The U.S. House of Representatives passed the One Big Beautiful Bill Act (the “Act”) on May 22, 2025. The Act includes proposed Section 899 to the Internal Revenue Code, which if adopted in final legislation would increase U.S. taxes on payments to certain non-U.S. investors.
Proposed Section 899 would designate certain foreign countries as “discriminatory foreign countries”—those with “unfair foreign taxes” that discriminate, as described by the House Budget Committee, against American businesses compared to similar non-U.S. businesses. This framework would include countries with digital services taxes, diverted profits taxes, or undertaxed profits rules. Canada and the United Kingdom, for example, fall into this category.
For tax residents of discriminatory foreign countries, proposed Section 899 would impose higher U.S. withholding taxes beginning as early as January 1, 2026, depending on when the Act is adopted. These rates would increase annually in 5% increments, capped at a total withholding rate of 50%. The increased rates would generally apply to any of the following that are resident or organized in a discriminatory foreign country: foreign individuals, foreign governments, private foundations, foreign corporations and trusts (unless owned predominantly by U.S. investors), and certain partnerships and branches as identified by the U.S. Treasury.
Proposed Section 899, if applicable, would override reduced rates of U.S. withholding permitted by tax treaties and the tax treatment foreign governments benefit from under Section 892. Although the Act does not address the exemption for portfolio interest, the House Budget Committee report states that Section 899 would not apply to such interest.
Section 899 could trigger gross-up obligations for U.S. borrowers to cover non-U.S. lenders’ increased costs resulting from the change in law. These obligations could be substantial. For example, assuming Section 899 becomes effective in 2026, a day-one 10% rate of withholding under a tax treaty applicable to a five-year loan made in July 2025 could rise to 30% by maturity. Loans providing for deferral of interest or payment-in-kind could be subject to even greater cumulative amounts of withholding.
The Act is now under consideration in the U.S. Senate. In the interim, parties to cross-border financings should assess the potential for higher tax costs in the event Section 899 is included in final legislation and subject to any adjustments in market practice that may ensue. Contact any of the authors or your usual MoFo point of contact with questions about this client alert.