On October 20, 2025, the Department of Treasury (Treasury) and the Internal Revenue Service (IRS) published proposed regulations (the Proposed Regulations) that would withdraw the domestic corporation look-through rule adopted in the April 25, 2024 final regulations under Internal Revenue Code (Code) section 897 (2024 Final Regulations). In a positive development for the private funds market, the Proposed Regulations would restore the historical treatment of non-public domestic C corporations as “blocker” entities for purposes of determining whether a Real Estate Investment Trust (REIT) or Regulated Investment Company (RIC) qualifies as a “domestically controlled” qualified investment entity (QIE). The Proposed Regulations are intended to simplify compliance, address administrative concerns associated with the 2024 Final Regulations, and realign the domestic control analysis with prior longstanding practice.
Background
Section 897 generally taxes a nonresident alien or non-US corporation on gains from the disposition of a US real property interest (USRPI) but excludes an interest in a ”domestically controlled qualified investment entity” (DC-QIE) from the scope of the USRPI definition. A QIE is generally any REIT or a RIC that is or would be (absent certain statutory exceptions) a U.S. real property holding corporation. A QIE is “domestically controlled” if at all times during the relevant testing period less than 50 percent in value of the stock was held “directly or indirectly” by foreign persons.
The 2024 Final Regulations provided detailed guidance on determining whether a REIT or RIC is domestically controlled. Among other things, the 2024 Final Regulations (1) created a “domestic corporation look-through rule” for non-public US C corporations more than 50 percent foreign-owned by value; (2) looked through partnerships, S corporations, RICs, REITs and trusts for purposes of testing foreign ownership; (3) defined “non-look-through persons” to include US individuals, domestic publicly traded C corporations, foreign corporations and foreign governments treated as such, and Qualified Foreign Pension Funds (QFPFs) or Qualified Controlled Entities (QCEs); and (4) adopted a 10-year transition rule for REITs and RICs in existence as of April 24, 2024. These rules aimed to prevent perceived abuses involving foreign-controlled US blockers and to clarify how indirect ownership is traced for purposes of domestic control testing.
Key Changes from the 2024 Final Regulations
The Proposed Regulations would rescind the tracing approach established by the domestic corporation look-through rule. Under this rule, if non-US ownership in a domestic corporation reached or exceeded 50% by value, the rule required the QIE to look through that corporation to its shareholders when testing if the QIE was domestically controlled.
Under the Proposed Regulations, all domestic C corporations are treated as non-look-through persons, without regard to the foreign or domestic profile of their shareholders. This restores the treatment of non-public domestic blockers to what most tax practitioners understood to be the appropriate treatment prior to Treasury’s issuance in late 2022 of the proposed regulations that led to the 2024 Final Regulations. The Proposed Regulations, however, retain the approach of the 2024 Final Regulations for other entity types. Partnerships (domestic or foreign) remain look-through persons, while public QIEs, publicly offered RICs, and QFPFs continue to be treated as non-look-through-persons.
Treasury and the IRS recognized that the corporate look-through rule creates substantial administrative burdens and uncertainty, particularly in tiered and private-equity-backed REIT structures. They also noted that adopting the corporate look-through rule is not the best interpretation of section 897(h)(4)(B) in light of the statute’s text, congressional intent and its place in the section 897(h) framework.
Taxpayers may rely immediately on the proposed regulations. Once finalized, taxpayers may apply the revised regulations to transactions occurring on or after April 25, 2024, and to transactions resulting from certain entity classification elections filed after, but effective on or before, that date.
The proposed withdrawal of the domestic corporation look-through rule would significantly simplify DC-QIE determinations and reduce compliance burdens. REITs and fund sponsors would no longer need to trace foreign ownership of non-public US blocker corporations, easing documentation requirements for FIRPTA certifications and transaction diligence through complex ownership chains. It is no longer necessary for existing structures to rely on the 10-year transition relief in the 2024 Final Regulations because all domestic C corporations are treated as non-look-through persons.
Unfortunately, the proposed regulations preserve the rule that treats QFPFs as foreign ownership when determining whether a QIE is domestically controlled, with the examples in the proposed regulations making it crystal clear this treatment continues to apply. Congress exempted QFPFs from FIRPTA tax, but they are still treated as “foreign” when testing whether a REIT is US-controlled. As a result, REITs majority-owned by non-US pension funds are not considered domestically controlled, which can complicate their investment structures and discourage QFPF investment in US real estate.
Sovereign wealth funds (SWFs) are still treated as foreign investors under both the 2024 Final Regulations and the Proposed Regulations. This means their ownership in a REIT or RIC counts toward the 50% foreign-ownership test used to decide if the entity is “domestically controlled.” Unlike QFPFs, SWFs don’t have a statutory FIRPTA exemption, so they remain exposed to US tax on gains from real estate investments unless they invest through a domestically controlled structure. While section 892 exempts income derived by a SWF from non-commercial activities, the exemption doesn’t usually apply to commercial real estate investments. The Proposed Regulations nonetheless make it easier for SWFs to invest in US real estate through US corporate blockers without tainting the structure as foreign-controlled.
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