Overview
On June 16, 2025, the Senate Finance Committee released its proposed version of the “One Big Beautiful Bill Act” (the Senate Bill). The House of Representatives passed its version of the bill on May 22, 2025 (the House Draft). Both versions address a broad range of tax provisions, including the addition of a new Section 899 to the Internal Revenue Code entitled “Enforcement of Remedies against Unfair Foreign Taxes.” The Senate Draft is still subject to further amendment, but Republicans hope for a final bill to be signed by President Donald Trump by July 4.
The proposed Section 899 is viewed as a retaliatory provision aimed at countries that impose taxes that are deemed to be unfair and that adversely affect U.S. persons, including Pillar II global minimum taxes and digital services taxes. The provision would establish a new overriding regime materially impacting the U.S. taxation of U.S. investments by residents and governmental entities of foreign countries that impose “unfair foreign taxes,” as well as broaden the reach of the base erosion and anti-abuse tax (BEAT). The proposal has attracted significant attention globally. Reportedly, many European companies are pressing their governments to avoid the application of Section 899 to their residents through the adoption of exemptions for U.S. persons to the underlying local tax regimes at which Section 899 is aimed.
Unfair Foreign Taxes
Section 899 would apply to investors from a “discriminatory foreign country” (under the House Bill) or “offending foreign country” (under the Senate Draft), which is any foreign country with one or more “unfair foreign taxes” imposed directly and in certain cases indirectly on U.S. persons.
Under the House Bill, the term “unfair foreign tax” includes the following: (i) “undertaxed profits rules” (UTPRs, which broadly speaking are rules that implement the Pillar II global minimum tax of 15%), (ii) “digital services taxes” (DSTs, which are taxes on gross revenue from a variety of digital services), (iii) “diverted profits taxes” (DPTs, which are taxes imposed to address arrangements where profits of multinational enterprises are shifted to lower tax jurisdictions or where transactions lack genuine economic substance) and (iv) to the extent provided by the Treasury, an “extraterritorial tax,” a “discriminatory tax” (the House Bill enumerates four types of taxes that would be considered a discriminatory tax), or any other tax enacted with a public or stated purpose indicating that the tax will be economically borne, directly or indirectly, disproportionately by U.S. persons.
The Senate Draft is similar to the House Bill except the Senate Draft (i) characterizes UTPRs as extraterritorial taxes and DSTs as discriminatory taxes, (ii) does not explicitly include DPTs as an unfair foreign tax and (iii) only imposes the rate increases if the foreign country imposes an extraterritorial tax (the modified BEAT provisions discussed below would apply if a country has in place either an extraterritorial tax or a discriminatory tax).
The House Bill and the Senate Draft include categories of exceptions from what might otherwise constitute unfair foreign taxes (other than DSTs and UTPRs and, under the House Bill, DPTs), such as broad-based income taxes, value added taxes, property taxes and other taxes identified by Treasury.
An “unfair foreign tax” does not include any tax that does not apply to U.S. persons or any foreign corporation that is a controlled foreign corporation (CFC) more than 50% owned (directly or indirectly, by vote or value) by U.S. persons. Thus, if a country adopts legislation excluding U.S. persons or U.S.-controlled CFCs from the above taxes, then the Section 899 rate increases and the modified BEAT rules would not apply.
Under both the House Bill and the Senate Draft, Treasury will release a list of jurisdictions that are discriminatory/offending on a quarterly basis. Unless measures are taken by such countries, the list of offending countries may include Canada, the United Kingdom, most EU countries, India, Japan, Australia and many others.
Affected Investors
Section 899 would apply to a relatively broad range of non-U.S. investors who are “applicable persons.” An “applicable person” includes:
- any government (within the meaning of Section 892) of a discriminatory/offending foreign country;
- any individual (other than a United States citizen or resident) who is a resident of a discriminatory/offending foreign country;
- any foreign corporation that is either (i) a resident of a discriminatory/offending foreign country (other than a United States-owned foreign corporation within the meaning of Section 904(h)(6)) or (ii) not publicly held and as to which more than 50%of its equity interests (by vote or value) are directly or indirectly owned by applicable persons;
- any private foundation (within the meaning of Section 4948) created or organized in a discriminatory/offending foreign country;
- any trust a majority of whose beneficial interests are held by applicable persons; and
- any other entity identified by Treasury.
While partnerships are not specifically included, the partners of a partnership who are applicable persons presumably would fall within the reach of Section 899.
