Final FIRPTA rules: DC-QIE exception & grandfathering

The IRS has published final regulations (T.D. 9992) regarding the determination of whether a qualified investment entity (QIE) is domestically controlled. The final regulations generally follow the proposed regulations under Section 897 (REG-10044-22) with certain revisions. However, they do not address the exemption from taxation afforded to foreign governments under Section 892. See our previous story on the proposed regulations.

The final regulations, effective as of April 25, 2024, include a transition rule exempting existing QIE structures from the final domestic corporation look-through rule for a ten-year period, provided they meet certain requirements.

Section 897(h)(2) provides that a U.S. real property interest (USRPI) does not include an interest in a domestically controlled QIE (“DC-QIE exception”). The DC-QIE exception applies to certain investment vehicles, including real estate investment trusts (REITs) and certain regulated investment companies (RICs) that primarily hold USRPIs.

If the DC-QIE exception applies, gain or loss on the disposition of stock in a domestically controlled QIE is generally not subject to taxation under Section 897(a). Section 897(h)(4)(B) stipulates that a QIE is domestically controlled if less than 50% of the value of its stock is held directly or indirectly by foreign persons at all times during the testing period prescribed in Section 897(h)(4)(D), typically the five-year period ending on the date of the disposition.

The final regulations confirm that a qualified foreign pension fund (QFPF), including any part of a QFPF, or a qualified controlled entity is treated as a foreign person for purposes of the DC-QIE exception. However, the final regulations retain but revise the domestic corporation look-through rule to increase the amount of foreign ownership required to look through a non-public domestic C corporation from 25% or more to more than 50%.

Impacted taxpayers should immediately evaluate the potential impact of the final regulations on their facts and circumstances.