Global Wealth Funds Brace for Strict US Tax Changes

Proposed changes to the American tax code have created uncertainty for Gulf sovereign investors, and tax adjustments now threaten regional wealth funds’ US commitments. These modifications that the Internal Revenue Service (IRS) introduced could weaken the growing US-Gulf investment momentum by making sovereign wealth fund (SWF) deals less appealing. The wealth funds might need to rethink their capital deployment strategy in the United States.

These proposals’ potential tax weaknesses have sparked strong reactions from wealth tax opponents. Lawyers started issuing alerts, investors began reviewing their strategies, and fund managers received worried calls from clients as news about changes to sovereign fund tax treatment spread. These developments have emerged right as a local fintech secured $250 million in seed funding and open finance initiatives started gaining ground. The US government’s plan to tax sovereign wealth investments marks a fundamental change that could reshape international investment flows and affect the mutually beneficial alliances between Gulf nations and American markets.

IRS Proposes Redefinition of Sovereign Tax Exemptions

“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.” — Financial Times, Leading international financial news publication covering IRS regulatory changes

The Internal Revenue Service (IRS) released a major package of final and proposed regulations on December 15, 2025. These new rules redefine tax exemptions for sovereign wealth funds under Section 892 of the Internal Revenue Code. The changes expose tax weaknesses that could transform how foreign governments invest in US markets.

Section 892 currently exempts foreign governments from US income tax on investment income from US stocks, bonds, securities, and bank deposits. This exemption doesn’t apply to income from “commercial activities” or from “controlled commercial entities” (CCEs).

Latest regulations broaden the definition of commercial activity beyond traditional trade or business standards. They also replace “effective practical control” with “effective control” when determining CCE status. Foreign entities can now fall under sovereign control through voting rights, contractual arrangements, or regulatory authority.

The rules bring a crucial change: debt acquisitions are now considered commercial activities by default unless they meet specific safe harbors or pass a facts-and-circumstances test. This change hits sovereign wealth funds hard, especially those active in private credit markets.

Critics of wealth tax say these changes make things needlessly complex. The new framework creates a situation where a single debt transaction could disqualify billions in otherwise exempt income.

Sovereign Wealth Funds Reassess US Investment Strategies

Tax regulation changes have prompted sovereign wealth funds (SWFs) to revamp their US investment strategies. Gulf-based funds invested a record AED 257.04 billion in the United States during 2025. This amount doubled their previous year’s allocation. These funds now prefer strategic direct investments over passive holdings.

The Public Investment Fund (PIF) spearheaded this movement by acquiring Electronic Arts for AED 106.49 billion. Mubadala followed with its AED 88.13 billion investment portfolio. SWFs backed global M&A deals worth AED 677.11 billion last year, which doubled the 2024 figures.

These sovereign investors want more than just returns – they seek operational control. Their attention has turned by a lot toward artificial intelligence and technology sectors. Qatar Investment Authority plans to invest AED 1,835.97 billion in US tech over the next decade.

These investments serve both financial and strategic goals that match national economic transformation plans like Saudi Arabia’s Vision 2030 and UAE’s industrial diversification initiatives. Strategic collaborations help Gulf states gain technological capabilities and manufacturing expertise they can apply to their domestic economies.

Regulatory changes now force many SWFs to reconsider how they structure their investment vehicles, despite their strong commitments.

Treasury Seeks Feedback Amid Investor Concerns

“The changes may discourage SWFs from participating in these structures, especially if they are subject to increased tax liabilities.” — AInvest Analysis, Investment analysis platform assessing behavioral impacts of tax reform on SWF participation

The US Treasury Department set February 13 as the deadline to receive public feedback on interim rules about sovereign wealth tax exemptions. Market anxiety surfaced initially, but Treasury Secretary Scott Bessent addressed these concerns on X: “[The US Treasury’s] recent notice of proposed rulemaking under §892 was issued in response to sovereign investors’ requests for greater clarity and certainty”.

Bessent’s message to stakeholders confirmed that the Treasury will “preserve established market practices and continue to support current and future sovereign wealth fund investment in the United States”. Lawyers sent out alerts while fund managers received many worried calls from investors who needed to review their strategies.

Investment experts recommend that sovereign funds should watch how details unfold during the consultation process. “Two things I would specifically look out for: one, when will the changes take effect? And two, will there be exceptions carved into the actual enacted policy?” an analyst pointed out. These exceptions might apply to specific funds, investor countries, or certain types of activities.

The Treasury officials’ earlier meetings with Singapore and Abu Dhabi’s representatives helped create principles for sovereign wealth fund investments. “The U.S. welcomes sovereign wealth fund investment and looks forward to continuing to work with these two countries and others,” the Treasury’s statement mentioned. The next few weeks are vital as regulations move toward completion, though nothing is final yet.

Recent IRS regulations signal a major change in how sovereign wealth funds handle their US investment strategies. These changes, while presented as clarifications, substantially expand the definition of “commercial activity” and redefine control parameters under Section 892. Gulf-based funds that poured record investments of AED 257.04 billion into American markets last year now face mounting uncertainty.

Market concerns prompted Treasury Secretary Bessent to reassure investors about the government’s ongoing support for sovereign wealth investment. These funds must now carefully review their exposure to potential tax vulnerabilities. The February 13 deadline for public feedback creates an opportunity for investors to shape these regulations’ final form.

These changes coincide with an unprecedented growth in strategic Gulf-US investment partnerships. Sovereign funds have grown from passive investors into active participants who seek operational influence, especially when you have technology sectors involved. Any policy changes that threaten this momentum could have broader geopolitical effects.

Treasury officials continue to work with sovereign investors from Singapore, Abu Dhabi, and other nations while the final effects remain unclear. The success of these tax modifications depends largely on upcoming clarifications – whether they will discourage investment or just require structural adjustments. Sovereign wealth funds must prepare for a changed investment environment and hope the final regulations maintain the investment-friendly conditions that have propelled record capital flows between Gulf states and American markets.