IRS rules a foreign-government-owned fund entity with two owners is not forced to be a corporation under the check-the-box foreign-government rule

Plain-English summary

A foreign government's global investment company (a sovereign-wealth-style
structure) set up a new global credit fund through a chain of foreign
subsidiaries. One of the fund entities is owned by two upper-tier subsidiaries,
each of which is a "controlled entity" of the foreign sovereign under the
Section 892 rules, and it elected to be treated as a partnership for U.S. tax.
A check-the-box regulation, Treas. Reg. Section 301.7701-2(b)(6), treats a
business entity "wholly owned by a foreign government" as a corporation, which
would block the partnership election. The entity asked the IRS to confirm that
rule does not apply to it. The IRS agreed: because the entity has two owners, it
is not "wholly owned" within the meaning of that regulation, so it is not forced
to be a corporation and its partnership status stands. This matters because
partnership (rather than corporate) treatment lets the sovereign investors claim
the Section 892 exemption on their shares of U.S. dividend and interest income
earned through the entity. The IRS was careful to rule only on the corporate
classification question; it expressly declined to opine on whether the entities
actually qualify for the Section 892 exemption or whether any of them conduct
commercial activities.

Ruling snapshot

• Question: Is a foreign-government-related entity with two owners classified as a corporation under the "wholly owned by a foreign government" rule of Treas. Reg. Section 301.7701-2(b)(6)?
• Outcome: Approved. The IRS ruled the entity is not classified as a corporation under that regulation.
• Key authorities: Treas. Reg. § 301.7701-2(b)(6); IRC § 892; Temp. Treas. Reg. § 1.892-2T

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 202551009
Release Date: 12/19/2025
Index Number: 7701.02-00

Third Party Communication: None
Date of Communication: Not Applicable

Person To Contact:
----------------, ID No. ----------
Telephone Number:

Refer Reply To:
CC:INTL:B05
PLR-110177-25
Date:
September 16, 2025

                                             LEGEND

Country A = --------------------
Country B = ----------
Country C = ----------------------
Date = ---------------------
FParent = ------------------------------------------------
FSub 1 = ------------------------------------------
FSub 2 = -----------------------
FSub 3 = ----------------------------------
FSub 4 = -------------------
FSub 5 = -----------------------------------------
FSub 6 = ----------------
FSub 7 = ----------------------------------
FSub 8 = -----------------------------------
FSub 9 = --------------------------------
FSub 10 = -----------------------
FSub 11 = ----------------------
Sub 1 = --------------------
Sub 2 = -----------------------------------
Subject Entities = FSub 5, FSub 6, FSub 7, FSub 8, FSub 9, FSub 10,
FSub 11, Sub 2
X = ------
Y = ----

Dear -----------------------:

This is in response to your letter on Date, as supplemented by additional information
statements, requesting a ruling that FSub 5 is not classified as an association taxable
as a corporation pursuant to Treas. Reg. § 301.7701-2(b)(6).

                                               FACTS

FSub 5 represents that the facts are as follows:

FParent is a private limited company organized under Country A law and is classified as
an association taxable as a corporation for U.S. federal tax purposes. FParent is a
global investment company that is directly wholly owned by Country A. FParent is a
“controlled entity” of Country A within the meaning of Temp. Treas. Reg. § 1.892-
2T(a)(3). FParent manages a diversified portfolio of investments across various sectors
including financial services, telecommunications, media and technology, transportation
and industrials, consumer and real estate, life sciences and agribusiness, and energy
and resources.

FParent directly wholly owns FSub 1, which in turn, directly wholly owns FSub 2. FSub
2 directly wholly owns FSub 3 and FSub 4. Each of FSub 1, FSub 2, FSub 3, and FSub
4 is a private limited company organized under Country A law and is classified as an
association taxable as a corporation for U.S. federal tax purposes. Each of FSub 1,
FSub 2, FSub 3, and FSub 4 is also a “controlled entity” of Country A within the
meaning of Temp. Treas. Reg. § 1.892-2T(a)(3).

FSub 2, FSub 3, and FSub 4 (collectively, the “Section 892 Investors”) together directly
and indirectly wholly own all of the interests¹ in the entities that collectively constitute a
newly formed global credit investment structure (the “Fund”), which makes primary and
secondary acquisitions of both U.S. and non-U.S. loans, debt instruments, and minority
equity interests in borrowers.

