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Foreign Investors & Section 899: 2025 U.S. Tax Outlook

Rödl & Partner Tax Matters Volume 2025-8, published June 4, 2025

On May 22, 2025, the U.S. House of Representatives approved the One Big Beautiful Bill Act. The bill includes tax updates affecting U.S. operating income and profit distributions to foreign investors. The Senate will now debate the bill and may propose changes. Passing of a final bill depends on negotiations between the Senate and the House of Representatives and could happen anytime between July 4, 2025, and December 31, 2025.

Introduction of Proposed Section 899 “Enforcement of Remedies Against Unfair Foreign Taxes”:

Under the proposed law, most residents—including individuals and corporations—of countries that impose discriminatory or extraterritorial taxes on U.S. persons would be subject to increased U.S. taxes on U.S.-sourced business and other income. Countries that have enacted a Digital Services Tax (DST) or an Undertaxed Profits Rule (UTPR) are deemed to impose such taxes. All EU member states have committed to implementing the OECD’s Pillar Two framework, which includes a UTPR, with most provisions taking effect by the end of 2025. Many non-EU jurisdictions are also on track to adopt these rules.

Proposed Section 899 focuses on certain “extraterritorial and discriminatory” taxes (collectively, “unfair foreign taxes”). The latest bill specifically includes DSTs, UTPRs, and certain other taxes as unfair foreign taxes. Therefore, Proposed Section 899 will apply to any country with one of those taxes already in effect or scheduled to take effect, unless such taxes are retracted or modified in a manner that exempts the country from its applicability.

Although the U.S. tax code already includes a generally comparable retaliatory provision, Section 891, because that law was enacted prior to current U.S. tax treaties it is questionable whether Section 891 overrides those tax treaties. This article, therefore, assumes foreign investors should be focused on Proposed Section 899.

Proposed Section 899 Increased Tax:

Would apply to income taxes, withholding taxes, and U.S. real estate transaction withholding.

Examples include tax or withholding on U.S. Effectively Connected Income (ECI) and U.S.-sourced Dividends, Interest, Royalties, Branch Profits Tax, and the 15% FIRPTA Withholding on U.S. Real Estate Dispositions.

Would increase the current tax or withholding rate by 5 percentage points on each annual anniversary of the Applicable Date. See timing notes below.
Would apply to any “applicable person”. An applicable person includes:

i. Any government of any “discriminating foreign country”;

ii. Any individual (other than a U.S. citizen or U.S. resident) who is a tax resident of a discriminatory foreign country;

iii. Any foreign corporation (with limited exceptions for certain U.S-owned foreign corporations) which is a tax resident of a discriminatory foreign country;

iv. Private foundations created or organized in a discriminatory foreign country

v. Any non-publicly traded foreign corporation if more than 50% of the voting power or value of the stock of such corporation is owned directly or indirectly by applicable persons;

vi. Foreign partnerships, branches, and any other entity identified as related to a discriminatory foreign country by the IRS.

Would repeat the 5 percentage point annual increase until the statutory (non-treaty) rate is increased by 20 percentage points.
Would override tax treaties, although the systematic increase starts with existing lower treaty rates.

For example, a royalty which currently has 0% withholding would increase to 5% the first year. Years 2-10 would increase 5 percentage points each year eventually going from 10% to 50% when the statutory rate of 30% would be exceeded by the maximum 20 percentage points. See example below.

Would also apply to the income tax on business profits of a U.S. branch or to the share of U.S. partnership income currently taxed at 21% for foreign corporate owners. The increase would be 5 percentage points each year for 4 years, eventually reaching 41%.
Would it Apply to Exempt Treaty Income? Whether treaty protection of business profits with no U.S. PE would be impacted is unclear. The proposed law includes continued exemption for Portfolio Interest, but without additional guidance it leaves open the possibility that the additional tax will apply to otherwise exempt treaty income. If not exempted, business profits without a U.S. branch and currently exempted under a treaty (i.e. 0% at the moment) could be taxed at 5% in the first year, plus subsequent increases to 20%.
Would it Apply to Management Services? Management services performed in Germany would not be U.S. source based on place of performance. Therefore, they should not be subject to increased withholding tax rates but may be impacted by the expanded application of the BEAT tax. See below.

