The Department of the Treasury and the Internal Revenue Service (IRS) today issued new guidance regarding proposed regulations under Section 892 of the Internal Revenue Code, offering grandfathering protection and transitional relief to foreign governments investing in the United States. This move aims to provide certainty for sovereign investors concerning their U.S. passive investments.
Section 892 exempts foreign governments, including sovereign wealth funds, from tax on certain income derived from passive U.S. investments. The new guidance follows December 2025 proposed regulations that clarified when this exemption would not apply, specifically concerning commercial activity and effective control of entities engaged in such activities.
Treasury Secretary Scott Bessent said, "President Trump’s economic policies continue to attract trillions of dollars in investment into the United States. Treasury and the IRS conducted thorough reviews of taxpayer and stakeholder comments on proposed technical U.S. tax rules, which informed the release of additional guidance to provide certainty on the treatment of current investments and transitional relief to sovereign investors." He added that feedback would be evaluated to strengthen the American economy and maintain a stable environment for investment.
IRS Chief Executive Officer Frank J. Bisignano noted, "In response to comments on the recent proposed regulations, the IRS heard the concerns of many taxpayers and decided to provide transitional relief." He emphasized that these changes aim to preserve established market practices, drive domestic economic growth, and support current and future sovereign wealth fund investment.
The new guidance introduces a two-part approach: a grandfathering rule ensuring existing foreign government interests are not subject to the final regulations, and a transition period providing at least 90 days or until the start of the first taxable year after publication for foreign governments to adapt. Treasury and the IRS continue to consider comments from interested parties on all aspects of the proposed regulations.