US House Passes Bill Targeting 'Unfair Foreign Taxes'

Overview of Proposed Section 899

On May 22, 2025, the US House of Representatives passed a bill with amendments to the Internal Revenue Code, including the addition of Proposed Section 899 titled “Enforcement of Remedies Against Unfair Foreign Taxes” (“Proposed Section 899”). Proposed Section 899 combines, with modifications, two tax bills previously proposed on January 21, 2025.¹ We provided a summary and analysis of these previously proposed bills in a prior Legal Update, “Congress Proposes a ‘Big Stick’ to Target Discriminatory Tax Measures.” The bill will now advance for the US Senate’s consideration.

Proposed Section 899 targets corporations, individuals, and governments of countries that impose discriminatory or extraterritorial taxes on US citizens or corporations by subjecting them to increased US tax rates. Specifically, and as described in greater detail below, Proposed Section 899 would increase the US tax rates imposed on “applicable persons,” that is, persons who are tax residents in, or are controlled by a tax resident in, a “discriminatory foreign country.”

Definitions of Discriminatory Foreign Country and Unfair Foreign Taxes

Proposed Section 899 defines a “discriminatory foreign country” as any foreign country that imposes one or more “unfair foreign taxes.”  An “unfair foreign tax” includes an undertaxed profits rule (UTPR), digital services tax,² diverted profits tax, and, to the extent provided by the Secretary of the Treasury (“Treasury”), an extraterritorial tax, discriminatory tax, or any other tax enacted with a public or stated purpose that the tax be economically borne, directly or indirectly, disproportionately by US persons. However, an unfair foreign tax does not include any tax that does not apply to any US person or to any foreign corporation that is a controlled foreign corporation more than 50% owned (by vote or value) directly or indirectly by US persons. 

Notably, under this definition, countries that have adopted a UTPR as part of their Pillar 2 legislation or that impose “digital services taxes” (a term not further defined in the proposed legislation) would automatically be considered discriminatory foreign countries, without further action required from Treasury.

An “extraterritorial tax” is a tax imposed by a foreign country on a corporation that is determined by reference to the income or profits of any other person connected to such corporation through any chain of ownership, other than by direct or indirect ownership by the corporation itself.

A “discriminatory tax” is a tax imposed by a foreign country that (i) applies more than incidentally to income that would not be considered sourced within, or effectively connected with a trade or business in, the foreign country applying the relevant US tax rules, (ii) is imposed on a base other than net income and does not permit recovery of costs and expenses, (iii) is exclusively or predominantly applicable to nonresidents, or (iv) is not treated as an income tax under the tax laws of such foreign country or is otherwise treated by the foreign country as being outside the scope of double tax treaties.

Proposed Section 899 provides several exceptions to the definition of extraterritorial or discriminatory taxes, including––

• Income taxes generally applicable to tax residents of such foreign country;
• Income taxes imposed on nonresidents attributable to their business in such foreign country;
• Income taxes imposed on tax residents of such foreign country by reference to the income of a corporate subsidiary;
• Withholding or other gross basis taxes imposed on interest, dividends, royalties, rents and similar income, other than withholding taxes on services performed by persons other than individuals;
• Value added, goods and services, sales, or other similar consumption taxes;
• Personal property, estate, gift, or other similar taxes;
• Taxes imposed on per-unit or per-transaction basis (rather than ad valorem);
• Taxes that would only be considered unfair foreign taxes due to consolidation or loss sharing rules that generally apply only to tax residents of the foreign country; and
• Any other taxes identified by the Secretary.

Definition of Applicable Persons

Proposed Section 899 defines “applicable person” as––

• Any government of any discriminatory foreign country;
• Any individual who is a tax resident of a discriminatory foreign country (other than a US citizen or resident);
• Any foreign corporation that is a tax resident of a discriminatory foreign country (other than a US-owned foreign corporation);
• Any private foundation created or organized in a discriminatory foreign country;
• Any foreign corporation, other than a publicly held corporation, more than 50% owned (by vote or value) directly or indirectly by applicable persons;³
• Any trust where the majority of the beneficial interests are held (directly or indirectly) by applicable persons; and
• Any foreign partnerships, branches, or entities identified by the Secretary with respect to a discriminatory foreign country.

Increased Tax Rates

The tax rate increases under Proposed Section 899 apply to five categories of income. For each of the applicable tax rate increases, the starting point is the reduced rate available under an applicable treaty, but the rate increase is capped at 20 percentage points above the applicable statutory rate without regard to any treaty reduced rate (e.g., even if an applicable person is entitled to a 5% rate on dividend income, the annual increase would be capped at 50% (30% rate applicable under the Internal Revenue Code plus 20%) and not 25% (5% plus 20%). The rate increase would be five percentage points for each year a foreign country is considered a discriminatory foreign country. The five categories are:

1) US-Source Income That Is Not Effectively Connected to a US Business

To the extent that the income is not “effectively connected income” (“ECI”), non-resident alien individuals and foreign corporations are taxed at 30% on fixed or determinable annual or periodic (“FDAP”) income.

