ARTICLE | May 23, 2025

A sweeping new tax proposal—Section 899 of the Internal Revenue Code—is making waves across international business and tax circles. Included as part of the 2025 US tax legislation (One Big Beautiful Bill Act) as a revenue raiser to help offset US domestic tax cuts, this part of the proposed tax law seeks to impose significantly higher U.S. tax rates on foreign individuals, companies, and even governments tied to jurisdictions considered to implement “unfair foreign taxes.”  Section 899 is designed to pressure foreign governments to repeal or modify taxes that the US views as unfair.  

The US House of Representatives narrowly passed the tax bill containing Section 899 on May 22, but it is important to note that the legislation must still be passed by the Senate (where the tax proposals are subject to change) and receive presidential approval before it can become law.  July 4, 2025 is the current target date for passage of the overall US tax bill.  

While still in the proposal stage, Section 899 has far-reaching implications for cross-border transactions and global tax planning strategies. At Larson Gross, we’re closely monitoring developments to help our clients prepare for what could become a defining shift in international tax policy.  

WHAT’S IN THE PROPOSAL?  

 The legislation targets jurisdictions the U.S. believes engage in discriminatory tax practices—most notably digital services taxes (DSTs), undertaxed profits rules (UTPRs), and other provisions perceived to penalize U.S. businesses.  It is important to note that Canada has enacted both a DST and a UTPR, and would be a targeted country. If enacted, it would result in tiered, annual tax rate hikes for affected non-U.S. persons (i.e. noncitizens of the US resident in those foreign countries, or foreign business entities) on certain US sourced income payments, up to a maximum of 20 percentage points over current rates. The new law would apply to tax years beginning 90 days after legislation enactment for countries with “unfair taxes” in force as of that date.

KEY PROVISIONS INCLUDE:  

Steep Tax Rate Increases

Foreign individuals and entities from “discriminatory foreign countries” would see their U.S. tax rates rise on US sourced income, as follows:

Initial increase of 5 percentage points, with an annual phase-in reaching 20 percentage points above standard rates within four years.

Broad Scope of Income Affected

The proposal casts a wide net, impacting various categories of U.S.-source income, including:

Passive income such as dividends, interest, royalties, and rents.

Income effectively connected with a U.S. trade or business (ECI) operated by a foreign company, including gains from the sale of US real estate by individuals.

Branch profits of foreign corporations.

Treaty Override Authority 

Perhaps most controversially, Section 899 would apply “notwithstanding any treaty obligation.” This suggests it could override current U.S. tax treaties, undermining long-standing agreements that reduce or eliminate tax on certain income streams. The end result could be increased taxes on income such as interest, dividends, and royalties.  It is not yet clear whether US sourced business income of a foreign person or corporation not connected with an office, place of management, or establishment in the US would be subject to this tax.

STRATEGIC IMPLICATIONS FOR CROSS-BORDER PLANNING  

 For businesses and high-net-worth individuals engaged in cross-border activities, this proposal is a call to action. International tax exposure could rise sharply—not only in tax cost but also in compliance burden and treaty uncertainty.  

Key takeaways:   

Multinational enterprises may need to reevaluate the structure and cross border income flows of U.S. inbound investments if the proposed legislation passes in its current form.  

Private investors with global interests must reassess tax treaty reliance.  

Withholding agents (including banks and any US person or company paying income to foreigners) will need updated systems and protocols to remain compliant.  

LOOKING AHEAD: PREPARE FOR POSSIBILITIES  

Though the legislation is still progressing through the political process, its intent is clear: to retaliate against foreign tax regimes viewed as targeting U.S. companies, and put pressure on foreign countries to repeal those types of foreign tax laws. If enacted, Section 899 would significantly alter the framework of U.S. international tax—raising rates, redefining treaty protections, and increasing compliance burdens.