Clifford Chance

The IRS Releases Proposed Regulations Regarding Taxation of Investments by Foreign Governments

11 November 2011

On November 2, 2011, the Internal Revenue Service ("IRS") released a set of proposed regulations (the "Regulations") under Section 892 of the Internal Revenue Code ("Section 892"), which exempts certain investment income earned by foreign governments from U.S. taxation. The Regulations limit the extent to which entities controlled by foreign governments will be treated as engaged in "commercial activity," a characterization which disqualifies such entities' entire income from exemption under Section 892. With the implementation and expansion of safe harbors for certain direct and indirect investment activities, the Regulations create new opportunities for sovereign investors in funds and U.S. real property.

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