The Impact of Section 899 — Rate Increases
Section 899 would provide for increased tax rates on applicable persons, starting at a rate increase of 5 percentage points and increasing annually by an additional 5 percentage points, up to a maximum of 20 percentage points under the House Bill and 15 percentage points under the Senate Draft. The increased rates would apply to taxes on “fixed determinable, annual, or periodical income”, taxes imposed under the Foreign Investment in Real Property or Tax Act, corporate income taxes on income effectively connected to a U.S. trade or business, U.S. branch profits taxes, and taxes imposed on the investment income of private foundations. As noted above, the House Bill applies the increased tax rate in respect of any country with an unfair foreign tax, while the Senate Draft only applies the increased tax rate in respect of any country with an extraterritorial tax.
Most interest payable by U.S. issuers to foreign bondholders is exempt from U.S. withholding tax under the “portfolio interest exemption” (generally applicable to interest payable on debt in “registered form” issued to persons (other than banks lending in the ordinary course and certain related controlled foreign corporations) who own, or are treated as owning, less than 10% of the issuer (by vote in the case of a corporate issuer)). The Senate Draft explicitly provides that Section 899 does not override the portfolio interest exemption, while the House Bill is less clear in this regard. The Senate Draft also excludes bank deposit interest, interest-related dividends paid by regulated investment companies and certain other items from the scope of Section 899.
Where a treaty provides for a reduced rate of tax on an item of income, the Section 899 increases would apply to such reduced rates. The Senate Draft explicitly provides that Section 899 would also apply to income that benefits from an exemption or exception from tax or that is subject to a zero rate of tax. Thus, treaties would not provide complete protection from the scope of Section 899 but would provide some relief in that the starting base against which the increases would apply would be lower.
Section 899 would also override the benefits under Section 892, which generally exempts certain U.S.-source income of foreign governments and their controlled entities from U.S. taxation. This could particularly impact sovereign wealth funds from discriminatory/offending countries that are active in the U.S., such as Australia, Canada and the Netherlands.
Modified BEAT Rules
Additionally, Section 899 would significantly expand the scope of the BEAT with respect to non-publicly traded corporations if more than 50% of their stock (by vote or value) is owned by applicable persons. Under the Senate Draft, such expanded scope would also impact U.S. branches of non-publicly traded foreign corporations that are applicable persons. Under the House Bill, among other modifications, (i) the BEAT rate would be increased to 12.5% from 10%, (ii) certain capitalized amounts would be treated as deductions, and thus as base erosion payments, and (iii) the $500 million gross receipts test and the 3% base erosion percentage threshold, which limit the scope of the BEAT to large companies with significant base erosion payments, would be eliminated. The Senate Draft generally aligns with the House Bill, except the Senate Draft (i) retains the BEAT erosion percentage threshold (though at a lower 0.5% threshold rather than the current 2% threshold for certain banks and securities dealers) and (ii) increases the BEAT rate for all taxpayers subject to the tax (and not only those subject to the modified Section 899 provisions) from 10% to 14%.
Effective Date
Section 899 would be effective with respect to an applicable person on the first day of the first taxable year beginning on or after the latest of:
- 90 days after Section 899 is enacted into law, under the House Bill, and one year after Section 899 is enacted into law, under the Senate Draft;
- 180 days after a foreign country adopts the unfair foreign tax that causes such country to be a “discriminatory foreign country”/“offending foreign country”; and
- the first day the unfair foreign tax becomes effective.
Thus, under the Senate Draft, calendar year taxpayers would not be subject to Section 899 prior to January 1, 2027. The transition period is expected to allow relevant governmental bodies, including those in the EU, to further consider their domestic measures and engage in discussions with the U.S. government.
What’s Next?
U.S. companies and foreign investors who may be impacted by Section 899 should carefully consider their existing and contemplated investment structures and corresponding contractual rights and obligations. For example, U.S. issuers and non-U.S. lenders who rely on reduced withholding under an applicable treaty should consider the potential impact that Section 899 might have under their loan agreements and derivative contracts, issuers and fund sponsors should consider whether additional disclosure is required in connection with proposed changes and foreign investors should consider whether additional protections may be appropriate in connection with U.S. investments (including possibly gross ups, excused investments, withdrawal rights or otherwise). In addition to closely monitoring legislative developments on this front both within the U.S. and globally, potentially affected parties may consider changes to their structural and contractual cross-border arrangements (including additional flexibility to deal with future changes).
The legislation needs to pass in both the Senate and the House, and changes are being considered, but even if enacted in a revised form, it is expected to meaningfully impact market practices by a broad range of non-U.S. investors.
The HSF Kramer tax team continues to closely monitor related developments and is available to discuss potential interim measures as far as structures and contractual provisions that may best align with our clients’ goals.
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