IRS and Treasury Clarify Tax Rules for U.S. Real Property Interests in Inbound F Reorganizations

The IRS and Treasury Department have announced new rules in Notice 2025-45 that will make it simpler and more predictable for foreign companies to restructure, particularly when they move their corporate home to the United States. This guidance addresses two key issues that have caused headaches for businesses and their advisors in the past:

• How to handle a foreign company becoming a U.S. company without triggering unexpected taxes on U.S. real estate.
• Whether normal stock trading by shareholders around the time of a reorganization could accidentally ruin its tax-free status.

This explainer summarizes what the changes mean for businesses and investors.

Part 1: Moving a Foreign Company to the U.S.

When a publicly traded foreign company becomes a publicly traded U.S. company, it’s a specific type of corporate reorganization called a “covered inbound F reorganization.” The new rules make this process easier from a tax perspective.

The Old Problem: U.S. Real Estate Taxes

Under normal U.S. tax law (Section 897), if a foreign company holds U.S. real estate, any transfer of that property can trigger a tax. The same rule can apply when a foreign company distributes shares tied to that real estate to its shareholders. This created a potential tax issue for a foreign company simply moving its legal home to the U.S., even if its business and ownership didn’t change, and raised concerns about potential tax avoidance on U.S. real estate.

The New Solution: Exception for Small Shareholders

The guidance provides a major exception for covered inbound F reorganizations: the foreign company does not owe tax on the distribution of new U.S. company stock if

• The shareholders own 5% or less of the company’s publicly traded stock. For these small investors, the stock they receive is not treated as a U.S. real property interest.
• The company doesn’t distribute other property (besides a small, insignificant amount of cash or non-cash assets worth less than 1% of the company’s total value).
• The company files proper paperwork for shareholders who own more than 5%.

This new approach strikes a balance: it makes it easier for foreign companies to redomicile to the U.S. for legitimate business reasons while still allowing the IRS to track and tax the gains of large investors who could pose a tax avoidance risk.

Part 2: Clarifying the Stock Ownership Rule

A key requirement for any F reorganization is that the same people must own the company in the same proportions immediately before and after the reorganization—the “identity of stock ownership” test.

The Old Problem: Uncertainty and Confusion

In the past, there was a lot of uncertainty about what happens if shareholders buy or sell stock right before or after an F reorganization. Could a shareholder selling their shares to a new investor accidentally “break” the reorganization and trigger a huge, unexpected tax bill for the company?

The New Solution: Focus on the Reorganization Plan

The IRS has now clarified that the identity of stock ownership test only applies to ownership changes that are part of the official reorganization plan.

Here’s the new rule in a nutshell:

• If the reorganization itself maintains the exact same ownership percentages, it qualifies as an F reorganization.
• Any sales, purchases, or other transfers of stock by shareholders that are not part of the formal reorganization plan (even if they happen at the same time) will not affect the F reorganization’s tax-free status. These are treated as separate, taxable events for the shareholders.

This provides much-needed clarity for businesses and investors, ensuring that normal trading of stock doesn’t interfere with a valid corporate restructuring.

Part 3: What This Means for You

Guidance and Release

These new rules are officially effective for transactions occurring on or after August 19, 2025. However, businesses have the option to apply these rules to transactions that happened before that date, as long as they apply the guidance in its entirety and consistently. This allows companies that were already planning or executing these types of reorganizations to benefit from the new, clearer rules right away.

In short, the IRS is making a clear statement: we want to encourage legitimate corporate reorganizations and will not penalize companies or investors for transactions that are not designed for tax avoidance.

This initiative is a step toward creating a more predictable and transparent tax environment for corporate reorganizations. The public is invited to provide comments on the proposed rules before the deadline on October 20, 2025. You can find the submission portal on www.regulations.gov by searching for the official notice number: IRS-2025-0170.