Treasury/IRS Propose Repeal of "Foreign Controlled Domestic Corporation" Look Through Rule for Domestically Controlled REITs

On October 20, 2025, the Treasury and the IRS released proposed regulations (REG‑109742‑25 (the “Proposed Regulations”)) that would remove the “foreign‑controlled domestic corporation” look‑through rule previously included in final regulations issued on April 24, 2024 (the “Prior Regulations”).¹ Under the Prior Regulations, the corporate look‑through rule applied in determining whether a “qualified investment entity,” including a REIT, qualifies as a “domestically controlled” REIT (“DC REIT”) under the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”). Foreign persons generally are exempt from U.S. federal income tax that would otherwise be imposed under FIRPTA on gain from the sale of stock of a DC REIT, making DC REITs advantageous vehicles for holding U.S. real property interests.

Under the Prior Regulations, a “foreign‑controlled domestic corporation” generally is a non‑public domestic “C” corporation in which foreign persons hold, directly or indirectly, more than 50% of the outstanding stock (by value) at any time during a five-year “lookback” period preceding the disposition that is tested for DC REIT status. The Prior Regulations treated a foreign‑controlled domestic corporation as a “look‑through person” and as a result, its foreign shareholders are treated as foreign persons for purposes of determining whether a REIT is domestically controlled, making it more difficult to qualify as a DC REIT. The Prior Regulations (including proposed regulations issued in December 2022) were the subject of significant criticism, including that they were inconsistent with longstanding Treasury regulations, a non-binding IRS private ruling,² legislative action and general U.S. federal income tax principles.

The Proposed Regulations treat all domestic C corporations as “non‑look‑through persons” for purposes of determining whether a REIT is a DC REIT, thereby counting a domestic corporate shareholder of a REIT as a U.S. person – regardless of their foreign ownership percentage.

The Proposed Regulations include an example in which a REIT whose stock is held 51% by a non‑public domestic C corporation and 49% by nonresident alien individuals is a DC REIT because the domestic C corporation is a non‑look‑through person.

Taxpayers may rely on the Proposed Regulations for transactions occurring before the date the Proposed Regulations are finalized. If finalized, the Proposed Regulations would also effectively eliminate the application of the look‑through rule for any period after April 24, 2024.