The One Big Beautiful Bill Act became law on July 4, 2025. RSM's Washington National Tax team continues to provide focused tax insights to help you move forward with confidence.
The One Big Beautiful Bill Act became law on July 4, 2025. RSM's Washington National Tax team continues to provide focused tax insights to help you move forward with confidence.
This article, originally published May 21, has been updated to reflect that Republican congressional leaders on June 26 announced they would remove the section 899 proposal from the broad taxation-and-spending package after the secretary of the U.S. Department of the Treasury announced a tax agreement with G7 countries.
Republicans in the U.S. House of Representatives on May 22 passed legislation that would add a new section of the tax code that targets inbound investment by individuals, entities and governments from countries that have in force any of the following:
Enactment could have significant repercussions on inbound investment from impacted countries. U.S. investment funds would likely be compelled to consider structural adaptations for foreign investors in affected countries.
However, Republican congressional leaders on June 26 announced they would remove the section 899 proposal from the broad taxation-and-spending package after the secretary of the U.S. Department of the Treasury announced a tax agreement with G7 countries
Republicans in the U.S. House of Representatives on May 22, 2025, passed the One Big Beautiful Bill Act, which would add a new section to the tax code that would target inbound investment by individuals, entities and governments from countries that have in force any of the following:
The new code section 899—titled Enforcement of Remedies Against Unfair Foreign Taxes—would increase the rate of tax on income classified as FDAP (including interest, dividends, and royalties), ECI (income that is treated as effectively connected to a U.S. trade or business, including gains from U.S. real property), and investment income earned by private foundations. The U.S. tax rate would increase by 5% every year the foreign “discriminatory” tax is in effect, with a maximum increase of 20% above the statutory rate.
The House-approved legislation would generally allow section 899 to override the lower rates in U.S. tax treaties. However, it is not clear whether the rate increase would also apply where the income is exempt under a treaty (e.g., where the treaty provides an exemption from ECI in the absence of a permanent establishment or provides an exemption for interest, dividends, royalties, and “other income”).
The draft legislation also prevents the section 892 exemption for income earned by foreign governments from applying to countries with these types of “discriminatory” taxes in effect. This may create an incentive for these governments (including sovereign wealth funds) to invest in other countries or to modify the nature of their U.S. investments to qualify for an alternative U.S. exemption that turns off the U.S. taxing rights on the income (e.g., the ECI trading safe harbors in section 864(b) or the section 897(l) U.S. real property exemption for foreign pensions).
The draft legislation would also modify BEAT (base erosion and anti-abuse tax) for U.S. corporations that are more than 50% owned (directly or indirectly) by persons from these countries by treating the gross receipts and the base-eroding percentage tests as having been met. It would also eliminate the exceptions for deductible payments subject to full withholding and payments qualifying for the service cost method. This will likely cause BEAT to play a more significant role in tax considerations for U.S. corporations with affiliates from these countries.
Section 899 is designed to put pressure on foreign countries to repeal these types of taxes. However, one can expect that not all impacted countries will respond immediately to revise their domestic laws in response. Consequently, the provision may have significant repercussions on foreign investment.
Taxpayers that are resident in a treaty jurisdiction may challenge section 899 tax in court on the basis that it violates the nondiscrimination article in an applicable tax treaty. However, because the statute overrides existing treaty obligations, foreign countries that do not seek to repeal their DSTs or UTPRs may decide to terminate their treaty with the U.S.
If section 899 is enacted, U.S. investment funds may need to develop a new parallel structure for foreign investors from countries impacted by this provision and may want to consider forming holding structures in countries without these types of taxes to mitigate the impact.
With respect to ECI earned by individuals, the rate increase would only apply to ECI from the sale of U.S. real property interests. It would not apply to ECI from a U.S. trade or business. This may create an incentive for inbound investors from these countries to avoid using foreign blocker corporations to prevent an application of the higher rates on income from a U.S. trade or business.
Proposed section 899 would generally apply to tax years beginning 90 days after the date of enactment for taxpayers resident in a country with a UTPR, DST or DPT in force on the date section 899 is enacted. Therefore, if the provision is enacted this year, it could begin impacting taxpayers starting in 2026. Taxpayers resident in countries that have enacted a UTPR, DST, or DPT that does not enter into force until after the start of 2026 may not need to apply section 899 until 2027.
While the U.S. Senate worked to finalize its version of the taxation-and-spending bill, Treasury Secretary Scott Bessent on June 26 announced a tax agreement with G7 countries, about which he did not disclose details.
As a result of that agreement, he recommended that Congress remove the proposed section 899 from its legislation. Republican congressional leaders subsequently announced they would heed that recommendation.
Republican leaders are aiming to enact the taxation-and-spending bill by July Fourth.
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