The Fund comprises a number of entities and is not treated as a single entity for U.S.
federal tax purposes. The Fund entities include FSub 5, FSub 6, FSub 7, FSub 8, FSub
9, FSub 10, FSub 11, Sub 1, and Sub 2. Certain Fund entities, including FSub 10,
FSub 11, and Sub 2, may receive additional capital from third-party investors subject to
commercial negotiation and regulatory approvals. Each of the Fund entities apart from
Sub 1 (the “Subject Entities”) has requested a letter ruling that it is not classified as a
corporation pursuant to Treas. Reg. § 301.7701-2(b)(6).

¹ FSub 5 represents in the letter ruling request that all ownership percentages described in the ruling
request represent actual interests in the relevant entity’s items of income, gain, loss, deduction, credit, or
capital, and the beneficial interest in the receipts, investments, or other property of the relevant entity
during operation or upon liquidation.

Each of the Subject Entities of the Fund has two owners and was formed to enable the
Fund to carry on investment activities and to divide the profits and losses therefrom. All
the Subject Entities have elected to be classified as partnerships for U.S. federal tax
purposes effective on their date of formation to permit the Section 892 Investors to claim
the exemption under section 892(a)(1) with respect to their pro rata shares of the U.S.
source dividend and/or interest income received through the Subject Entities. The
Section 892 Investors cannot claim their section 892 benefits on the income if one or
more of the Subject Entities were classified as associations taxable as corporations for
U.S. federal tax purposes.

FSub 2 directly owns X percent and FSub 3 directly owns Y percent of the interests in
FSub 5. Each of FSub 2 and FSub 3 will certify to FSub 5 on a Form W-8EXP,
Certificate of Foreign Government or Other Foreign Organization for United States Tax
Withholding and Reporting, that it is classified as a “controlled entity” of Country A.

FSub 5 is a private limited company organized under Country A law and has elected to
be classified as a partnership for U.S. federal tax purposes effective on its date of
formation.

                                     LAW AND ANALYSIS

Treas. Reg. § 301.7701-2(b)(6) provides that, for U.S. federal tax purposes, the term
corporation includes a business entity wholly owned by a U.S. state or any political
subdivision thereof, or a business entity wholly owned by a foreign government, or any
other entity described in Temp. Treas. Reg. § 1.892-2T.

Before the promulgation of Treas. Reg. § 301.7701-2(b)(6) in 1996, the Treasury
Department and the IRS were concerned that organizations wholly owned by a U.S.
state that were not integral parts of that U.S. state were claiming integral part status and
thereby circumventing taxation of income not properly excluded by section 115.²
Section 115(1) provides that gross income does not include income derived from the
exercise of any essential governmental function and accruing to a U.S. state or any
political subdivision thereof. To address that concern, Treas. Reg. § 301.7701-2(b)(6)
requires an organization that is wholly owned by a U.S. state to be recognized as an
association taxable as a corporation for U.S. federal tax purposes. The income of such
an organization is exempt from U.S. federal income tax only to the extent it can,
pursuant to section 115, demonstrate that such income is derived from the exercise of
any essential governmental function and accrues to a U.S. state or any political
subdivision thereof.

² Simplification of Entity Classification Rules, 61 Fed. Reg. 21989, 21991 (May 13, 1996). See Treas.
Reg. § 301.7701-1(a)(3), which provides that an organization wholly owned by a U.S. state is not
recognized as a separate entity for U.S. federal tax purposes if it is an integral part of the U.S. state.
Revenue Ruling 87-2, 1987-1 C.B. 18, provides that income earned by a U.S. state, a political subdivision
of a U.S. state, or an integral part of a U.S. state or of a political subdivision of a U.S. state is generally
not taxable in the absence of specific statutory authorization for taxing such income.

Similar concerns arose about foreign governments taking advantage of the favorable
treatment afforded to integral parts for purposes of section 892.³ Temp. Treas. Reg. §
1.892-2T(a) defines the term foreign government to mean only the integral parts⁴ or
controlled entities⁵ of a foreign sovereign. Both an integral part and a controlled entity
of a foreign sovereign are eligible for the section 892 exemption. An integral part of a
foreign sovereign, however, does not lose its ability to claim the exemption with respect
to income not derived from commercial activities even if the integral part engages in
commercial activities (within the meaning of Temp. Treas. Reg. § 1.892-4T).⁶ In
contrast, if a controlled entity of a foreign sovereign conducts (or is treated as
conducting) commercial activities, it loses the exemption under section 892 with respect
to all of its income, including any income not derived from commercial activities.⁷ The
exemption does not apply to income derived from the conduct of any commercial
activity (whether within or outside the United States), received by or received (directly or
indirectly) from a controlled commercial entity (as defined in section 892(a)(2)(B), a
“CCE”), or derived from the disposition of any interest in a CCE.⁸