Example:

Proposed Section 899 Timing:

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.
For countries with existing DST or Pillar 2 UTPs enacted and scheduled to go into effect (#2 above), depending on the date of passage of Proposed Section 899, the penalty rates would begin either on January 1, 2026 or on January 1, 2027. As currently written, January 1, 2026 would apply if the bill passes by October 3, 2025, which is the minimum 90 days after the effective date.
There is planned relief for U.S. withholding agents who may qualify for delayed implementation of withholding. However, the tax would still apply at the foreign owner level as described above and would need to be paid through estimated taxes and/or with the filing of a U.S. tax return.

Proposed Section 899 Expansion of BEAT Tax (so-called “Super BEAT”):

The Base Erosion and Anti-Abuse Tax (BEAT) is a minimum tax designed to prevent large multinational corporations from shifting profits out of the U.S. by imposing a 10% minimum tax on an adjusted tax base which ignores certain related party deductions like interest expense, royalties, and intragroup service payments.
BEAT typically applies to businesses with a 3-year average of U.S. gross receipts which exceeds $500M. Proposed Section 899 eliminates this threshold and applies BEAT to all U.S. entities which are >50% owned / controlled by residents of a foreign country that has enacted “unfair foreign taxes”.
Under Proposed Section 899 the BEAT minimum tax is increased to 12.5% and disallows certain otherwise favorable exemptions from the tax base calculation such as payments subject to withholding, payments for routine low-margin services, and payments made at cost.

Other Key Updates Applicable to All U.S. Businesses - Foreign or U.S. Owned:

Bonus depreciation: 100% expensing (bonus depreciation) for qualified property would apply to property placed in service from Jan. 19, 2025, through Dec. 31, 2029.
Sec. 179 expensing: In certain circumstances, Sec. 179 may be preferred over bonus depreciation. For 2025, the maximum Sec. 179 expense would be increased to $2.5 million, with a phaseout threshold of $4 million, both indexed for inflation after 2025.
Research and experimental expenditures: Would allow full expensing of domestic R&D from Jan 1, 2025, through 2029.
Business interest limitation (Sec 163(j)): For 2025–2029, the limitation is calculated using earnings before interest, taxes, depreciation and amortization (EBITDA), rather than EBIT.
Section 199A: Some individual foreign owners of transparent entities may benefit from the current Section 199A 20% deduction. That deduction would be increased to 23% after 2025.
Clean energy and IRS credits: The bill would terminate or phase out several clean energy credits from the Inflation Reduction Act (IRA).

Conclusion:

If enacted, Proposed Section 899 would mark a significant shift in U.S. tax policy, introducing escalating tax rates on foreign investors from countries deemed to impose unfair taxes. The bill’s potential to override tax treaties and expand BEAT could create substantial compliance challenges for multinational corporations and foreign individuals deriving U.S. source income that is not effectively connected to a U.S. trade or business. As the Senate debates the bill, foreign investors should closely monitor developments and consider strategic tax planning to mitigate potential risks. One relatively simple strategy for investors with beneficial treaty withholding rates would be to accelerate dividend or other payments potentially subject to the new proposed Section 899 tax.

This publication contains general information and is not intended to be comprehensive or to provide legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. Consult your advisors. The fact that you have received this publication does not create an accountant-client or advisory relationship between you and Rödl Langford de Kock LLP or any of its subsidiaries or affiliates. If you wish to hire Rödl Langford de Kock LLP or any of its subsidiaries or affiliates you will need to speak with one of our accountants and enter into a written agreement establishing the scope of engagement. We have made reasonable efforts to ensure the accuracy of the information contained in this publication, however this cannot be guaranteed. Neither Rödl Langford de Kock LLP nor any of its subsidiaries nor any affiliate thereof or other related entity shall have any liability to any person or entity which relies on the information contained in this publication, including, but not limited to, incidental or consequential damages arising from errors or omissions. Any such reliance is solely at user’s risk. Any tax and/or accounting information contained herein is based on our understanding of the facts and assumptions we have been asked to make for the purpose of this publication alone, and on the tax laws and/or accounting principles in effect as of the date of this advice. No assurance is given that the conclusions would be the same if the facts or assumptions change, or are not as we understand them, or that the tax laws and/or accounting principles will not change subsequent to the issuance of these conclusions. In addition, we do not undertake any continuing obligation to advise on future changes in the tax laws and/or accounting principles, or of the impact on the conclusions herein. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Rödl Langford de Kock LP.

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