offerings. They will also impact investment funds and asset managers whose investor base includes foreign governments and their controlled entities.