U.S. Senate Draft Retains Section 899 “Revenge Tax” in One Big Beautiful Bill Act

On June 16, 2025, the U.S. Senate Finance Committee released draft legislative text for inclusion in the One Big Beautiful Bill Act (H.R. 1), modifying various tax provisions of the version of the bill that passed the House on May 22, 2025. Among other items, the Senate text retains with modifications the House bill’s Section 899 provisions, which would impose increased taxes on certain foreign persons in countries with “unfair foreign taxes” and domestic corporations majority owned by such persons. If enacted, these provisions could adversely affect residents of many of the United States’ key trading partners, entities in or through which they invest, and U.S. withholding agents.

Introduction

The Senate bill’s Section 899 provisions broadly follow the House provisions, with modifications. Under the Senate bill, a new Section 899 would be added to the Internal Revenue Code of 1986, as amended (the Code), generally imposing three sets of tax increases.

• First, Section 899 generally would increase the U.S. federal income (and withholding) tax rates on the income of foreign persons in jurisdictions that have adopted extraterritorial taxes by 5% per year, up to a 15% maximum increase (vs. 20% in the House bill), unless and until the jurisdiction eliminates the extraterritorial tax or revises it so as not to apply to U.S. persons and their foreign subsidiaries.
  
  • Income that is otherwise exempt from tax under statutory exemptions or income tax treaty provisions would nonetheless be subject to the increases as if it were subject to a 0% rate of tax, with certain exceptions.
  • Importantly, in a clarification of the House bill, the Senate bill confirms that Section 899 would not override existing exemptions for “portfolio interest,” bank deposit interest, and certain interest-related dividends paid by regulated investment companies.
• Second, Section 899 would separately render inapplicable the exemption under Section 892(a)(1) of the Code for foreign governments (including sovereign wealth funds) of offending foreign countries.

• Third, Section 899 would modify the application of the base erosion and anti-abuse tax (BEAT) to (i) a domestic corporation (other than a publicly held corporation) that is majority owned by foreign persons in jurisdictions that have adopted extraterritorial taxes or discriminatory taxes and (ii) a U.S. branch of a foreign corporation in such a jurisdiction.
  
  • These “Super BEAT” provisions would, among other changes, eliminate the $500 million gross receipts threshold for BEAT applicability, reduce the base erosion percentage threshold to 0.5%, and add back certain tax credits when determining BEAT liability.
  • Unlike the House bill, the Senate bill’s Super BEAT provisions would not increase the generally applicable BEAT tax rate, but that rate is otherwise increased to 14% under the Senate bill (vs. 10% in the House bill).

Under the Senate bill, these provisions would apply beginning January 1, 2027, a delay of generally one year from the House bill.

Offending Foreign Countries

Section 899 targets “offending foreign countries.” In general, an “offending foreign country” is a foreign country that has an extraterritorial tax or a discriminatory tax that, in either case, applies to U.S. persons or foreign corporations that are majority U.S.-owned (an “unfair foreign tax”).

An extraterritorial tax is generally any tax imposed on a corporation that is determined by reference to any income or profits received by any person by reason of such person being connected to such corporation through any chain of ownership, determined without regard to the ownership interests of any individual, and other than by reason of such corporation having a direct or indirect ownership interest in such person. Various exceptions apply. In all events, however, any tax imposed under an undertaxed profits rule (UTPR) is treated as an extraterritorial tax.

A discriminatory tax generally includes any digital services tax (DST) and any other tax meeting specified criteria that is identified by the Treasury Secretary.

It is our understanding that the following countries have in effect a UTPR or DST:

• UTPR: Australia, the European Union countries (other than Estonia, Latvia, Lithuania, Malta, and Slovakia), Indonesia, Japan, New Zealand, South Korea, Turkey, and the United Kingdom
• DST: Austria, Canada, France, Italy, Spain, Turkey, and the United Kingdom

However, additional countries have announced intentions to evaluate or implement these taxes, and the scope of taxes which may constitute DSTs, in particular, is not entirely clear. The Treasury Secretary would be required to maintain a list of all offending foreign jurisdictions, including information as to which of such countries has only unfair foreign taxes which are extraterritorial taxes.

Increased Taxes on Applicable Persons of Foreign Countries With Extraterritorial Taxes

The first set of tax increases noted above applies only to an “applicable person” with respect to a foreign country that is an offending foreign country by reason of such country having an unfair foreign tax which is an extraterritorial tax (e.g., a UTPR). Because discriminatory taxes do not trigger this provision, residents of a country that has enacted only a DST (or other discriminatory tax) generally would not be subject to these tax increases.

An “applicable person” includes, unless the Treasury Secretary provides otherwise, any:

• foreign government of an offending foreign country,
• individual (other than a U.S. citizen or resident) who is a tax resident of an offending foreign country,
• foreign corporation (other than those that are majority U.S.-owned) that is a tax resident of an offending foreign country,
• private foundation that is created or organized in an offending foreign country,
• foreign corporation (other than a publicly held corporation) more than 50% owned, directly or indirectly, by vote or value, by “applicable persons,”
• trust the majority of the beneficial interests of which are directly or indirectly held by applicable persons, or
• other entity (including branches) identified with respect to an offending foreign country by the Treasury Secretary.

