May 8, 2024

IRS Finalizes Regulations for Domestically Controlled REITs and other Qualified Investment Entities

On April 24, 2024, the U.S. Treasury Department and the Internal Revenue Service released final regulations (the “Final Regulations”) regarding when REITs and certain regulated investment companies investing primarily in securities of real estate companies, collectively referred to as “qualified investment entities” or “QIEs,” will be treated as domestically controlled under Section 897 of the Internal Revenue Code of 1986, as amended (the “Code”).


Under provisions of the Code commonly known as “FIRPTA,” non-U.S. taxpayers are generally subject to U.S. federal income tax on gains from sales of “U.S. real property interests” in the same manner as if such gains were effectively connected with the conduct of a trade or business within the United States, regardless of whether the gains in fact arise in a U.S. trade or business. Such U.S. real property interests generally include stock in domestic corporations whose assets consist primarily of interests in U.S. real property (and/or stock of other real estate companies). Stock of a “domestically controlled qualified investment entity” (a “domestically controlled QIE”), including a REIT that is domestically controlled, is, however, not treated as a U.S. real property interest, meaning that a non-U.S. investor avoids FIRPTA tax when it sells stock of a domestically controlled QIE even if the QIE invests primarily in U.S. real property interests.

A QIE (including a REIT) will qualify as a domestically controlled QIE as of the date of the applicable disposition if on the date of disposition and throughout the shorter of the previous 5 years and the QIE’s existence, less than 50 percent of the value of the stock of the QIE is held, directly or indirectly, by persons that are not United States persons.

Apart from limited statutory rules addressing upstream ownership by other QIEs and certain presumptions for holders of less than 5 percent of a class of regularly traded QIE stock, prior to proposed regulations issued on December 29, 2022 (the “Proposed Regulations”), neither the Code nor Treasury Regulations provided guidance on what it means for stock to be held “indirectly” for purposes of measuring domestic control.

The Proposed Regulations introduced the concept of “non-look-through persons” whose ownership—including both direct ownership and indirect ownership through intervening “look-through persons”—is taken into account for purposes of measuring domestic control. Non-look-through persons were defined generally to include individuals, certain domestic corporations (discussed further below), nontaxable holders, foreign corporations, publicly traded partnerships, public regulated investment companies, estates, international organizations and qualified foreign pension funds. Any other persons were “look-through persons.”

In a departure from then current law (which provided no basis for distinguishing among different taxable domestic corporations) and an IRS private letter ruling, the Proposed Regulations imposed a look-through approach for some, but not all, domestic taxable corporations. Specifically, the Proposed Regulations treated a domestic C corporation (defined to mean a domestic corporation other than a RIC, a REIT or an S corporation) as a non-look-through person unless it was a “foreign-controlled domestic corporation,” which in turn was defined as any non-public domestic C corporation in which foreign persons hold directly or indirectly more than 25 percent of the fair market value of that corporation’s outstanding stock.

The Final Regulations

The Final Regulations generally follow the approach of the Proposed Regulations with certain clarifications and added procedures, but relax the foreign ownership threshold for treating domestic C corporations as look-through persons. In particular, for purposes of determining whether any non-public domestic C corporation is subject to the look-through rule, the Final Regulations raise the required foreign ownership percentage from 25 percent to 50 percent. Under the Final Regulations, a “foreign-controlled domestic corporation” is treated as a look-through person and includes any non-public domestic C corporation in which foreign persons hold directly or indirectly through look-through persons more than 50 percent of the fair market value of that corporation’s outstanding stock.

The Final Regulations became effective April 25, 2024, but provide transition rules for existing QIE structures, which may defer the application of the look-through rule for foreign-controlled domestic corporations for up to 10 years (i.e., until April 24, 2034). During this 10-year period, QIEs in existence on April 24, 2024, are exempt from the look-through rule for foreign-controlled domestic corporations if and for so long as: (i) the QIE is domestically controlled as determined under the Final Regulations but without regard to the look-through rule for foreign-controlled domestic corporations, (ii) the value of any U.S. real property interests acquired by the QIE after April 24, 2024, does not exceed 20 percent of the value of the U.S. real property interests held by it on April 24, 2024, and (ii) the QIE does not have a significant change in ownership. A significant change in ownership is defined as a more than 50 percentage point increase in the aggregate ownership by non-look-through persons (determined by looking through foreign-controlled domestic corporations) compared to April 24, 2024.

When and if the transition rule no longer applies to the QIE, the look-through rule for foreign-controlled domestic corporations applies on a prospective basis only and thus does not apply to any portion of a 5-year domestically controlled QIE testing period covered by the transition rule.

Key Takeaways

  • Subject to the transition rule, QIEs relying on domestic C corporation ownership for domestic control will need to determine if their non-public domestic C corporation direct and indirect shareholders have sufficient foreign ownership to trigger the look-through rule.
  • For periods covered by the transition rule, the Final Regulations provide certainty for QIEs in existence on April 24, 2024, that no look through is required for a domestic corporation that is not a RIC, a REIT or an S corporation.
  • QIEs wishing to rely on the transition rule will need to carefully monitor their asset composition and stock ownership going forward.


This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.