Before Treas. Reg. § 301.7701-2(b)(6) was amended to include a business entity wholly
owned by a foreign government, it was possible for an integral part of a foreign
sovereign to form a disregarded entity for U.S. federal tax purposes and claim the
exemption under section 892 with respect to income not derived from commercial
activities, even if the disregarded entity was conducting commercial activities. The
preamble to Prop. Treas. Reg. § 301.7701-2(b)(6) published in 2001,⁹ which brought
foreign government entities within scope, explains that:

    The IRS and Treasury believe that it is appropriate to treat a foreign government
    similarly to a [U.S.] State in this context. Thus, to achieve parallel tax treatment
    under the check-the-box regulations of a business entity wholly owned by a
    [U.S.] State or any of its political subdivisions and a business entity wholly owned
    by a foreign government, these proposed regulations provide that a business
    entity wholly owned by a foreign government cannot elect to be treated as a
    disregarded entity.¹⁰

When Treas. Reg. § 301.7701-2(b)(6) was amended in 2002 to include a business
entity wholly owned by a foreign government, the “parallel tax treatment under the
check-the-box regulations of a business entity wholly owned by a [U.S.] State or any of
its political subdivisions and a business entity wholly owned by a foreign government”
was accomplished by ensuring that a business entity wholly owned by a foreign
government “cannot elect to be treated as a disregarded entity” for U.S. federal tax
purposes.¹¹ Hence, the purpose of the modification was to ensure that a business entity
whose sole direct owner is either an integral part or a controlled entity is a corporation
(and thus subject to the CCE rules). The language of Treas. Reg. § 301.7701-2(b)(6)
(“wholly owned by a foreign government or any other entity described in Treas. Reg. §
1.892-2T”) may be read consistently with this intent, as the reference to “other entity
described in § 1.892-2T” would be unnecessary unless the drafters considered it
needed in order to include a controlled entity because they used the term “foreign
government” to include only an integral part. Accordingly, the phrase “business entity
wholly owned by a foreign government or any other entity described in § 1.892-2T” is
properly construed as a business entity that is wholly owned directly by a single
controlled entity or integral part and that thus does not have two or more owners.

The Treasury Department and the IRS recognized that use of partnerships by foreign
governments could present concerns similar to those presented by disregarded entities
but chose to address those concerns differently. Rather than providing a special entity
classification rule for partnerships similar to that provided by Treas. Reg. § 301.7701-
2(b)(6) for disregarded entities, the Treasury Department and the IRS chose to address
concerns presented by partnerships by treating them as potentially CCEs, in a separate
rule that was promulgated in 2002 together with Treas. Reg. § 301.7701-2(b)(6).¹²
Treas. Reg. § 1.892-5(a)(3) provides that, for purposes of section 892(a)(2)(B) (defining
a CCE), the term “entity” means and includes a corporation, a partnership, a trust
(including a pension trust described in Temp. Treas. Reg. § 1.892-2T(c)) and an estate.
Before this regulation was finalized in T.D. 9012 on August 1, 2002, the term “entity” did
not include a partnership.¹³ Thus, concerns about foreign governments using
partnerships to circumvent limitations within section 892 were addressed by adding
“partnerships” to the types of entities that, for purposes of section 892(a)(2)(B), could be
controlled entities and thus CCEs, which are not eligible for the exemption under section
892,¹⁴ rather than (as in the case of disregarded entities) classifying them as
corporations. As a result, classifying a partnership with two or more direct owners, each
of which is directly or indirectly wholly owned by a “controlled entity” as defined in Temp.
Treas. Reg. § 1.892-2T(a)(3), as a corporation pursuant to contemporaneously issued
Treas. Reg. § 301.7701-2(b)(6) was unnecessary to protect the purposes of section
892.

