Section 892 Proposed Regulations – Applicability Date Relief

REG-00349656-26 (Scheduled for Publication June 1, 2026)

May 29, 2026

Executive Summary

New Transition Period, Grandfathering of Certain Previously Effectuated and Binding Commitment Transactions, and Acknowledgment of Substantive Issues with the Proposed Regulations

Background

On December 15, 2025, the Treasury and the IRS published proposed regulations under Internal Revenue Code Section 892 providing guidance relating to the determination of whether an acquisition of debt constitutes commercial activity, and whether a foreign government has effective control of an entity (the “Proposed Regulations”). The Treasury and the IRS received extensive criticism of the Proposed Regulations, including comments relating to the application of the regulations to acquisitions of debt and equity investments effectuated based on law as it existed prior to the Proposed Regulations. On May 29, 2026, the Treasury and IRS released a notice of proposed rulemaking (the “Notice”) that provides for new Transition Periods and Grandfathering Rules for the applicability dates of the Proposed Regulations. In this regard, the Notice expressly states in the preamble that:

As a general matter, the Treasury Department and the IRS did not intend for the [Proposed Regulations], once finalized, to apply retroactively to existing foreign government holdings of debt and of interests in entities…

Transition Periods and Grandfathering Rules

Under the original applicability rules, the Proposed Regulations would have applied to taxable years beginning on or after the date of publication of final regulations in the Federal Register. A foreign government could also choose to apply the regulations to open taxable years under certain conditions. Commentators noted that it was unclear whether and how the Proposed Regulations would apply to existing positions and positions acquired after the effective date of the Proposed Regulations that were executed pursuant to a pre-existing binding commitment. As explained in detail below, under the transition period rules set forth in the Notice, the Proposed Regulations generally would not take effect until a date that is after the date on which the Proposed Regulations are published in final form (the “Transition Periods”). Moreover, the Notice contains language explicitly grandfathering certain existing positions and certain positions entered into after the effective date of the Proposed Regulations that were executed pursuant to a pre-existing binding commitment (the “Grandfathering Rules”).

Revision of the Substantive Language of the Proposed Regulations Likely to Follow

While the Notice only provides for new Transition Periods and Grandfathering Rules, the Treasury and the IRS state in the Notice that the substantive provisions of the Proposed Regulations relating to the debt-acquisition commercial activity rules and the effective control determination framework remain subject to further review and revision. In a somewhat rare acknowledgment, the Treasury and IRS explicitly stated that they “are evaluating how to reflect [the comments] in the next phase of this project by taking into account established market practices and the general policy to support current and future sovereign wealth fund investment in the United States.” No indication was made as to whether the “next phase of this project” would be the withdrawal and re-issuance of proposed regulations or the direct implementation of any revised approach in a final regulation package.

The Press Release Accompanying the Notice

In a press release dated May 29, 2026 (the “Press Release”), IRS Chief Executive Officer, Frank Bisignano, stated that:

In response to comments on the recent proposed regulations, the IRS heard the concerns of many taxpayers and decided to provide transitional relief… 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.

These statements echo those of Treasury Secretary Scott Bessent, who said:

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... 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.

Debt Acquisition Commercial Activity Determinations

The Transition Period

The Notice revises the applicability date of the debt-acquisition commercial activity rules set forth in the Proposed Regulations such that the revised rules would only apply to debt acquired on or after the later of:

• The first day of the acquirer’s first taxable year beginning on or after the publication date of the final regulations; or
• 90 days after the publication date of the final regulations.

The Binding Commitment Exception

The Notice also expressly provides that the debt-acquisition commercial activity rules set forth in the Proposed Regulations would not apply to debt acquired on or after the applicability date if acquired pursuant to a binding commitment entered into before the applicability date.

The Grandfathering Rule

Pursuant to the Notice, debt acquired before the applicability date, or pursuant to a pre-applicability-date binding commitment, would continue to be governed by Treasury Regulation §§1.892-4 and 1.892-4T, as in effect on April 1, 2026.

