Proposed IRC Section 899: U.S. Strikes Back at Discriminatory Foreign Taxes

On May 22, 2025, the U.S. House of Representatives narrowly passed the “One Big Beautiful Bill Act”, a $3.8 trillion tax reconciliation package. Tucked inside is the proposed Section 899, a powerful new provision targeting what the U.S. considers discriminatory foreign tax practices.

While the legislation now moves to the Senate—where changes are likely—the introduction of Section 899 represents a significant shift in U.S. international tax strategy.

What Is Proposed IRC Section 899?

Section 899 would authorize the Treasury to impose surtaxes on individuals and entities from countries implementing taxes perceived as unfair or extraterritorial toward U.S. businesses.

Targeted foreign taxes include:

·       Digital Services Taxes (DSTs)

·       Diverted Profits Taxes (DPTs)

·       Undertaxed Profits Rules (UTPRs) under OECD’s Pillar Two

·       Other taxes Treasury designates as discriminatory

Importantly, Section 899 is designed not simply as a penalty but as a negotiating tool — encouraging foreign governments to repeal these taxes before penalties take effect.

Who Would Be Affected?

The surtax would apply to “applicable persons,” including:

·       Foreign governments and their sovereign wealth funds (even those normally exempt under Section 892)

·       Foreign individuals and corporations from designated countries

·       Trusts with majority beneficial ownership by applicable persons

·       Private foundations organized in discriminatory jurisdictions

·       Non-U.S. corporations more than 50% owned by applicable persons (using Section 958(a))

Foreign corporations majority-owned by U.S. persons are excluded.

Once “tainted,” entities must have zero ties to discriminatory countries for a full year to remove the designation.

When Is a Country “Discriminatory”?

A country earns this label by imposing:

·       DSTs, DPTs, UTPRs, or

·       Other taxes deemed unfair by Treasury

Treasury will publish a quarterly list of designated jurisdictions. Likely impacted regions: Europe, Asia-Pacific (Australia, India, South Korea, Japan), Canada, parts of the Middle East.

How the Surtax Works

The surtax applies to U.S.-source income:

• FDAP Income (dividends, interest, rents, royalties): Currently subject to a 30% withholding tax, this could rise to a maximum of 50% after the surtax phases in.

• FIRPTA Real Estate Gains: Gains from the sale of U.S. real estate (or interests in real estate investment trusts or partnerships) are currently subject to a 15% withholding tax, which could increase to 35% with the surtax.

• Effectively Connected Income (ECI): Active business profits earned by non-U.S. corporations in the United States would be taxed at higher U.S. corporate rates under the surtax regime.

• Branch Profits Tax: Non-U.S. companies operating through U.S. branches currently face a 30% tax on repatriated profits, which could climb to 50%.

• Private Foundation Investment Income: Investment income earned by non-U.S. private foundations would see U.S. tax rates rise from 30% up to 50%.

Non-U.S. persons’ capital gains on public stock remain unaffected.

Impact on BEAT

Non-U.S. corporations subject to the Base Erosion and Anti-Abuse Tax (BEAT) will face:

·       A fixed 12.5% BEAT rate

·       No 3% base erosion threshold — any deductible payment triggers BEAT

·       Capitalized amounts treated as deductions — reducing flexibility

Tax Treaties and Exemptions

While Section 899 doesn’t explicitly override U.S. tax treaties, treaty-reduced withholding rates could still face the surtax increases.

Portfolio Interest Exemption (PIE) appears to be protected — but further clarification is needed to ensure zero-rate exemptions are not subject to the surtax.

Traps for the Unwary

·       Residency Missteps: Simply incorporating in Cayman/Luxembourg may not avoid taint if ownership is tied to discriminatory countries.

·       Ultimate Beneficial Ownership: Must be documented carefully.

·       Withholding Agents: Will need updated systems and compliance documentation.

Immediate Planning Steps

Action Items:

·       Monitor U.S. Legislation: Stay updated on Congressional negotiations.

·       Monitor Foreign Taxes: Watch for countries repealing discriminatory measures.

·       Clarify Effective Dates: Track jurisdiction-specific triggers.

