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Analysis & trends
Spotlight on Proposed U.S. Tax Code Section 899: “Enforcement of Remedies Against Unfair Foreign Taxes”
Congressional House Republicans, with White House support, proposed a new Section 899 of the U.S. Internal Revenue Code of 1986 (the “Code“) entitled “Enforcement of Remedies Against Unfair Foreign Taxes” (“Section 899“). Section 899 would facilitate increased U.S. taxation of non-U.S. companies, citizens, and governments from countries designated by the U.S. Treasury Secretary as “discriminatory foreign countries” as result of imposing taxes deemed unfair to U.S. interests. The tax rate would increase by 5% annually up to a 15% ultimate surtax above the relevant statutory rate for certain U.S. income items. In addition, Section 899 appears designed to override beneficial tax treaty rates that may otherwise apply.
Section 899 is part of the “One Big Beautiful Bill Act“[1] (the “Big Act“) which, having been voted through the House in May 2025, has now been reviewed by the Senate. The Senate version of the legislation was released on June 16 and largely maintains the House bill, subject to a delay and a slightly lower maximum tax rate.[2] The Senate’s version will need to be agreed by the House before being sent to the President for signature, anticipated on or around July 4, 2025. However, to date Section 899 does not appear to be the focus of much Congressional debate or controversy relative to other proposals in the Big Act, arguably making it more likely it could become law “as is” when the Big Act is signed by the President.
Section 899 is the product of two resurrected pieces of legislation originally introduced in 2023, the “Defending American Jobs and Investment Act” (H.R. 591) and the “Unfair Tax Prevention Act” (H.R. 2423). These two bills were reintroduced in January 2025 and March 2025, respectively, with the common goal of discouraging foreign countries from damaging U.S. interests by adopting taxes deemed by the United States to be extraterritorial or discriminatory toward U.S. interests – in other words, deemed to be unfair taxes. H.R. 591 and H.R. 2423 eventually were modified, combined, and incorporated into the Big Act in the form of this newly proposed Section 899. While Section 899 is estimated to raise approximately $116 billion in revenue over a 10-year period, its main purpose is to pressure foreign countries to change tax regimes the United States finds unfair.
Among the foreign taxes considered de facto unfair is the OECD’s Pillar 2 undertaxed profits rule (the “UTPR“) and its top-up tax feature, an enforcement measure allowing a country to levy additional tax on a multinational company if its group parent and any localities apply a less than 15% tax rate. The 15% global minimum tax is the signature achievement of the global Pillar 2 initiative.[3] More than 140 countries have committed to Pillar 2, and more than thirty countries plan to adopt the UPTR by end of 2025. This includes the member countries of the European Union which issued a directive in 2022 requiring member states to transpose Pillar 2 into their domestic laws.[4] In France, these rules were included in domestic law through the annual finance law for 2024.[5] The controversial Pillar 2 Tax is largely recognized as the engine driving the various U.S. “unfair foreign tax” initiatives which have now culminated in proposed Section 899. In addition to the UPTR, digital services taxes (“DST”) and diverted profits taxes (“DPT”) are similarly considered de facto unfair.
DEFINITIONS AND SCOPE
Under Section 899, increased U.S. federal income tax rates would apply to the U.S.-source income earned by certain “Applicable Persons” from discriminatory countries imposing an “Unfair Foreign Tax.”
Applicable Persons is a broad term including:
- foreign individuals who are tax residents of a discriminatory foreign country – not including U.S. citizens or residents;
- foreign corporations which are tax residents of a discriminatory foreign country;
- any foreign corporation that is not publicly traded if more than 50% of the vote or value is owned by Applicable Persons (“Majority Owned Foreign Corporation“);[6]
- private foundations created or organized in a discriminatory foreign country;
- trusts for which the majority of the beneficial interests are held by Applicable Persons;
- foreign partnerships, branches and any other entity identified with respect to a discriminatory foreign country by the U.S. Treasury Secretary; and
- any foreign government of a discriminatory foreign country, understood to include sovereign wealth funds.
The Majority Owned Foreign Corporation concept significantly broadens the scope of Section 899 relative to earlier iterations since a foreign corporation resident in a country that is not targeted by Section 899 may nonetheless be impacted to the extent its owners are from a discriminatory foreign country. In addition, the inclusion of foreign governments themselves is another expansion of the scope. On the other hand, foreign corporations that are at least 50% owned by vote or value by U.S. persons are generally excluded.
Section 899 defines an Unfair Tax as a UPTR, DST, DPT and any other tax deemed by the U.S. Treasury Secretary to be discriminatory, extraterritorial, or designed to be economically borne disproportionately by U.S. persons.[7]
A “Discriminatory Foreign Country” is any country that has an Unfair Foreign Tax. Under Section 899, the U.S. Treasury Secretary would have the power to designate and update a list of Discriminatory Foreign Countries quarterly and would have wide discretion to implement Section 899. The U.S. Treasury Secretary would be empowered to assess not only the substance of foreign tax regimes, but also whether a country is applying its U.S. tax treaty in “good faith.” Effectively, any country imposing a UTPR, DST or DPT is already viewed by the United States as undermining the spirit or the letter of its U.S. tax treaty, perhaps providing a rationale to the United States to similarly disregard U.S. obligations under the treaty.
