On May 29, 2026, the Treasury Department and the Internal Revenue Service (IRS) issued additional proposed regulations (the “2026 Proposed Regulations”) addressing the applicability dates of proposed Section 892 regulations released on December 15, 2025 (“2025 Proposed Regulations”). The 2025 Proposed Regulations established a framework for determining (1) when debt acquisitions may constitute commercial activity and (2) when an entity owned by a foreign government may be treated as a controlled commercial entity due to the foreign government’s effective control.
In response to comments on the 2025 Proposed Regulations, the Treasury Department and the IRS acknowledged that the rules were not intended to apply retroactively to existing foreign government investments. Accordingly, the 2026 Proposed Regulations provide transition rules that afford foreign governments more time to structure new investments in compliance with Section 892 before the more stringent rules apply, assuming the regulations are finalized.
Under the 2026 Proposed Regulations, the debt acquisition and effective control rules of the 2025 Proposed Regulations would take effect on the later of (1) 90 days after the publication date of the final regulations or (2) the first day of the taxpayer’s first taxable year beginning after publication. Debt or entity interests acquired before the end of this transition period, or acquired pursuant to a binding commitment entered into before the end of the transition period, would continue to be governed by the existing rules for purposes of determining whether a debt acquisition is a commercial activity and whether an interest constitutes effective control.
Notably, the 2026 Proposed Regulations would grandfather existing interests owned by foreign governments for purposes of the new effective control rules. However, if a foreign government subsequently acquires new controlling interests that, in the aggregate, confer effective control, the entity would become subject to the final regulations at that time.
The preamble to the 2026 Proposed Regulations further confirms that the relevant commercial activity is the acquisition of debt, rather than the mere holding of debt, and that legacy debt holdings alone do not cause later-year debt acquisitions to be treated as commercial activity.
Despite this guidance, certain questions remain, including whether a significant modification of a debt instrument should be treated as the acquisition of new debt that is not grandfathered for purposes of these rules.
The 2026 Proposed Regulations do not revise the substantive provisions of the 2025 Proposed Regulations. However, the Treasury Department and the IRS continue to evaluate comments and are “taking into account established market practices and the general policy to support current and future sovereign wealth fund investment in the United States.” This statement may signal a willingness to narrow or clarify the 2025 Proposed Regulations, which have been the subject of considerable commentary and criticism.
Comments on the 2026 Proposed Regulations are due by July 31, 2026.
If you have any questions, or would like additional information, please contact one of the attorneys on our Federal & International Tax team.
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