Proposed Tax Increases on Foreign Investors in “Unfair” Jurisdictions: Are You Exposed?

At a glance

• The main takeaway: Proposed Section 899, part of the One Big Beautiful Bill Act, could significantly affect the U.S. tax liability of foreign investors located in jurisdictions that impose “unfair foreign taxes.”
• The impact on your business: As proposed, Section 899 increases multiple categories of U.S. taxes imposed on foreign persons, including withholding on U.S. source interest, dividends, rents, and royalties (FDAP income), effectively connected income (ECI), Foreign Investment in Real Property Tax Act (FIRPTA) income, and the U.S. branch profits tax.
• Next steps: Foreign investors should monitor developments, understand their potential exposure, and plan accordingly. Restructuring opportunities can help reduce exposure.

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A proposed change within the “One Big Beautiful Bill,” currently under debate in the Senate, aims to address the issue of “unfair foreign taxes” imposed on certain jurisdictions, potentially reshaping the United States tax liability for foreign investors. Navigating the ever-evolving tax landscape can be complex, making it crucial for businesses to understand their exposure to mitigate risks.

In this article, we explore the proposed Section 899, who will be impacted, how the tax works, and how business can prepare.

What is Proposed Section 899 and Who is Affected?

Section 899, as proposed, would increase taxes on foreign individuals who invest in the U.S. Residents of foreign countries that impose “unfair foreign taxes” would be subject to increases in certain U.S. tax rates. Such deemed “unfair foreign taxes” include digital services taxes (DSTs), undertaxed profit rule (UTPR) taxes, and diverted profits taxes (DPTs). In general, DSTs cause a digital tax presence rather than a physical tax presence, resulting in tax on revenue sourced in those jurisdictions. UTPRs are designed to ensure multinational company earnings are subject to a minimum level of taxation, and DPTs target profit shifting from the economic jurisdiction. In addition, an “unfair foreign tax” can also be designated by the Secretary of the Treasury in certain instances.

Based on our understanding of the legislation in its proposed form, countries that either have or are expected to have a DST, UTPR, or DPT include the following:

Canada	United Kingdom	Brazil	South Korea
Japan	Australia	New Zealand	South Africa
Much of the European Union	Norway	Turkey	United Arab Emirates
Vietnam	Thailand	Malaysia	Indonesia

“Applicable persons” of countries with “unfair foreign taxes” are affected, as well as foreign and domestic corporations that are controlled by residents of such countries. Applicable persons include:

• The governments of discriminatory foreign countries, individual and corporate tax residents of a discriminatory foreign country (with exception for U.S. citizens and residents and U.S.-controlled foreign corporations),
• Foreign corporations controlled by vote or value by residents in a discriminatory foreign country (if not public),
• Private foundations, and
• Trusts where the majority of beneficial interests are held, directly or indirectly, by applicable persons.

U.S. corporations are not included in the definition, but one controlled by a resident in a discriminatory country would be subject to the special base erosion and anti-abuse tax (BEAT) rules (see below).

How the Tax Works

Under proposed Section 899, tax increases escalate with respect to income taxes, withholding taxes, and dispositions and distributions implicating FIRPTA. In general, in each case, applicable tax rates increase by 5 percentage points per year, up to 20%. For example, U.S.-source FDAP payments would be subject to this increased rate of withholding on both statutory and treaty-reduced rates, effectively overriding existing income tax treaties without explicitly doing so. In a worst-case scenario, a foreign resident could be subject to a 50% rate of withholding tax on FDAP income.

BEAT is proposed to have significant changes and expands its scope. Any corporation, whether domestic or foreign, that is controlled by an applicable person would be subject to BEAT irrespective of the current $500 million gross receipts and 3% base erosion percentage thresholds. Further, the BEAT tax rate would increase from 10% to 12.5 %.

Section 899 Effective Date

If a country has an “unfair foreign tax” in effect, the non-withholding tax rate increases begin in calendar years beginning 90 days after the date of enactment of the proposed Section 899. The withholding tax rate increases would apply to each calendar year beginning during the period that the person is an “applicable person.” Withholding agents are provided a safe harbor before January 1, 2027, which provides for no penalty and interest imposition for failures to withhold any amounts if the withholding agent demonstrates to the satisfaction of the Secretary that the agent made best efforts to comply with the increased rates for withholding in a timely manner.

How Businesses Can Prepare

Steps to consider if the law takes effect:

Distribution: U.S. companies with undistributed earnings and profits (E&P) should evaluate accelerating distributions.

Debt restructuring: Consider interest-bearing debt if able to benefit from the portfolio interest exemption. Proposed Section 899 does not apply to income that is exempt from taxation under the Internal Revenue Code.

Treaty review: Assess whether current treaty positions are vulnerable to an effective override.

Model impact: Simulate scenarios under the new rules to quantify risk exposure.

Transaction timing: Consider adjusting timelines for major transactions.

The bottom line

Since the One Big Beautiful Bill is still with the Senate, it is difficult to predict the ultimate effects of the proposed Section 899 and the impacts on foreign investment in the U.S. There are no revenue or size thresholds—companies of all sizes may be affected. Affected taxpayers should consider planning and restructuring options. Finally, foreign investors and U.S. funds with foreign investors should monitor developments while the proposed Section 899 is considered in the Senate and begin to assess their possible exposure. 

To learn more about how the proposed regulations impact you, schedule a consultation with one of Aprio’s knowledgeable International Tax advisors.