Entities treated for U.S. federal income tax purposes as foreign partnerships or foreign branches would therefore not constitute applicable persons unless the Treasury Secretary otherwise provides, which was not clear under the House bill.

The increases in tax rates (5% per year, 15% max) generally would apply to the following taxes imposed on foreign persons:

• the 30% withholding tax rate applicable to U.S. source interest (subject to the exceptions noted below), dividends, and other fixed or determinable annual or periodical gains, profits, and income that are not effectively connected with the conduct of a trade or business within the United States (FDAP);
• the graduated income tax rates applicable to income that is effectively connected with the conduct of a trade or business within the United States (ECI) (limited, in the case of individuals, to gains treated as such under the Foreign Investment in Real Property Tax Act (FIRPTA) provisions applicable to investments in U.S. real property interests and U.S. real property holding corporations);
• the 30% branch profits tax applicable to earnings considered repatriated from U.S. branches of foreign corporations; and
• the 4% excise tax on U.S. source gross investment income of foreign private foundations.

If a statutory or treaty-based exemption or exception would eliminate a tax imposed above, then the increased tax rates effectively apply from a baseline of 0% (except as described below for foreign governments). In a helpful clarification of the House bill, however, the Senate bill explicitly provides that interest eligible for the existing exceptions for portfolio interest, bank deposits, or interest-related dividends from regulated investment companies will not be subject to the tax increases. In addition, it appears the bill would not impose the increased taxes on FIRPTA gains of individuals, or to the branch profits tax with respect to a corporation, to the extent a domestic or treaty-based exemption or exception would otherwise apply.

Increased Withholding by U.S. Withholding Agents

Section 899 would similarly increase by 5% per year (max 15%) the amount of tax that U.S. and other persons must withhold from amounts payable to applicable persons that are subject to the increased tax rates described above. This generally applies to payments of FDAP and to payments with respect to dispositions of (or distributions of, or distributions attributable to gain from the sale of) U.S. real property interests. As noted above, interest eligible for the existing exceptions for portfolio interest, bank deposits, or interest-related dividends from regulated investment companies would not be subject to increased withholding.

The withholding obligation does not apply until the offending foreign country with respect to which the payee is an applicable person is included on a list of offending foreign countries published by the Treasury Secretary (and an additional 90 days thereafter, in the case of a non-publicly held foreign corporation or trust that is an applicable person by reason of its ownership under the rules described above). Further, no penalties or interest will be imposed with respect to withholding failures before January 1, 2027, if the withholding agent demonstrates to the satisfaction of the Treasury Secretary that it made “best efforts” to comply in a timely manner.

Loss of Section 892 Exemption for Foreign Governments of Offending Foreign Countries

Section 899 would separately render inapplicable the exemption under Section 892(a)(1) of the Code for foreign governments (including sovereign wealth funds) of offending foreign countries. Accordingly, such foreign governments would be subject to tax at rates applicable to foreign corporations on amounts otherwise exempt from tax under Section 892(a)(1) (e.g., 30% for U.S. source dividends, 21% on FIRPTA gains). If the foreign country is an offending foreign country by reason of such country having an unfair foreign tax which is an extraterritorial tax, the foreign government would additionally be subject to the increased taxes described above.

Imposition of Super BEAT on Certain U.S. Corporations and Branches

The Super BEAT provisions generally apply to domestic corporations that are majority owned, directly or indirectly, by vote or value, by applicable persons and to U.S. branches of foreign corporations that are applicable persons. However, publicly held corporations are not subject to the Super BEAT.

In addition to expanding the applicability of the BEAT to additional taxpayers by eliminating the gross receipts threshold and reducing to 0.5% the base erosion percentage threshold, the Super BEAT provisions could effectively deny the benefit of some or all tax credits. In general, a taxpayer’s BEAT liability is equal to the excess of an alternative tax calculation (i.e., 14% multiplied by modified taxable income) over the taxpayer’s regular tax liability, after reduction for any tax credits. However, the research credit and up to 80% of the low-income housing credit, renewable electricity production credit, and energy credit are added back to regular tax liability, reducing the potential excess. Under the Super BEAT, none of these add-backs would be permitted, with the result that any benefit of such credits may be offset in whole or in part by increases in BEAT liability.

The Super BEAT provisions would also generally treat as base eroding tax benefits (which are added back in computing modified taxable income) deductions attributable to base eroding payments that are subject to U.S. withholding taxes, certain at-cost payments for services, or that are subject to a high rate of foreign tax (which the Senate bill would otherwise exclude for BEAT purposes). Finally, amounts that would otherwise be base eroding payments but for the fact that the taxpayer capitalizes (rather than deducts) the amount are nonetheless treated as base eroding payments under the Super BEAT provisions, except for the purchase price of depreciable or amortizable property or inventory.

The Super BEAT provisions would apply not sooner than a taxpayer’s first taxable year beginning one year after the date Section 899 is enacted. For calendar year taxpayers, they would therefore apply no sooner than January 1, 2027.

