IRS proposes targeted FIRPTA relief for inbound F reorganizations

Executive summary

On Aug. 19, 2025, the IRS released Notice 2025-45, signaling its intent to issue proposed regulations that recalibrate FIRPTA’s application to inbound F reorganizations. The Notice targets transactions in which a publicly traded foreign corporation redomiciles into the U.S. via a section 368(a)(1)(F) reorganization. Historically, these transactions have triggered FIRPTA gain recognition at the shareholder level, even when the underlying ownership and business operations remain unchanged.

The IRS proposes to revise temporary regulations under sections 897(d) and 897(e) to exempt qualifying transactions from FIRPTA taxation and streamline compliance obligations. Relief is limited to “covered inbound F reorganizations”—those involving publicly traded entities that meet specific trading history and distribution thresholds. The Notice also clarifies that incidental stock sales not included in the plan of reorganization will not disqualify an F reorganization under the continuity of ownership rules.

Taxpayers may rely on the proposed framework immediately, provided they apply the rules in full and consistently. The guidance reflects a shift in the IRS’ approach, acknowledging that FIRPTA enforcement mechanisms designed for private transactions may not translate well to the public company context. For multinational groups considering a change in place of incorporation, the Notice offers a clearer path forward—one that balances policy integrity with practical compliance.

On Aug. 19, 2025, the IRS released Notice 2025-45, announcing its intent to issue proposed regulations under sections 897(d), 897(e) and 368(a)(1)(F). The Notice provides targeted relief for certain inbound F reorganizations involving publicly traded foreign corporations that hold U.S. real property interests (USRPIs). Specifically, the IRS will revise the gain recognition rules under Temp. Reg. sections 1.897-5T and 1.897-6T to exempt qualifying transactions from FIRPTA taxation and clarify the “identity of stock ownership” requirement under Reg. section 1.368-2(m).

Planned regulatory changes

The IRS and Treasury intend to issue regulations that would exempt certain inbound F reorganizations from FIRPTA gain recognition and streamline compliance for foreign corporations. The relief applies to transactions where a publicly traded foreign corporation becomes a publicly traded domestic corporation through an F reorganization. These transactions often qualify for nonrecognition under section 368(a)(1)(F), but FIRPTA can override that treatment—particularly at the distributing foreign corporation level—if the domestic corporation is a U.S. real property holding corporation (USRPHC). The Notice proposes to revise the FIRPTA rules under Temp. Reg. sections 1.897-5T and 1.897-6T to allow nonrecognition treatment in these cases, provided certain conditions are met.

The Notice also clarifies that incidental stock sales not included in the plan of reorganization will not disqualify an F reorganization under the continuity of ownership rules.

Taxpayers may rely on the proposed framework immediately, even before regulations are finalized.

Breaking down the Notice

Notice 2025-45 is divided into five key sections, each addressing a different aspect of the regulatory framework governing inbound F reorganizations, including FIRPTA treatment and qualification requirements. The guidance is framed as a direct response to stakeholder concerns—particularly from multinational corporations and their advisors—about the tax and compliance friction created when a foreign public company redomiciles into the U.S. The Notice walks through the statutory framework, identifies the practical challenges, and proposes targeted relief for transactions that do not raise the policy concerns FIRPTA was designed to address.

Section 1 outlines the IRS’ intent to issue regulations that ease FIRPTA’s application to inbound F reorganizations under section 368(a)(1)(F). These transactions involve a foreign corporation becoming a domestic corporation for U.S. tax purposes, either through a statutory merger or a jurisdictional conversion. In the latter case, Reg. section 1.367(b)-2(f)(2) treats the inbound F reorganization as a two-step transaction: first, a deemed transfer of assets of the foreign corporation to a newly formed U.S. corporation in exchange for stock in the U.S. corporation; second, a deemed distribution of that stock to the foreign corporation’s shareholders in exchange for their shares in the foreign corporation. This structure allows the foreign entity to migrate into the U.S. corporate system while preserving continuity of ownership.

