The Internal Revenue Service (IRS) has reportedly proposed tax changes that could hold sovereign wealth funds (SWFs) and some public pension funds accountable for taxes on their American investments.
IRS May Tax Foreign Funds' Commercial Acts
Under Section 892 of the U.S. tax code, foreign governments and their controlled entities, such as sovereign wealth funds and certain public pension funds, are exempt from U.S. taxes on activities classified by the IRS as investment-related. However, they must pay taxes if the IRS considers their activities to be commercial in nature, reported the Financial Times on Friday.
The proposal would expand the IRS's definition of commercial activity, potentially impacting SWFs that lend to companies or take direct equity stakes in private firms.
The IRS proposes that participating in a company's debt restructuring counts as commercial activity, even for sovereign wealth funds that purchased the bonds years earlier with minimal default risk.
Comments on the proposals are due by February 13.
Trump Pushes SWF To Boost US wealth
A sovereign wealth fund is a government-owned investment fund, typically financed by commodity revenues, foreign exchange reserves, or budget surpluses, and invests in assets like stocks, real estate, and infrastructure.
In 2025, state-owned investors held $550 billion in private credit globally, while their direct US private equity investments more than tripled to $73 billion, mostly via co-investments, according to Global SWF.
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