Insights

Administrative Flexibility. Section 899 notably puts considerable power in the hands of the Treasury Secretary, who has the authority to expand or provide exceptions to the scope of “applicable persons,” to designate additional taxes as extraterritorial taxes or discriminatory taxes, to determine when offending foreign countries are added to or removed from the list that triggers withholding tax obligations on withholding agents, and to provide for other adjustments to the application of Section 899 to prevent the avoidance of its purposes. This could allow the executive branch significant control over the jurisdictions and taxpayers subject to its provisions.

Withholding Agents. Persons who make payments of amounts subject to withholding, or who are otherwise treated as withholding agents, will need to be prepared to apply increased rates of withholding on payments to applicable persons subject to the tax increases described above by January 1, 2027. Withholding agents will need to establish a process for monitoring the list of offending foreign countries the Treasury Secretary will publish to determine which of their payees may be subject to increased withholding. Presumably the Internal Revenue Service will update its Forms W-8 to include self-certifications relevant to identifying applicable persons, before which it will likely be impractical for withholding agents to revise their withholding procedures, although the timing of any such updates is unclear.

Investment Funds. Section 899 could have a considerable impact on investment fund structures and their investors. Investors and investment vehicles in offending foreign countries could be subject to tax increases, notwithstanding any treaty benefits that may currently apply. Foreign funds classified as corporations for U.S. federal income tax purposes, including typical “foreign feeders” and “foreign blockers,” could be subject to tax increases if they are majority owned by investors from offending foreign countries. Similarly, “domestic blockers” that are majority owned by investors from offending foreign countries could be subject to the Super BEAT, and the U.S. withholding tax rate on any dividends paid by such “domestic blockers” could be increased if the recipient is an applicable person. Such “domestic blockers” are commonly established to hold interests in U.S. operating businesses, to engage in U.S. direct lending, or to hold interests in U.S. real estate assets. Any fund-level tax increases could affect all investors, subject to any provisions in fund agreements that may allocate the increases only to applicable persons. Further, as these rules look to both direct and indirect ownership, fund managers and other service providers may need to conduct significant diligence on fund investors to determine the effects on the fund vehicles. This may be difficult to complete before the Internal Revenue Service updates its Forms W-8 to include self-certifications relevant to identifying applicable persons and would require ongoing diligence and monitoring as offending foreign countries are added to or removed from the Treasury Secretary’s list.

Financing Transactions. Section 899’s impact on lending and other financing transactions is muted somewhat by the continued availability of the portfolio interest exemption. However, foreign banks relying on a treaty exemption from withholding tax due to the unavailability of the portfolio interest exemption for bank lending activities generally would be subject to increased taxes under the rules. Importantly, there is no grandfathering rule for existing financing transactions. Accordingly, both new and existing borrowers and lenders should consider which party is required under the applicable credit documents to bear the burden of any tax increases under Section 899.

Real Estate. Many real estate-related investments will involve structures and financings described above. U.S. real estate investment trusts (REITs), which generally are required to distribute their taxable income annually to maintain their REIT status, may find it more difficult to attract capital from applicable persons in offending foreign countries due to the increased withholding taxes that could apply to REIT dividends. In addition, as noted above, the tax increases on applicable persons generally apply notwithstanding any statutory or treaty-based exemptions or exceptions. The extent to which this rule would apply to various taxpayer-favorable aspects of the FIRPTA provisions (e.g., the provisions relating to qualified foreign pension funds) seems unclear. However, it does not appear the tax increases would apply to FIRPTA gains of individuals to the extent a domestic or treaty-based exemption or exception would otherwise apply.

Mergers and Acquisitions. The effects of Section 899 on M&A transactions, particularly in the cross-border context, will depend on financing and ownership structures. Foreign-parented multinationals in offending foreign countries could be at a significant disadvantage in acquisitions of U.S. targets as a result of both the tax increases on applicable persons, which could significantly increase the tax burden on dividend and interest payments from the U.S. group, and the Super BEAT provisions, which could directly increase the U.S. tax burden on the U.S. group.

Foreign Governments. As noted above, Section 899 overrides the exemption from U.S. federal tax under Section 892(a)(1) for foreign governmental entities, such as sovereign wealth funds, that are organized in an offending foreign country. The Section 899 tax increases would then apply in addition to the otherwise applicable statutory rates if the foreign country is an offending foreign country by reason of such country having an unfair foreign tax which is an extraterritorial tax. For example, the withholding tax rate on a U.S. source dividend paid to such a foreign governmental entity that otherwise would be exempt from tax under Section 892(a)(1) could increase from 0% to 30%, plus 5% increases per year up to a 45% maximum rate. Similarly, U.S. federal income tax on gain from the sale of stock in a U.S. real property holding corporation under FIRPTA could be increased from 0% to 21%, plus 5% increases per year up to a 36% maximum rate.

The Section 899 provisions are complex and their implications to specific taxpayers are highly dependent on the particular facts and circumstances. Clients wishing to discuss the implications to them of these provisions should reach out to one of the authors listed below or the Sidley attorney with whom they regularly work.