Section 2 explains why FIRPTA applies to inbound F reorganizations and sets the stage for the relief proposed later in the Notice. FIRPTA was enacted in 1980 to ensure that foreign persons pay U.S. tax on gains from U.S. real estate. Over time, its reach expanded to include not just direct ownership of land or buildings, but also indirect ownership—most notably, stock in a USRPHC. A U.S. corporation (but not a foreign corporation) is a USRPHC essentially if at least 50% of its assets (by value) consist of USRPIs. Stock in another USRPHC is treated as a USRPI for purposes of applying this test. However, if the U.S. corporation is publicly traded, stock in the U.S. corporation is treated as USRPI only to foreign persons who own more than 5% (directly or indirectly).

This becomes relevant in an inbound F reorganization when a foreign corporation becomes a domestic one. Although the transaction qualifies as a tax-free “mere change” under section 368(a)(1)(F), FIRPTA can override that treatment and require gain recognition on the exchange. Specifically, when the foreign corporation distributes the U.S. corporation’s stock to its foreign shareholders—and that U.S. corporation is a USRPHC—the stock they receive is normally treated as a USRPI unless the domestic corporation is publicly traded and the shareholder owns 5% or less. In these fact patterns, sections 897(d) and (e) may cause the distributing foreign corporation to recognize gain on the distribution of the U.S. corporation’s stock to foreign shareholders unless an exception applies.

While sections 897(d) and (e) preserve nonrecognition treatment in certain cases, the conditions for qualifying have historically been difficult to satisfy. Under Temp. Reg. sections 1.897-5T and 1.897-6T, along with guidance in Notices 89-85 and 2006-46, the IRS attempted to implement exceptions but added layers of complexity. For example, as a condition for preserving nonrecognition, the IRS may require the foreign corporation to track whether any foreign shareholder disposed of stock in the foreign corporation in the past ten years and pay a hypothetical FIRPTA tax on those dispositions as if the corporation had been domestic at that time (the so called ‘FIRPTA toll charge’). These rules may have worked in theory, but they are nearly impossible to apply to public companies with thousands of shareholders and frequent turnover. Section 2 of the Notice acknowledges this reality and lays the groundwork for a more workable approach—one that recognizes the practical limitations of enforcing FIRPTA at the shareholder level in the context of inbound F reorganizations.

Section 3 introduces the relief the IRS intends to provide and explains the scope of the proposed regulations. The central idea is to carve out a practical exception to FIRPTA for a narrow class of inbound F reorganizations—those involving publicly traded foreign corporations that become publicly traded domestic corporations. These transactions, referred to in the Notice as “covered inbound F reorganizations,” are viewed by the IRS as low risk from a policy standpoint. The concern is not that these transactions are being used to avoid U.S. tax, but rather that FIRPTA’s current rules impose unnecessary gain recognition and compliance burdens in situations where the underlying policy rationale does not apply.

To qualify as a covered inbound F reorganization, the transaction must meet three conditions:

1. The foreign transferor corporation must have been publicly traded for the three years leading up to the reorganization.
2. The resulting domestic corporation must be publicly traded for at least one year following the transaction.
3. The transaction must not involve a distribution by the U.S. corporation of property (other than cash and stock in the U.S. corporation) to its shareholders within a year of the reorganization, unless the total value of such property is less than 1% of the foreign corporation’s asset value at the time of the reorganization.

These thresholds are designed to ensure that the relief applies only to genuine redomiciliation transactions—not to transactions that function as disguised sales or shareholder-level bailouts.

The proposed regulations will modify the FIRPTA rules under Temp. Reg. sections 1.897-5T and 1.897-6T to allow nonrecognition treatment for transfers of USRPI to the U.S. corporation and distributions of USRPHC stock to shareholders that occur in a covered inbound F reorganization.

The proposed regulations would allow the transfer of USRPI by the foreign corporation to the U.S. corporation to satisfy the requirement in Temp. Reg. section 1.897-6T(a) that it receive back USRPI to preserve nonrecognition even though the U.S. corporation is not a USRPHC immediately after the exchange.

