Proposed Section 892 regulations address applicability dates and transition rule: Key takeaways

Today, the United States Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) published new proposed Section 892 regulations (2026 Proposed Regulations) regarding the applicability dates of proposed Section 892 regulations that were published in December 2025 (2025 Proposed Regulations). Foreign governments and their investing entities, which typically include sovereign wealth funds and non-US pension funds (referenced together, for simplicity, as Foreign Governments), rely on Section 892 as a key tax exemption related to their US investments.

The 2025 Proposed Regulations provided new guidance on when the acquisition of debt may constitute commercial activity (Debt Acquisition Rule) and when a Foreign Government has effective control of an entity (Effective Control Rule). Please see DLA Piper's previous client alert for more information about the 2025 Proposed Regulations.

Below, we offer the following key takeaways from the 2026 Proposed Regulations.

Partial withdrawal of 2025 Proposed Regulations only

The 2026 Proposed Regulations withdraw only the portion of the 2025 Proposed Regulations relating to applicability dates and not the entirety of the 2025 Proposed Regulations. The preamble to the 2026 Proposed Regulations confirms that the substance of the 2025 Proposed Regulations remains under review. The Treasury Department will endeavor to take into account established market practices and the general policy of supporting current and future Foreign Government investment in the US.

Revised applicability dates: Grandfathering rule

Under the 2025 Proposed Regulations as originally published, the Debt Acquisition Rule and the Effective Control Rule were set to generally take effect for taxable years beginning on or after the date of publication of the final regulations. The 2025 Proposed Regulations, if finalized, would have retroactive effect with respect to both the determination of whether a Foreign Government is engaged in a commercial activity and whether a Foreign Government has income from a commercial activity.

The Treasury Department and the IRS confirmed that the 2025 Proposed Regulations were not intended to apply retroactively. Specifically, the preamble provides:

Because it is the acquisition of debt, and not the mere holding of debt, that is potentially treated as commercial activity for purposes of section 892, 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 the subsequent taxable years. Furthermore, a debt that was 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.

To this end, the 2026 Proposed Regulations provide transition relief through modified effective date rules.

Debt Acquisition Rule effective dates

The 2026 Proposed Regulations provide a transition period of 90 days after the publication date or, if later, until the start of the first taxable year after the publication date, before the Debt Acquisition Rule applies (Transition Period). 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 the Transition Period, the existing rules applicable before the final regulations are published would continue to apply.

The 2026 Proposed Regulations are silent on whether the grandfathering rule for the Debt Acquisition Rule applies if debt is deemed reissued after the effective date as a result of a “significant modification” under Section 1.1001-3 of the US Treasury Regulations. Therefore, Foreign Government investors should consider the impact of the Debt Acquisition Rule on any significant modification (e.g., from a debt workout) following the effective date, notwithstanding the grandfathering rule.

Effective Control Rule effective dates

The Effective Control Rule would similarly only apply to interests in entities for which a new acquisition occurs after the Transition Period. For these purposes, acquisitions made pursuant to binding commitments entered into before the Transition Period would also be excluded.

Specifically, the 2026 Proposed Regulations provide that the Effective Control Rule would not apply to “previously acquired interests” so long as the Foreign Government does not acquire any “new controlling interests” in such entity. The term “new controlling interests” are one or more interests in the entity, other than any previously acquired interests, that in the aggregate result in effective control of the entity. The term “previously acquired interests” includes 1) interests acquired before the applicability date, and 2) interests acquired pursuant to a binding commitment entered into before the applicability date.

Next steps

For more information, please contact the authors or a member of the DLA Piper Investment Management and Funds Team.