Final and proposed Treasury regulations published under Section 892 of the Code: Key takeaways

On December 15, 2025, the United States Department of the Treasury and the Internal Revenue Service (IRS) published final and proposed regulations under Section 892 of the Internal Revenue Code. The final regulations are effective as of their publication date.

Section 892 of the Code provides an exemption from US federal income tax for the investment income of non-US governments and sovereign wealth funds (892 Investors). This exemption does not apply to income derived from “commercial activity” or to income received by or from a “controlled commercial entity.”

Five takeaways from the published regulations are summarized below.

Key takeaways

1. Commercial activity is broader than “trade or business”

The final regulations reaffirm that “commercial activity” under Section 892 includes any activity ordinarily conducted for the current or future production of income or gain. Activities that constitute a trade or business under Section 162 or 864(b) will be treated as commercial activities unless described in one of the express exceptions listed in the regulations.

2. Debt acquisition as a commercial activity

The proposed regulations would provide that the acquisition of debt (i.e., any interest or instrument treated as debt for US federal income tax purposes) is a commercial activity unless it qualifies as an investment. Whether the acquisition of debt qualifies as investing would generally depend on an “all facts and circumstances” test with a non-exclusive list of eight relevant factors included in the proposed regulations. Two narrow safe harbors would provide investment treatment for:

• Debt instruments acquired as part of a registered offering from unrelated underwriters
  
  
• Exchange-traded debt instruments not acquired from the issuer or a person under common management or control with the acquiror, provided that the acquiror did not participate in negotiating the terms or issuance of the debt

3. “Controlled commercial entity” and “effective control”

The regulations remove the word “practical” from the prior term “effective practical control”; meanwhile, proposed regulations would address when an 892 Investor may be treated as having “effective control” of an entity engaged in commercial activity, causing such entity to be a “controlled commercial entity.”

4. Qualified partnership interest exception

The regulations finalize the “LP Exception” from the 2011 proposed regulations (with some changes) and rename it the “qualified partnership interest” (QPI) exception. An 892 Investor’s investment vehicle that holds a QPI will not be treated as engaged in the partnership’s commercial activity (and therefore will not be a controlled commercial entity), which is an exception to the general rule that a partnership’s commercial activities are attributed to its partners. However, a QPI holder may be subject to US federal income tax on its share of the partnership’s commercial activity income. The final regulations provide further guidance regarding the scope of the QPI exception, including that the 892 Investor’s investment vehicle cannot have a majority interest in or “effective control” of the partnership.

5. The so-called “USRPHC trap”

The final regulations provide that an 892 Investor’s non-US investment vehicle will no longer be deemed to be a controlled commercial entity solely because the vehicle’s passive ownership of US real property interests causes the vehicle to become a US real property holding corporation (USRPHC). The so-called “USRPHC trap” has concerned 892 Investors who may hold direct or indirect investments in portfolio companies that are USRPHCs.

Next steps

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