Further, a 30% withholding tax is imposed on such US-source FDAP income paid to nonresident alien individuals, foreign partnerships, and foreign corporations.

2) ECI

Non-resident individuals are taxed at the graduated rates on their ECI. In the case of non-resident individuals, the increased rates under Proposed Section 899 will only apply to Foreign Investment in Real Property Tax Act (“FIRPTA”) gains.
Foreign corporations are taxed at a rate of 21% on their ECI.

3) Branch Profits

ECI deemed repatriated by a US branch of a foreign corporation (i.e., “dividend equivalent amounts”) is subject to branch profits tax at a rate of 30%.

4) Income From Dispositions of US Real Property Interests (“USRPI”)

Dispositions of USRPI by foreign persons are subject to tax and withholding under the FIRPTA rules. The FIRPTA rules generally treat the foreign person’s gain or loss from the disposition of a USRPI as ECI and impose a 15% withholding tax to be deducted and remitted by the purchaser or transferee of the USRPI.

5) Gross Investment Income

Income that foreign private foundations receive from US source interest, dividends, rents, payments with respect to securities loans, and royalties, but not including any unrelated business taxable income (“UBTI”), is taxed at a rate of 4%.

Tax Treaties

As further clarified in the Joint Committee on Taxation description of Proposed Section 899, the provision would override tax treaties to the extent it would result in tax rates exceeding the maximum rates permitted under an applicable tax treaty.⁴ 

However, as explained above, treaty-reduced rates are used as the baseline for any increases. For example, if a treaty reduces a rate of tax on US source dividends to 5%, then the initial tax liability under Proposed Section 899 would increase from 5% to 10%, rather than from 30% to 35%. This approach differs from the predecessor bill, which would have applied the rate increase by reference to the domestic tax rates without regard to any treaty rates. A tax treaty may provide a complete exemption from tax, such as under the interest, royalty, dividend or business profits provision. Proposed Section 899 is not clear whether (a) such exemption would continue to apply or (b) the exemption would be viewed as a zero rate of tax to which a tax rate increase would apply.⁵

Foreign Governments

Proposed Section 899 would override the statutory exemption for foreign governments under Section 892(a), which generally exempts foreign governments and instrumentalities for income received from investments in certain US securities or interest on deposits in U.S banks. If a foreign government is an “applicable person,” the Section 892 tax exemption would not apply, and the foreign government would be taxed in the same manner as other non-US persons.

Modified Base Erosion and Anti-Abuse Tax

Proposed Section 899 introduces a modification to the Base Erosion and Anti-Abuse Tax (BEAT) for certain US corporations (or US branches of foreign corporations) owned by applicable persons. The BEAT is a minimum tax on corporations that make significant deductible payments to related non-US entities. The BEAT only applies to corporations that meet the minimum thresholds of $500 million in average annual gross receipts and a 3% “base erosion percentage.”

To the extent that the BEAT liability is greater than the taxpayer’s regular US federal income tax liability, the taxpayer must pay BEAT. Very generally, the BEAT liability is calculated by adding back to the taxpayer’s US federal taxable income the taxpayer’s tax deductions allowed for amounts paid or accrued to related non-US entities (“base erosion payments”). The result, referred to as “modified taxable income,” is then multiplied by an applicable tax rate. The applicable tax rate is 10% for tax years through 2025, and 12.5% thereafter, but the bill introduced by the House Ways and Means Committee would make permanent the current BEAT rate of 10%. 

Proposed Section 899 would modify certain specific aspects of the BEAT for corporations, other than publicly traded corporations, that are more than 50% owned (by vote or value) by an “applicable person.”  First, the corporation would be subject to the BEAT without regard to the otherwise applicable minimum gross receipts and base erosion percentage thresholds. Second, the applicable BEAT rate for the corporations subject to the special Proposed Section 899 rule would be 12.5% instead of 10%. Third, payments made by the corporation that would normally escape characterization as base erosion payments because they are capitalized and not deducted would nonetheless be considered base erosion payments. Finally, the exception for payments for services eligible for the use of the “services cost method” would not apply to these corporations.

Safe Harbor for Withholding Taxes

Proposed Section 899 provides certain safe harbor provisions related to withholding taxes. The first safe harbor is that the increase in withholding taxes would not apply to an “applicable person” unless their country of residence is listed by the Secretary as a discriminatory foreign country. For payments to certain trusts and foreign corporations that are majority-owned, directly or indirectly, by “applicable persons,” the increase in withholding taxes would not apply until their country of residence is listed as such for at least 90 days. The second safe harbor is that, to the extent withholding agents can demonstrate that they made best efforts to comply with any increased withholding tax rates under Proposed Section 899, the withholding agent would not be subject to penalties or interest for failures to withhold before January 1, 2027.

