The IRS has proposed removing a recently adopted rule that prescribes looking at the shareholders of certain domestic corporations to determine if a qualified investment entity (QIE) is domestically controlled, for purposes of the Foreign Investment in Real Property Tax Act (FIRPTA). (REG-109742-25, 10/21/2025)
Background
Under FIRPTA, the Tax Code treats a nonresident alien or foreign corporation’s gains and losses from the disposition of a U.S. real property interest as effectively connected with a U.S. trade or business of the taxpayer. The Code generally taxes foreign shareholders of QIEs, such as real estate investment trusts (REITs) and certain regulated investment companies (RICs), when they dispose of a U.S. real property interest.
However, there is an exception: an interest in a domestically controlled QIE is not a U.S. real property interest under IRC § 897(h)(2). Therefore, FIRPTA does not apply to a disposition from a “domestically controlled” QIE.
An April 2024, final rule (TD 9992) addressed how to determine whether foreign persons “hold directly or indirectly” stock of a QIE for purposes of defining a domestically controlled QIE. The rule established two categories of potential QIE owners, “look-through persons” and “non-look-through persons.” It treats only non-look-through persons as directly or indirectly holding stock of a QIE.
Under the 2024 final rule, non-publicly traded domestic C corporations are treated as look-through persons if foreign persons hold more than a 50% interest in a corporation’s stock. Conversely, domestic C corporations, generally, are treated as non-look-through persons.
Current Proposal
The October 2025 proposed rule would reverse course, removing the domestic corporation look-through rule and treating all domestic C corporations as non-look-through persons for purposes of determining whether a QIE is domestically controlled. The rule also would make conforming revisions to other portions of Reg. § 1.897-1(c)(3).
The changes would apply to transactions after the date of the rule’s publication in the Federal Register. Taxpayers, however, could choose to apply the regulations to transactions occurring on or after April 25, 2024.
The IRS indicates it is taking this step in response to feedback that the domestic corporation look-through rule resulted in “legal uncertainty, operational complexity, and potentially chilling effects on investment in U.S. real estate.”
Critics of the 2024 rule point to difficulties in tracing upstream ownership and in accessing reliable data, says the IRS. The agency also received feedback that the rule is inconsistent with statute, with commenters noting that the domestically controlled QIE provisions do not contain explicit corporate look-through rules.
Comments Requested
Comments on the proposed rule are due December 22, 2025, and can be submitted via the Federal eRulemaking Portal (indicate IRS and REG-109742-25). The IRS will schedule a public hearing upon request.
For more on dispositions of foreign investments in U.S. real property, see Checkpoint’s Federal Tax Coordinator 2d ¶ O-10700.
Take your tax and accounting research to the next level with Checkpoint Edge and CoCounsel. Get instant access to AI-assisted research, expert-approved answers, and cutting-edge tools like Advisory Maps and State Charts. Try it today and transform the way you work! Subscribe now and discover a smarter way to find answers.