³ T.D. 9012, 67 Fed. Reg. 49862, 49864 (Aug. 1, 2002). See Clarification of Entity Classification Rules, 66
Fed. Reg. 2854, 2856 (Jan. 12, 2001).
⁴ See Temp. Treas. Reg. § 1.892-2T(a)(2).
⁵ See Temp. Treas. Reg. § 1.892-2T(a)(3).
⁶ See Temp. Treas. Reg. § 1.892-5T(d)(4), Example 1(a).
⁷ See id., Example 1(c).
⁸ See section 892(a)(2)(A).
⁹ Clarification of Entity Classification Rules, 66 Fed. Reg. 2854, 2856 (Jan. 12, 2001).
¹⁰ 66 Fed. Reg. at 2855.
¹¹ Id.
¹² T.D. 9012, 67 Fed. Reg. 49862, 49864 (Aug. 1, 2002).
¹³ See T.D. 8211, 53 Fed. Reg. 24060, 24064 (June 27, 1988). The flush text under former Temp. Treas.
Reg. § 1.892-5T(a) stated: “For purposes of this paragraph, the term ‘entity’ encompasses corporations
and trusts (including pension trusts described in § 1.892-2T(c)) and estates.” We note that Prop. Treas.
Reg. § 1.892-5(a)(1), however, states: “For purposes of section 892 and the regulations thereunder, the
term entity means and includes a corporation, a partnership, a trust (including a pension trust described in
§ 1.892-2T(c)), and an estate, and the term controlled commercial entity means any entity (including a
controlled entity as defined in § 1.892-2T(a)(3)) engaged in commercial activities (as defined in §§ 1.892-
4 and 1.892-4T) (whether conducted within or outside the United States) . . .” 76 Fed. Reg. 68119, 68122
(Nov. 3, 2011). The purpose for which the term “entity” is defined in this proposed regulation appears to
be broader than is set forth in the temporary and final regulations, but the position of the sentence within
the CCE rules suggests that it was intended to apply solely for CCE purposes.
¹⁴ See Clarification of Entity Classification Rules, 66 Fed. Reg. 2854, 2855 (Jan. 12, 2001) (“To ensure
that investments in the United States by a foreign government through separate juridical entities are
treated similarly, these proposed regulations under § 1.892-5(a) provide that, for purposes of section
892(a)(2)(B), the term entity also includes a partnership.”). This rule was finalized in T.D. 9012, 67 Fed.
Reg. 49862, 49864 (Aug. 1, 2002). If FSub 5 were to conduct (or be treated as conducting) commercial
activities within the meaning of Temp. Treas. Reg. §§ 1.892-4T or 1.892-5T, it could be a CCE.

FSub 5 has elected to be classified as a partnership for U.S. federal tax purposes
effective on its date of formation. FSub 2 and FSub 3 are the owners of FSub 5. Each
of FSub 2 and FSub 3 is an association taxable as a corporation for U.S. federal tax
purposes, and each will certify to FSub 5 on a Form W-8EXP that it is classified as a
“controlled entity” of Country A for purposes of section 892. Thus, FSub 5 has at least
two owners (such that it cannot be classified as a disregarded entity for U.S. federal tax
purposes) and hence is not “wholly owned” within the meaning of Treas. Reg. §
301.7701-2(b)(6).

                                      RULING

Based solely on the information submitted and the representations made, FSub 5 is not
classified as a corporation pursuant to Treas. Reg. § 301.7701-2(b)(6).

                                            CAVEATS

The ruling contained in this letter is based upon information and representations
submitted by FSub 5 accompanied by a penalty of perjury statement executed by an
appropriate party. This office has not verified any of the material submitted in support of
the ruling request, and it is subject to verification on examination.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter. Furthermore, except as expressly provided in the ruling, no opinion is
expressed or implied concerning the entity classification for U.S. federal tax purposes of
any entity or party discussed herein. No opinion is expressed or implied concerning
whether any of FParent, FSub 1, FSub 2, FSub 3, FSub 4, FSub 5, and FSub 9 is an
integral part or a controlled entity as defined under Temp. Treas. Reg. § 1.892-2T(a).

No opinion is expressed or implied concerning whether any income received by any
party qualifies for exemption from U.S. federal income tax under section 892, or whether
any party conducted commercial activities within the meaning of Temp. Treas. Reg. §
1.892-4T. No opinion is expressed or implied concerning whether any entity discussed
herein is a controlled commercial entity under section 892(a)(2)(B).

This letter ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)
provides that this letter ruling may not be used or cited as precedent. This letter ruling
will be modified or revoked by the adoption of temporary or final regulations to the
extent the regulations are inconsistent with any conclusion in the letter ruling. See
Section 11 of Rev. Proc. 2025-1, 2025-1 I.R.B. 1, 63. If the taxpayer can demonstrate
that the criteria in Section 11 of Rev. Proc. 2025-1 are satisfied, a letter ruling is not
revoked or modified retroactively except in rare or unusual circumstances.

A copy of this letter must be attached to any income tax return to which it is relevant.

In accordance with the power of attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.

                                    Sincerely,




                                    Matthew S. Blum
                                    Senior Technical Reviewer, Branch 5
                                    Office of the Associate Chief Counsel
                                    (International)

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