INCREASED TAX RATES
The additional tax would start at 5 percentage points and increase annually to a maximum of 20 percentage points (as per the House version) or 15 percentage points (as per the Senate version)) above the relevant statutory rate. For example, if the dividend statutory withholding rate is normally 30%, the rate may be increased by 5 percentage points each year up to a maximum withholding tax rate of 50% (i.e., 30% + 20 percentage points) per the House version or 45% (i.e., 30% + 15 percentage points) per the Senate version. The increased rate would apply to specified U.S. tax regimes including:
- The 30% tax on “fixed or determinable annual or periodical gains, profits, and income” (“FDAP” income) of non-resident foreign individuals and foreign corporations.
- The graduated individual or corporate income tax imposed on income effectively connected with a U.S. trade or business (‘ECI”), but – for individuals – only on ECI that is gain with respect to the Foreign Investment in Real Property Tax Act (“FIRPTA“).
- The 30% branch profits tax.
- The 4% tax imposed on US-source gross investment income of foreign private foundations.
- The U.S. withholding tax imposed under Code Sections 1441(a), 1442(a), 1445 (a) and (e).
The additional tax would apply to a range of U.S. passive investment income earned by foreign investors such as dividends, interest, royalties, and rents. However, portfolio interest would remain exempt from U.S. withholding tax under Section 899, an important exception. As a result, foreign investors from Discriminatory Foreign Countries would likely feel the most Section 899 impact on U.S. dividends, because gain from a foreign investor’s sale of U.S. corporate shares (the kind of passive income most likely to be earned through a private equity fund) generally is not subject to U.S. tax in the hands of a foreign investor. (Gain is not classified as U.S. source income under U.S. tax rules and is therefore not subject to Section 899).[8]
TAX TREATY OVERRIDE
Crucially, Section 899 appears to effectively override U.S. tax treaty exemptions and rate reductions. If a different tax rate applies to an item of income pursuant to a U.S. treaty obligation (i.e., a treaty rate rather than the normally applicable statutory rate), Section 899 would apply to increase the rate by 5% each year that the foreign taxpayer’s country remains designated as a Discriminatory Foreign Country. The cap on the rate increase is defined such that the rate cannot exceed the relevant statutory rate (determined without regard to any treaty rate that may apply) by more than 20 percentage points (per the House version) or 15 percentage points (per the Senate version). In other words, if a tax treaty permits a reduced 15% withholding tax rate on U.S. dividends in lieu of the normally applicable 30% withholding tax rate, it appears that Section 899 would function to increase the 15% treaty rate by 5 percentage points in every year that Section 899 applies, up to a cap equal to 30% (the statutory rate) plus either the addition Section 899 20 percentage point tax under the House version or the additional Section 899 15 percentage point tax under the Senate version, for a potential maximum tax of 50% (House version) or 45% (Senate version).
Such a blanket tax treaty override would be disruptive to cross-border transactions and would – on the face of it – appear to violate nondiscrimination clauses of U.S. tax treaties. Section 899 would have the potential to render moot all manner of effective and fair tax planning built around U.S. tax treaty eligibility and benefits, as well as eroding the faith and reliance placed by U.S. and foreign taxpayers on the security of a U.S. tax treaty. It will be important to review the language of the final bill, and any subsequent guidance that may be issued, but a plain reading of the statute today is rather clear on this point.
Among other impacts, the treaty override would create specific withholding tax disruption for many existing cross-border loan agreements involving foreign lenders and U.S. borrowers. Foreign bank lenders generally are not eligible for the portfolio interest exemption with respect to U.S. source interest received from a U.S. borrower. Such lenders typically rely on a U.S. tax treaty to benefit from a 0% reduced withholding rate. If Section 899 were to apply with the treaty override mechanic, the withholding rate could, over time (at a 5 percentage point increase per year) increase up to the statutory rate of 30% and beyond to 50% or 45% (per the House or Senate version respectively). Change of law indemnity clauses in loan agreements would likely put the initial burden on U.S. borrowers, who cover change of law tax risk in standard tax indemnity clauses. Ultimately loan agreements would need to price and allocate Section 899 withholding tax risk as a Day One issue.
SECTION 899 AND THE BEAT
Section 899 also would expand application of the existing Base Erosion and Anti-Abuse Tax (BEAT) provisions to Majority Owned Foreign Corporations[9] including their U.S. subsidiaries, without regard to the income and base erosion thresholds that normally apply as a gate to the BEAT.[10] (Currently, the BEAT only applies to corporations that meet a $500 million average annual gross receipt test and a 3% base erosion percentage test). In addition, the BEAT rate would increase from 10% to 12.5% and various exceptions to base erosion payments that normally apply under the BEAT framework to relax its impact would be called off, rendering the BEAT more severe.
