TAX POLICY CLIENT ALERT: New Tax Regulations Seek to Ameliorate Harsh Effects of Commercial Activity Limitation Under Section 892 Sovereign Tax Exemption

    View Authors 8 November 2011
    On November 2, 2011, the U.S. Treasury and Internal Revenue Service issued proposed regulations (the “Proposed Regulations”) under section 892 of the Internal Revenue Code of 1986, as amended (the “Code”), which provides an exemption from U.S. federal income tax for certain categories of U.S. source income when that income is received by a foreign government. The Proposed Regulations represent the first major overhaul of regulations issued in 1988 (the “Existing Regulations”) and generally focus on issues related to the so-called “commercial activity” limitation, which has particular relevance for those entities that qualify for the section 892 exemption as “controlled entities” of a non-U.S. sovereign. This memorandum contains a brief overview of the section 892 exemption and a summary of the Proposed Regulations.