The proposed regulations will also incorporate the publicly traded stock exception under section 897(c)(3), which provides that stock in a USRPHC is not treated as a USRPI if the shareholder owns 5% or less. The distribution of stock in a U.S. corporation, which is a USRPHC, by the foreign corporation to shareholders that own less than 5% will be treated as satisfying the requirement in Temp. Reg. section 1.897-5T(c)(4)(ii)(A) that the transferee be subject to U.S. tax on the USRPI received to preserve nonrecognition treatment. In other words, foreign shareholders whose ownership falls under the 5% threshold will be treated as satisfying the requirement that the transferee be subject to U.S. tax on the USRPI received—even though they are not actually subject to U.S. tax due to section 897(c)(3).

The proposed regulations would also clarify that the section 897(c)(3) exception would apply in calculating the FIRPTA toll charge which is required to qualify for an exception to gain recognition under Notice 89-85 and Notice 2006-46. More specifically, if a foreign transferor disposed of shares in the foreign corporation within 10 years of the reorganization, gain on that disposition would not be included in the toll charge calculation if the foreign transferor held 5% or less in the foreign corporation.

The IRS also proposes to ease the compliance burden by limiting the FIRPTA filing requirements to shareholders who do not qualify for the 5% exception. Foreign corporations will be required to make reasonable efforts to identify such shareholders—such as reviewing publicly available information—but will not be expected to track historical ownership or obtain declarations from every shareholder. This change is especially important for publicly traded corporations where shareholder turnover is frequent and ownership is dispersed.

Taken together, these changes reflect a shift in the IRS’ approach: rather than applying FIRPTA mechanically to all inbound reorganizations, the proposed rules would allow for a more tailored application that distinguishes between transactions that raise policy concerns and those that do not.

Section 4 addresses a separate but important issue: whether incidental stock sales can jeopardize qualification as an F reorganization. Under the regulations governing section 368(a)(1)(F), an F reorganization requires continuity of ownership—specifically, the same persons must own all of the stock of the transferor and resulting corporation in identical proportions immediately before and after the transaction. This rule is straightforward in theory but difficult to apply in practice, especially for publicly traded corporations where shareholder turnover is routine and largely outside the company’s control.

The IRS acknowledges that the current regulations leave taxpayers uncertain about how incidental stock dispositions affect qualification. For example, if shareholders of the resulting domestic corporation sell stock between the merger and liquidation steps, does that break the continuity requirement? The Notice proposes to resolve this ambiguity by clarifying that stock dispositions not included in the plan of reorganization do not affect qualification under section 368(a)(1)(F). In other words, incidental trading—such as sales on the open market that occur in close proximity to the reorganization—will not disqualify the transaction.

To illustrate this point, the IRS will add a new example to the regulations. In the example, a foreign corporation merges into a newly formed U.S. corporation and elects to be treated as a disregarded entity. Some shareholders sell their stock in the U.S. corporation shortly after the merger but before the liquidation. Because those sales were not part of the plan of reorganization, the transaction still qualifies as an F reorganization. This clarification is expected to provide much-needed certainty for public companies navigating multistep inbound restructurings.

Section 5 sets out the effective date and reliance rules for the forthcoming regulations. The proposed changes will apply to transactions occurring on or after Aug. 19, 2025. However, taxpayers do not need to wait for the regulations to be finalized. The IRS confirms that taxpayers may rely on the rules described in the Notice for earlier transactions, as long as they apply the rules in full and on a consistent basis.

This reliance language is particularly important for taxpayers currently planning or executing inbound F reorganizations. It provides a clear path forward: if the transaction meets the conditions for a covered inbound F reorganization, and the taxpayer follows the framework laid out in the Notice, the IRS will respect the nonrecognition treatment and the associated relief from FIRPTA gain recognition and filing obligations. In effect, the IRS is signaling that it will administer the law in line with the proposed rules even before they are formally adopted.

Takeaway

Notice 2025-45 offers meaningful relief for inbound F reorganizations, but its scope is narrow, and its conditions are specific. The safe harbor applies only to transactions involving publicly traded foreign corporations that become publicly traded domestic corporations. Organizations considering a change in place of incorporation should assess whether their transaction fits within the framework of a “covered inbound F reorganization.”

The proposed rules not only reduce the risk of FIRPTA gain recognition but also streamline compliance for foreign corporations and their shareholders. Still, applying the relief requires careful attention to ownership thresholds, timing requirements and filing obligations. Transactions that fall outside the safe harbor may remain subject to FIRPTA, and the consequences can be significant.