Effective Control Determinations

The Transition Period

The Notice revises the applicability dates for effective control determinations to be consistent with the Transition Period for debt acquisitions described above (the later of the first day of the taxable year beginning on or after the issuance of the final regulation or 90 days after publication of the final regulations).

The Grandfathering Rule

The Notice provides that the finalized effective control rules would not apply to any previously acquired interests in an entity until and unless the foreign government acquires, after the transition period, new controlling interests – defined as interests that, by themselves, would result in effective control under the Proposed Regulations.

Pursuant to the Notice, until that triggering acquisition occurs, all of the interests of the foreign government in the entity (including any interests added during the Transition Period or pursuant to a binding commitment) would be tested for controlled commercial entity status under the existing Treasury Regulation §§1.892-5 and 1.892-5T, as in effect on April 1, 2026, taking into account all interests regardless of when acquired.

Practical Implications for Sovereign Investors and Their Related Investment Platforms

Recognition That Holding Debt Should Not Be a Commercial Activity or Taint Subsequent Acquisitions

The Notice indicates that the revised rules applicable to commercial activity from debt-acquisitions were influenced by the arguments made by commentators. In particular, commentators argued that because it is the acquisition of debt (not the mere holding of debt) that constitutes commercial activity, a foreign government should not be deemed to be engaged in commercial activity in later years solely by holding previously acquired debt that may have been acquired in a fashion that is inconsistent with the Proposed Regulations. The Treasury and the IRS appear to also have concluded that merely holding such pre-applicability-date debt should not taint other debt acquisitions effectuated in the post-applicability-date period, whether any such acquisition is of the debt of the same issuer or otherwise.

Prior Rules Relating to Controlled Commercial Activity and Effective Control Continue to Apply to Legacy Positions

Determinations relating to commercial activity and effective control relating to legacy positions generally would not be expected to be impacted by any eventual finalization of the Proposed Regulations. Treasury Regulation §§1.892-4 & 5, and §§1.892-4T & 5T, as in effect on April 1, 2026, generally would be expected to continue to govern those determinations indefinitely, subject to the triggering-acquisition concept described above.

Binding Commitments Executed Prior to the Revised Applicability Date to Be Respected

Foreign governments and their controlled entities will be expected to be able to continue to close transactions in the pipeline pursuant to agreements executed before the applicability date without being recharacterized under the new rules. This is significant for, among other things, committed but undrawn debt facilities and for staggered equity acquisitions and capital contributions. It will be necessary to assess the precise terms of existing agreements in this regard to ensure that the terms of the agreement are appropriately characterized as creating a binding commitment.

Conditionality of the Relief for Effective Control Determinations

The Grandfathering Rule for effective control determinations is conditional, not absolute. Any post-transition acquisition that by itself would result in effective control will pull the entire holding under the new framework. Sovereign investors planning incremental capital commitments, buy-ups, follow-ons, or governance and side letter changes in existing portfolio companies, investment platforms, and joint ventures must assess up and down the chain whether the incremental acquisition or change in rights would independently trigger effective control under the Proposed Regulations. Significant ambiguity remains as to how this assessment will be effectuated in real-world fact patterns.

Additional Substantive Changes Indicated

The Notice and Press Release clearly signal that the Treasury and IRS acknowledge the appropriateness of many of the criticisms set forth in the comment letters on the substantive debt-acquisition commercial activity and effective control provisions of the Proposed Regulations. This Notice does not resolve those criticisms, but the Treasury and IRS have clearly indicated that more changes are to come to better align the rules with established market practice and to support existing and future sovereign investment.

New Comment Period Opened

The Notice provides that written or electronic comments and requests for a public hearing must be received by July 31, 2026. The Press Release makes clear that this comment period relates not just to the applicability date changes made in the Notice, but that “Treasury and the IRS continue to consider comments from interested parties on all aspects of the proposed regulations.” Accordingly, if you have concerns not addressed in the comment letters submitted in connection with the Proposed Regulations, consideration should be given to submitting a comment letter to the Notice.