Domestic Law Exemptions

Based on our reading of Proposed Section 899, applicable persons should still benefit from exemptions on withholding or other taxes not explicitly addressed by Proposed Section 899. Important domestic law exemptions that do not appear impacted by the current drafting of the legislation include:

• The application of Section 501(c) to non-US entities that are entitled to such status;
• The portfolio interest exemption under Sections 871(h) and 881(c);
• The bank deposit interest exception under Sections 871(i) and 881(d);
• The exemption for interest-related dividends paid by a regulated investment company under Sections 871(k) and 881(e); and
• The exemption from FIRPTA for qualified foreign pension funds under Section 897(l).

Impact on Foreign Pension Funds

Many non-US pension funds invest substantial portions of their portfolios in the United States. As noted above, the current draft of the bill would not appear to affect the application of Section 897(l), the exemption from FIRPTA for qualified foreign pension funds. Many of these pension funds do, however, benefit from 0-rate withholding provisions in tax treaties, even for portfolio dividends. Proposed Section 899 would impact this, such that if a pension fund is resident in a discriminatory foreign country, then it could be subject to a 5% withholding rate on dividends.⁶

In addition, many non-US pension funds hold certain investments in the United States in branch form and pay tax on the resulting ECI. Many of those foreign pension funds take the position that they are foreign complex trusts for US federal income tax purposes and are therefore taxed as nonresident alien individuals for purposes of their ECI. In such cases, it would appear that the impact of Proposed Section 899 on their ECI taxation may be limited to FIRPTA-connected gains, and for those with qualified foreign pension fund status, the FIRPTA exemption under Section 897(l) could still apply, even if the foreign pension fund was resident in a Section 899 impacted jurisdiction.⁷

Timing and Other Considerations

Proposed Section 899 would take effect on the first day of the first calendar year following the later of three dates: (1) 90 days after its date of enactment, (2) 180 days after the date of enactment of an unfair foreign tax that causes a country to be considered a discriminatory foreign country, or (3) the first date that the unfair foreign tax begins to apply. The increased rates would cease to apply on the last date on which the discriminatory foreign country imposes an unfair foreign tax. 

Thus, if Proposed Section 899 were enacted in its current form before October 2025, residents of countries that already have a UTPR, digital services tax or diverted profits tax in effect, could become subject to the increased rates as of January 1, 2026. However, as explained above, withholding agents still would not be required to impose additional withholding taxes on payments to applicable persons until the Secretary publishes the list of “discriminatory foreign countries.” 

Further, Proposed Section 899 gives Treasury the authority to enact anti-avoidance rules.

Looking Ahead  

The proposed tax bill has been passed by the US House of Representatives. It will need to be passed by the US Senate and signed by President Trump before it takes effect. Significant changes may be made during the Senate review process. In particular, Proposed Section 899 will be subject to the parliamentary rules governing whether a provision may be included in reconciliation legislation. Under the reconciliation rules, for a policy to be included in a reconciliation bill, the committee of jurisdiction over the policy must receive an instruction in the budget resolution.⁸  As such, there may be questions about whether the provisions of the proposal that override tax treaties could be included in the US Senate’s version of the tax bill.

If you have any questions or concerns about Proposed Section 899 or its potential impact on your business, please contact us.

¹ Defending American Jobs and Investment Act, H.R. 591, 119th Cong. (1st Sess. 2025); Unfair Tax Prevention Act, H.R. 2423, 119th Cong. (1st Sess. 2025).

² Many countries have implemented taxes on gross revenue derived from digital goods, services, or activities, where the digital provider is not physically doing business in the country of the payor. The differences in scope, structure, and mechanics of these taxes across jurisdictions may create uncertainties as to what is and what is not a digital services tax.

³ Under this definition, common investment vehicles, such as offshore feeder funds, could be treated as applicable persons if 50% or more of its equity is owned by investors that are applicable persons from a variety of different countries, even if no single investor that is an applicable person owns 50% or more of its equity.

⁴ Joint Committee on Taxation, Description of the Tax Provisions of the Chairman’s Amendment in the Nature of a Substitute to the Budget Reconciliation Legislative Recommendations Related to Tax (JCX-21-25), at 363, May 12, 2025.

⁵ For example, taxpayers relying on tax treaties in respect of US activities conducted by an independent agent should consider whether Proposed Section 899 could impact this outcome.

⁶ In the case of interest income, however, it may be possible that another domestic exemption, such as the portfolio interest exception, is available to the pension fund.

⁷ For those foreign pensions that take the position that they are corporations for US tax purposes, they would appear to be within the purview of Proposed Section 899 on their ECI, although Section 897(l) could still be available with respect to their FIRPTA-connected gains that are not otherwise ECI.

⁸ S. Cong. Res. 7, 119th Cong., Sec. 2002 (1st Sess. 2025).