US Treasury Issues Additional Proposed Regulations Under Section 892 Providing Transitional Relief for Foreign Government Investors

On May 29, 2026, the US Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) published new proposed regulations (the “2026 Proposed Regulations ”) providing revised applicability dates replacing the applicability dates originally set forth in the proposed regulations published in December 2025 (the “2025 Proposed Regulations ”) under Section 892 of the Code.¹ As discussed in our prior Legal Update on the 2025 Proposed Regulations (the “Prior Alert ”), the 2025 Proposed Regulations introduced a new framework for determining when a foreign government’s acquisition of debt constitutes commercial activity and expanded guidance on when a foreign government has effective control of an entity for purposes of the controlled commercial entity rules. The 2026 Proposed Regulations do not modify those substantive rules; rather, they provide both grandfathering protection and transitional relief to existing foreign government holdings of debt and interests in entities as well as holdings acquired during a transition period.

In addition, although the substantive rules of the 2025 Proposed Regulations generally were not addressed, the 2026 Proposed Regulations did provide clarification on certain substantive issues as well as indicate that there may be changes to the substantive rules in light of comments received. In that regard, the preamble provides that the substance of the 2025 Proposed Regulations is still being considered to “tak[e] into account established market practices and the general policy to support current and future sovereign wealth fund investment in the United States.”

This Legal Update should be read in conjunction with our Prior Alert, which provides a comprehensive discussion of the “Final Regulations ” (T.D. 10042) and the 2025 Proposed Regulations.

Debt Acquisition Rules

The 2025 Proposed Regulations provided that all acquisition of debt is considered to be commercial activity, unless it either meets one of the safe harbors that treat debt acquired in a registered offering or in a qualified secondary market acquisition as a passive investment, or satisfies a facts-and-circumstances test. The 2026 Proposed Regulations provide that such rules would apply, if finalized, only on or after the later of (i) the start of the first taxable year after finalization, or (ii) 90 days after finalization. This new timeline applies both to the acquired debt and committed debt.

Although the 2026 Proposed Regulations address only applicability dates, the preamble includes a notable clarification regarding the substance of the debt acquisition rules. Specifically, Treasury states that a foreign government will not be treated as engaged in commercial activity in taxable years following the year of acquisition solely by reason of continuing to hold the debt with the rationale that it is the acquisition of debt, and not the mere holding of debt, that is potentially treated as commercial activity. Treasury further clarifies that debt acquired in a previous year and held in the current year does not cause other, unrelated debt acquisitions in the current year to be treated as commercial activity.

This clarification resolves an important ambiguity left open by the 2025 Proposed Regulations. As discussed in our Prior Alert, the 2025 Proposed Regulations established a broad presumption that all debt acquisitions constitute commercial activity unless a safe harbor or facts-and-circumstances test is satisfied, and that even a single loan in a given year could give rise to commercial activity. Given that breadth, practitioners had questioned whether a prior-year debt acquisition determined to constitute commercial activity could create an ongoing “taint” affecting the foreign government’s status in subsequent years or contaminating separate acquisitions. The preamble’s statements foreclose that interpretation and provide that the commercial activity analysis is transaction-specific and point-in-time, and there is no stacking or contamination effect across taxable years. 

Effective Control Rules

The 2025 Proposed Regulations provided a facts-and-circumstances test when a foreign government has effective control of an entity for purposes of controlled commercial entity rules. The 2026 Proposed Regulations provide a parallel transition period for such effective control rules. The new rules will apply on or after the later of (i) the start of the first taxable year after finalization, or (ii) 90 days after finalization.

The 2026 Proposed Regulations also provide a critical safeguard for existing government holdings. According to these rules, the new effective control standard outlined in the 2025 Proposed Regulations would not apply to a foreign government’s existing interests in an entity unless the foreign government acquires, after the transition period, new interests in the entity that, by themselves, would provide effective control to such foreign government. Acquisitions pursuant to a binding commitment entered into before the end of the transition period are excluded from this new effective control standard.

This is particularly relevant given the breadth of the 2025 Proposed Regulations’ effective control standard, as discussed in our Prior Alert. Foreign governments with existing governance arrangements need not immediately restructure those arrangements. However, caution is warranted when acquiring additional interests after the transition period, particularly where such interests carry governance or management rights that, viewed in isolation, could independently satisfy the new effective control standard. 

¹ References in this Legal Update are to sections of the Internal Revenue Code of 1986, as amended, unless otherwise specified.