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Proposed regulations restore common market structures for REITs
The Internal Revenue Service (IRS) and U.S. Treasury Department have proposed regulations (the Proposed Regulations) that would expand FIRPTA (Foreign Investment in Real Property Tax Act) relief for domestically controlled REITs (real estate investment trust) by repealing the corporate look-through rule introduced by final U.S. Treasury regulations issued in April 2024 (the 2024 Regulations).
As discussed in a prior bulletin, the 2024 Regulations adopted a look-through rule affecting many "domestically controlled" REIT structures. Those structures typically involved a fully taxable U.S. C corporation as a majority shareholder of a REIT to cause it to qualify as a domestically controlled REIT, and therefore foreign minority shareholders were exempt from FIRPTA on their shares. Before the 2024 Regulations, a REIT could remain domestically controlled even if the U.S. C corporation was wholly owned by foreign persons. The 2024 Regulations changed that by requiring look-through treatment of a non-publicly traded U.S. C corporation, defined as a domestic corporation other than a REIT, registered investment company (RIC) or S corporation, if foreign persons own, directly or indirectly, more than 50% of the corporation's stock by value. As a result, many inbound investments in U.S. REITs were expected to become less attractive unless non-U.S. investors had sufficient U.S. co-investors to preserve domestically controlled status.
Only 18 months later, on October 20, 2025, the IRS and the U.S. Treasury issued the Proposed Regulations (REG‑109742‑25) that would repeal the U.S. C corporation look‑through rule and treat all U.S. C corporations as domestic owners for purposes of determining whether a REIT is domestically controlled. In practical terms, stock of a REIT held by a U.S. C corporation would be treated as held by a U.S. person without regard to the corporation's foreign shareholder base.
The Proposed Regulations would restore the long-standing market practice of using a fully taxable U.S. C corporation to "break the chain" for indirect foreign ownership when measuring a REIT's domestic control. They would not otherwise alter the rule in the 2024 Regulations that clarifies the treatment of qualified foreign pension funds as foreign persons for purposes of the domestic control test, the look‑through rules for partnerships, trusts, and other look‑through entities (including corporations other than C corporations as defined in the 2024 Regulations), or the special rules for publicly traded ownership and de minimis holders.
The Proposed Regulations would apply to transactions occurring on or after the date on which the final regulations are published in the Federal Register, and taxpayers may rely on the proposed regulations for transactions occurring before the regulations are finalized, including for transactions occurring on or after April 25, 2024 (the effective date of the 2024 Regulations).
What This Means for Existing and New Investments
For existing stakeholders of REITs that have been navigating the 2024 look‑through rule and its transition conditions (which grandfather existing structures for up to 10 years provided that certain changes do not occur), the Proposed Regulations offer immediate relief. Investors who adjusted ownership, implemented contractual transfer restrictions or restructured to preserve domestically controlled status under the 2024 Regulations should consider whether those measures remain necessary.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
