On May 22, 2025, the U.S. House of Representatives passed the "One Big Beautiful Bill" (OBBB), formally known as H.R. 1, which notably includes a critical provision: Section 899, titled "Enforcement of Remedies Against Unfair Foreign Taxes." This section introduces potentially significant impacts on foreign investors engaged in transactions involving U.S.-sourced income. 

Overview of Section 899 

Section 899 establishes a retaliatory surtax aimed at jurisdictions that impose taxes deemed discriminatory or predominantly targeted at U.S. persons and entities. This surtax incrementally increases from 5% in the first year up to a maximum of 20% after four years. It is added on top of existing U.S. statutory withholding tax rates, which means the overall withholding tax could rise significantly, potentially reaching as high as 50% in certain circumstances. 

Determining "Discriminatory Jurisdictions" 

Under Section 899, a jurisdiction is labeled discriminatory if it implements tax measures considered by the U.S. to unfairly target or economically disadvantage U.S. businesses. Specific measures triggering this classification include: 

• OECD Pillar Two Measures: Particularly the Under-Taxed Payment Rule (UTPR). 

• Digital Services Taxes (DST): Taxes targeting revenues from digital services provided by predominantly U.S.-based companies. 

• Diverted Profits Taxes (DPT): Taxes targeting profits perceived to have been artificially shifted from high-tax to low-tax jurisdictions. 

• Other extraterritorial or discriminatory taxes: Any additional tax rules identified by the U.S. Treasury as disproportionately affecting U.S. entities. 

A quarterly updated list of these jurisdictions will be maintained by the U.S. Treasury, likely including significant global economic regions such as Europe, Canada, the Asia-Pacific region, and selected Middle Eastern countries. 

Impact on Foreign Investors 

Direct and Indirect Implications 

Foreign investors from designated discriminatory jurisdictions will directly face the incremental withholding tax. Even entities exempt from the surtax, such as non-U.S. corporations majority-owned by U.S. persons (the "Majority U.S. Owner Exception"), could experience indirect implications. Specifically, minority interests in joint ventures or subsidiaries within discriminatory jurisdictions would indirectly bear increased tax burdens, reducing distributable income. 

Who Qualifies as an “Applicable Person”? 

• Applicable persons include: 

• Individuals, corporations, partnerships and trusts tax-resident in a designated “discriminatory” jurisdiction; 

• Non-U.S. corporations more than 50% owned (by vote or value) by residents of such jurisdictions; 

• Any other entity or arrangement that Treasury may specify by regulation.  

• Majority-U.S. Owner Exception 
  A non-U.S. entity that is majority-owned by U.S. persons escapes treatment as an applicable person and thus avoids direct surtax exposure. However, this exemption does not immunize the entity’s minority-interest joint ventures or subsidiaries: any U.S. source income received at that lower tier will bear the surtax, effectively reducing the upstream cash flow.  

Types of Income Affected 

The surtax primarily affects key categories of U.S.-source income: 

• Fixed, Determinable, Annual, or Periodic Income (FDAPI): Including dividends, interest, royalties, and rents, with potential withholding rates escalating significantly. 

• Real Estate Investment Income (FIRPTA-related): Gains and distributions from U.S. real estate investments could also see withholding rates rise significantly. 

• U.S. Branch Profits Tax and Business Income: Income generated by non-U.S. corporations through U.S. branches or effectively connected trade or business income faces higher withholding. 

Tax Treaty and Structural Considerations 

The surtax under Section 899 explicitly overrides tax treaties, meaning even treaty-based reduced withholding rates could be substantially increased. Investors should thus reassess their investment structures, income streams, and jurisdictions carefully, potentially restructuring or recharacterizing income streams to mitigate impact. 

Special Considerations for Tax-Exempt Entities 

Although entities such as pension funds and sovereign investors typically enjoy exempt or reduced U.S. withholding rates, Section 899 could indirectly impact their investment returns, particularly if investments are routed through structures in discriminatory jurisdictions. Such indirect effects must be closely evaluated to preserve the net return on investments. 

Strategic Recommendations for Investors 

Given the significant potential impacts of Section 899, foreign investors should: 

• Regularly monitor updates to the list of discriminatory jurisdictions. 

• Review and potentially restructure investment vehicles and jurisdictional exposures. 

• Consider engaging in dialogues with local tax authorities and U.S. regulatory bodies for clarifications or possible mitigation. 

Conclusion 

Section 899 of the OBBB represents a notable shift in U.S. tax policy, aimed explicitly at counteracting international tax measures perceived as targeting U.S. interests unfairly. As the U.S. Senate deliberates and potentially modifies the bill, ongoing vigilance and proactive tax planning will be essential for foreign investors to manage effectively and minimize the impact of these new provisions.