SECTION 899 AND FOREIGN GOVERNMENTS – SECTION 892
Section 899 would deny the benefits of Section 892 the governments of Discriminatory Foreign Countries. Section 892 normally exempts foreign governments and certain entities under government control, such as sovereign wealth funds, from U.S. tax on U.S. source investment income provided the income is not derived from commercial activities. Under Section 899, governments would lose this exemption rendering their U.S. source investment income taxable. This approach would be a significant expansion of Section 899 relative to earlier versions of the bill which did not target government exemptions. Affected sovereign wealth funds and other foreign government-controlled entities could experience significant U.S. tax liability as a result.
EFFECTIVE DATE
Under the House version, Section 899 would take effect on the first day of the calendar year following the latest of the following:
- 90 days after its enactment of Section 899;
- 180 days after the enactment of an Unfair Foreign Tax by the Discriminatory Foreign Country (if enacted more than 90 days after Section 899 is enacted); or
- the initial effective date of the Unfair Foreign Tax (if that date is more than 180 days after the tax is enacted by the Discriminatory Foreign Country.
Section 899 would effectively be self-executing with respect to countries with existing DSTs, DPTs or the UTPR, including France and the U.K., among others. The earliest the increased Section 899 tax would apply is January 1, 2026.
The Senate version would vary and delay the timing. Increases in the rates of taxes other than withholding taxes would apply as of the “applicable date” for a Discriminatory Foreign Country, which would be on the first day of the calendar year following the latest of the following:
- 1 year after the enactment of Section 899;
- 180 days after the enactment of an Unfair Foreign Tax by the Discriminatory Foreign Country (if enacted more than 90 days after Section 899 is enacted); or
- the initial effective date of the Unfair Foreign Tax (if that date is more than 180 days after the tax is enacted by the Discriminatory Foreign Country.
Increases in the withholding rate would apply for each calendar year beginning in the period the person is an Applicable Person, so new withholding rates should go into effect on January 1 following the “applicable date” determined above.
Section 899 still would effectively be self-executing with respect to countries with existing DSTs, DPTs or the UTPR. However, the earliest the increased Section 899 tax would apply under the Senate version is January 1, 2027 (vis a vis January 1, 2026 under the House version).
The House and Senate versions likely will be further negotiated and reconciled and thus the final language will have to be monitored for changes.
FINAL THOUGHTS
Section 899 is clearly designed to provide the United States with significant leverage to compel foreign countries to abandon Unfair Foreign Taxes in order to avoid the impact of Section 899. The desired effect is already in play, evidenced by various foreign business and industry coalitions petitioning foreign governments to change any Unfair Foreign Tax regime to accommodate U.S. demands and avoid a potential application of Section 899.
Areas of uncertainty remain, including the interaction of Section 899 with existing tax treaty obligations and with certain statutory tax exemptions, as well as the practical mechanics required for withholding agents and others with respect to implementing Section 899. The fact that Section 899 would effectively self-execute with respect to countries with existing Unfair Foreign Taxes means there would likely be some period of confusion and uncertainty before guidance is issued. However, Section 899 of the House version provides a withholding agent safe harbor with respect to payments to Applicable Persons from Discriminatory Foreign Countries that have been so designated for less than 90 days, and for withholding agents that fail to withhold before January 1, 2027, provided the agent can demonstrate best efforts to comply. (It is unclear if the Senate version intends to retain a similar safe harbor with a January 1, 2028 date).
More recently, some have raised concerns that Section 899’s inclusion in the Big Act may not comport with the certain required Senate procedures, namely the so-called “Byrd Rule” which governs what kind of provisions may be included in a budget reconciliation bill, which is the bill procedure framework being used for the Big Act. Among the issues cited by some legal scholars and congressional procedure experts, is whether Section 899 is actually under the jurisdiction of a different Congressional Committee (i.e., the Senate Foreign Relations Committee) due to is impact on U.S. tax treaty obligations, and not just the Finance Committee, and whether its primary goal of influencing foreign government behavior, as opposed to raising revenue, violates the budgetary impact requirements under the Byrd Rule. However, to date the Senate has not raise a Byrd Rule challenge to Section 899 during its review, suggesting that the provision meets the reconciliation procedural rules.
The impact of Section 899 cannot be under-estimated. Its deployment would place any Discriminatory Foreign Country’s citizens, residents and businesses, and its government, at significant economic disadvantage with respect to accessing the world’s largest capital markets. As a result, it seems likely that the mere threat of Section 899 may prompt a foreign country with an Unfair Foreign Tax to negotiate with the United States or modify tax policy as needed to avoid its impact. As Rep. Ron Estes (R-Kansas) stated when he sponsored the original Unfair Tax Protection Act:
For those individuals or governments that failed to heed our advice and warnings over the past 24 months, I will restate that it is not too late to turn back now and abandon discriminatory taxes on United States businesses. If your country has already adopted extraterritorial or discriminatory taxes, pass legislation to remove them. President Trump and congressional Republicans will do whatever it takes to protect tax sovereignty here in the U.S. and across the globe. The days of using U.S. companies for passive income are over.