New Applicability Dates of Proposed Section 892 Regulations

On June 1, 2026, the U.S. Department of the Treasury (the Treasury) and the Internal Revenue Service (the IRS) published proposed regulations (the 2026 Proposed Regulations) addressing the applicability dates of proposed regulations published last year (the 2025 Proposed Regulations) regarding the Section 892 tax exemption for foreign governments.¹

Background

By way of background and in general, the Section 892 tax exemption for foreign governments does not apply to certain income, including income derived from the conduct of commercial activities and income received from a controlled commercial entity, which includes an entity engaged in commercial activities over which a foreign government has effective control.

The 2025 Proposed Regulations provide rules for determining whether an acquisition of debt constitutes commercial activity and whether a foreign government has effective control over an entity. For a detailed discussion of the 2025 Proposed Regulations, please see our February 2026 Advisory.

In response to comments regarding the applicability dates of the 2025 Proposed Regulations, the 2026 Proposed Regulations provide rules to ensure that certain existing investments, as well as investments acquired during a transition period, would not be subject to the new debt acquisition and effective control rules in the finalized 2025 Proposed Regulations.

Debt Acquisition Rules

The 2026 Proposed Regulations provide foreign governments with a transition period, before the new debt acquisition rules in the finalized 2025 Proposed Regulations apply, of at least 90 days after the date the 2025 Proposed Regulations are finalized, or until the start of the acquirer’s first taxable year after that date.

Specifically, if debt is acquired before the end of the transition period or is acquired pursuant to a binding commitment entered into before the end of that period, the existing rules applicable before the 2025 Proposed Regulations are finalized would continue to apply to determine whether that acquisition is commercial activity.

The Preamble to the 2026 Proposed Regulations provides that, because it is the acquisition of debt, and not the mere holding of debt, that is potentially treated as commercial activity, a debt acquirer is not engaged in commercial activity in taxable years following the taxable year of the acquisition of the debt solely by reason of holding the debt in subsequent taxable years. The Preamble further provides that debt acquired in a previous year and held in the current year does not cause other debt acquisitions in the current year to be treated as commercial activity.

Effective Control Rules

The 2026 Proposed Regulations would similarly provide foreign governments with a transition period, before the new effective control rules in the finalized 2025 Proposed Regulations apply, of at least 90 days after the date the 2025 Proposed Regulations are finalized, or until the start of the foreign government’s first taxable year after that date.

Furthermore, the effective control rules in the finalized 2025 Proposed Regulations would not apply to a foreign government’s existing interests in an entity unless, after the transition period, and excluding acquisitions pursuant to a binding commitment entered into before the end of that period, the foreign government acquires additional interests in the entity that, by themselves, would provide the foreign government with effective control under the finalized 2025 Proposed Regulations. Unless and until this occurs, whether that entity is a controlled commercial entity would be determined under the existing rules applicable before the 2025 Proposed Regulations are finalized.

Conclusion

The 2026 Proposed Regulations address only the applicability dates of the 2025 Proposed Regulations. The Preamble to the 2026 Proposed Regulations provides that the Treasury and the IRS recognize the importance of the other comments they received regarding the substantive aspects of the 2025 Proposed Regulations, and are evaluating how to reflect those comments in future guidance, taking into account established market practices and the general policy to support current and future sovereign wealth fund investment in the United States.

© Arnold & Porter Kaye Scholer LLP 2026 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.