·       Review Corporate Structures: Ensure U.S. majority ownership where possible.

·       Reassess Income Sourcing: Can revenue streams be restructured as foreign-sourced?

·       Model Financial Impacts: Evaluate after-tax returns and cash flow.

·       Prepare Withholding Agents: Update documentation, systems, gross-up clauses.

Conclusion

Section 899 introduces a diplomatic tax penalty designed to encourage foreign governments to scrap discriminatory taxes. Whether it becomes a significant tax burden or a largely avoided measure will depend on global diplomatic negotiations.

However, companies, private investors, and family offices should assume the risk is real — and consider reviewing their structures to identify potential Section 899 traps.

For customized tax advice, contact Christine Alexis Concepción at caconcepcion@concepcionlaw.com

The One Big, Beautiful Bill: What the 2025 Tax Reform Means for Businesses, Employees, and Investors

Overview of the 2025 Tax Reform

The U.S. House of Representatives has passed the “One Big, Beautiful Bill”, a sweeping 2025 tax reform package that redefines the U.S. tax landscape. From new business deductions to expanded health savings account (HSA) eligibility and revised international tax enforcement, this bill has major implications for businesses, employees, and investors.

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International Tax Policy Updates

1. TCJA Provisions Made Permanent: The bill locks in lower international tax rates: GILTI (10.5%), FDII (13.125%), and BEAT (10%).

2. New Section 899: Penalties for Discriminatory Foreign TaxesImposes escalating taxes on foreign entities from “discriminatory countries,” aligning with U.S. efforts to resist the OECD global minimum tax.

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Estate & Gift Tax Changes

$15M Unified Credit Exemption Made Permanent

The estate, gift, and GST tax exemption increases to $15 million per individual, indexed for inflation. This encourages long-term estate planning and wealth transfer.

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Business Tax Reform Highlights

1. R&D Expense Deduction Flexibility
   Taxpayers can now choose how to deduct domestic research and development expenses, with expanded credits for software and engineering work. Startups benefit from refundable R&D credits—even without taxable income.

2. Bonus Depreciation & Section 179 Expansion
   Reinstates 100% bonus depreciation through 2030 and increases the Section 179 deduction limit to $2.5 million, supporting capital investment in equipment and property.

3. 199A QBI Deduction Boost

   The Qualified Business Income deduction is made permanent and increased to 23%, with clarified income eligibility rules.

4. More Generous Business Interest Deductions
   Changes to adjusted taxable income (ATI) calculations allow for greater interest expense deductions by excluding depreciation and amortization.

5. Excess Business Losses Made Permanent
   Codifies the excess business loss limitation, now with broader applicability and indexed thresholds.

6. Qualified Opportunity Zones (QOZ) Revamped
   A new QOZ program begins in 2027, emphasizing rural investment, with new compliance and reporting mandates.

7. Expanded Low-Income Housing Tax Credits
   The bill increases credit allocations through 2029 and enhances access for rural and Indian areas.

8. Rural Loan Interest Exemption
   Banks may exclude 25% of interest income on agricultural or aquaculture real estate loans from taxable income.

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Employee Benefits & ACA Changes

1. HSA Expansion
   Health Savings Accounts (HSAs) see broadened eligibility, including Medicare recipients and FSA spouses. Contribution limits double for individuals earning under $75,000.

2. Employee Retention Credit (ERC) Restrictions
   ERC claims filed after January 31, 2024 are denied. Statute of limitations for audits is extended to 6 years.

3. ACA Exchange Updates
   ACA marketplaces must verify 75% of new enrollees and conduct shorter open enrollment periods. Employers may see higher plan participation.

4. DACA Exclusion from ACA
   DACA recipients lose eligibility for ACA coverage and subsidies, potentially shifting coverage burdens to employers.

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Conclusion: What Comes Next?

The Senate will now review the bill. If passed, the One Big, Beautiful Bill will reshape tax policy for the next decade. Businesses, estate planners, and benefits administrators should prepare now.

For customized tax advice, contact Christine Alexis Concepción at caconcepcion@concepcionlaw.com