The U.S. Department of the Treasury and the Internal Revenue Service (IRS) issued guidance on the applicability dates of proposed regulations that exempt foreign governments from tax on certain income derived from passive U.S. investments.
The additional guidance provides grandfathering protection and transitional relief to foreign governments investing in 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,” Treasury Secretary Scott Bessent said. “As final regulations continue to develop, we will evaluate feedback to ensure that they strengthen the American economy, uphold established market practices, and maintain a stable environment for existing and future sovereign wealth fund investment.”
On December 15, 2025, Treasury and the IRS issued proposed regulations clarifying when an acquisition of debt by a foreign government is commercial activity and when a foreign government has effective control of an entity engaged in commercial activities, in which cases the exemption does not apply.
After taking stakeholder comments into consideration, Treasury and the IRS introduce a two-part approach in the guidance providing both grandfathering protection and transitional relief to sovereign investors before these proposed rules become final.
The grandfathering rule proposes new applicability dates to ensure that existing foreign government interests would not be subject to the final regulations. The transition period rule says a foreign government has at least 90 days after the publication date or until the start of the first taxable year after the publication date to transition to the final regulations.
“In response to comments on the recent proposed regulations, the IRS heard the concerns of many taxpayers and decided to provide transitional relief,” IRS Chief Executive Officer Frank Bisignano said. “With these changes, the IRS aims to preserve established market practices, drive domestic economic growth and support current and future sovereign wealth fund investment in the United States.”
Treasury and the IRS continue to consider comments from interested parties on all aspects of the proposed regulations.