In mid-December 2025, Treasury issued proposed and final regulations under § 892 that could impose additional burdens on sovereign wealth funds’ investments in the United States, including in the currently volatile private credit market. This latest iteration in the long-running guidance project under § 892 stood in some tension with the Trump Administration’s efforts to bind U.S. trading partners to gaudy inbound investment commitments in tariff-motivated bilateral agreements.
Then, early 2026 brought a host of comments on, and critiques of, these regulations, including from the NYSBA Tax Section. As February turns into March, there’s an apparent thaw in Treasury’s positions on commercial activities and controlled commercial entities, neither of which qualify for § 892’s tax exemption. More coverage, below the fold.
Yash Roy, Treasury to Revise Foreign Fund Tax Plan After Credit Warnings, Bloomberg Law (Feb. 20, 2026):
The Treasury Department is retreating from a proposed overhaul of the way it taxes sovereign wealth funds and public pension funds . . . .
[Following feedback from private credit firms, private equity firms, and the real estate industry, a Treasury spokesperson said,] “We are revising the proposal to address key issues and ensure it supports stable, long-term capital flows.”
Alexander F. Peter, IRS Official Eases Foreign Government Rule’s Retroactivity Scare, Tax Notes Today Fed. (Feb. 23, 2026):
“We do not want to penalize current market practices during this regulatory process,” [said Huzefa] Mun [of the Treasury Office of Tax Policy]. Therefore, “we will ensure that the proposed regulations, to the extent they are finalized, will not have any retroactive effect” on existing transactions and structures, [added Robert] Scarborough [of the IRS Office of Associate Chief Counsel].
Mary McDougall, Calum Kapoor & Claire Jones, Washington Seeks to Reassure Sovereign Wealth Funds over Tax Changes, Fin. Times (Mar. 16, 2026):
Babak Nikravesh, a partner at law firm Greenberg Traurig who advises a number of sovereign wealth funds, [said that] his clients . . . would “have a hard think” when it comes to deploying new cash.
Josh Parker (Ancora), Changing Foreign Government Income Rules Risks Blurring a Line, Bloomberg Tax (Mar. 11, 2026):
It’s important to be clear about what this debate is about. This isn’t an argument against regulation, nor a reflexive industry objection to reform. Section 892 needs revisiting as it relates to the rapid growth of private credit, direct lending, and co-investment strategies, which barely existed when the statute was enacted. . . .
While investment in the US wouldn’t disappear, it could migrate into less transparent structures that increase friction and reduce clarity, an outcome that serves neither regulators nor markets.
Libin Zhang (Fried Frank), The Original Intent of the Section 892 Sovereign Exemption and Its Limitations, 190 Tax Notes Fed. 2017 (Mar. 23, 2026):
The proposed regulations [that would limit § 892’s exemption for certain lending activities] do not appear to be consistent with the intent of the section 892 exemption when it was enacted in 1917 and later revised in the Tax Reform Act of 1986. . . .
Further, there does not appear to be any pressing reason to change the statutory section 892 exemption for nonbank lending activities. Section 892 was originally enacted in 1917 to eliminate federal taxes on loans held by foreign governments, especially the United Kingdom during World War I . . . . The proposed regulations would contradict the original intent and meaning of section 892.
Related TaxProf Blog coverage:
- New Report by NYSBA Tax Section [on the § 892 proposed and final regulations] (Feb. 25, 2026)
- Section 122 Tariffs Challenged in the Court of International Trade [on foreign investment and the balance of payments] (Mar. 11, 2026)
