The One Big Beautiful Bill Act, a budget reconciliation bill, passed the United States House of Representatives vote on May 22, 2025, and is currently under Senate consideration. The bill, if enacted, would make significant changes to U.S. income tax law, including by adding a new section 899 to the Internal Revenue Code. Section 899, if enacted in its current form, could have a material impact on non-U.S. investors in private equity transactions and financings, including sovereign wealth funds (SWFs). An overview and summary of the bill can be found here.
Overview of Section 899
Labeled the “revenge tax” by the press, section 899 could significantly increase the U.S. tax rates applicable to any government of, or any individual or corporation resident in, any foreign country (a “discriminatory foreign country”) that has one or more taxes that are deemed unfair or discriminatory in respect of U.S. persons, i.e., an “unfair foreign tax.” An “unfair foreign tax” would include any “undertaxed profits rule” (presumably within the meaning of the OECD’s Pillar 2 global tax framework), “digital services tax” or “diverted profits tax,” though these terms are not defined in the statutory text. The Treasury Secretary would also have the authority to designate certain taxes as “extraterritorial” or “discriminatory” taxes, which would then qualify as unfair foreign taxes. Although the precise scope of what will qualify as an “unfair foreign tax” is not entirely clear, it appears that most major trading partners of the U.S. currently have taxes that will be considered to be an “unfair foreign tax” – e.g., all members of the European Union, the United Kingdom, Canada, Australia, South Korea, Japan, India, Thailand, etc.
Section 899 would increase the rate of U.S. tax imposed on such foreign investors by 5% per year, up to a maximum increase of 20% above the statutory rate. These taxes include:
- withholding taxes on dividends and interest;
- U.S. income taxes on active income (i.e., income that is “effectively connected with U.S. trade or business”);
- taxes on sales of interest in U.S. real property and U.S. real property holding companies; and
- U.S. branch profits taxes imposed on foreign corporations doing business in the U.S.
Thus, for example, an item of income that would otherwise be subject to 30% U.S. withholding tax for a non-U.S. person that is resident in a discriminatory foreign country could potentially be subject to U.S. tax up to a rate of 50%, unless the foreign country repeals the unfair foreign tax.
Portfolio Interest
Interest paid to non-bank lenders (such as private credit funds) has long been exempt from U.S. withholding taxes under the so-called “portfolio interest exemption.” There is some uncertainty as to whether section 899 would override the portfolio interest exemption. Reports from the House Budget Committee and the Joint Committee on Taxation (the “House Report”), however, suggest that section 899 is not intended to apply to portfolio interest.
Impact of U.S. Income Tax Treaties
The U.S. has a broad network of income tax treaties with most of its major trading partners. These treaties reduce or eliminate the U.S. withholding tax on dividends and interest, and provide additional protections that limit the U.S. income tax of active trades or businesses within the U.S. In this regard, the House Report seems to indicate that section 899 could alter the treaty rules and apply higher rates of tax on income that is currently treaty protected. Such application, however, could conceivably result in a violation of an income tax treaty on the part of the United States vis-à-vis the treaty counterparty, and any such violation could have diplomatic ramifications.
Impact on BEAT Taxes
Section 899 would also subject non-publicly held U.S. subsidiaries that are majority-owned or controlled (directly or indirectly) by foreign parents that are residents of discriminatory foreign countries to a modified (and more punitive) BEAT (base erosion and anti-abuse tax) regime (the “Super BEAT”). The existing BEAT regime imposes a minimum 10% tax on large multinational corporations with gross receipts of $500 million or more if “base erosion” payments – payments that a U.S. corporation makes to related foreign corporations – exceed 3 % (2 % for certain financial firms) of total deductions taken by a corporation. The Super BEAT would presume such U.S. corporate subsidiaries to be subject to the BEAT regime, would impose an increased BEAT rate of 12.5%, and would turn off certain provisions available within the ordinary BEAT regime that would lessen its impact. The Super Beat could materially affect existing and proposed investments into the United States through U.S. blocker corporations, as well as decisions about whether to make investments into blockers using shareholder loans.
Implications for PE Funds and Portfolio Companies
The version of section 899 that passed the House vote could have material implications for both non-U.S. investors in private equity funds and private equity portfolio companies.
Implications for PE Investors
If an investment by a private equity fund results in U.S. dividend income that is allocated to a foreign investor, this income or gain would be subjected to an increased rate of withholding tax. For example, some private funds will return capital through “leveraged distributions” from portfolio companies that may be taxable as dividends for U.S. income tax purposes. Under section 899, the rate of tax on these and other dividends may be as great as 35%-50%. For example, a SWF investor of a discriminatory foreign country currently is generally exempt from U.S. withholding taxes on dividends. Such an investor could lose the benefit of the sovereign exemption and become subject to full withholding plus the penalty rate under section 899 – increasing initially from 0% to 35% and then increasing by 5% annually to a maximum of 50%.
Likewise, although much less common, sales of stock in U.S. real property holding companies would be subject to the section 899 penalty taxes.
In addition, the tax increases described above could significantly limit the potential sources for both equity and debt capital used to finance private equity portfolio acquisitions. The U.S. could become too tax inefficient for some classes of investors that commonly co-invest in private equity transactions, such as SWFs who typically enjoy zero rates of tax throughout the world.
Implications for Portfolio Companies of PE Funds
Funds holding a non-U.S. portfolio company, which has one or more U.S. subsidiaries, could be impacted by the Super BEAT, potentially increasing the U.S. tax liability of those U.S. companies.
In addition, interest on foreign bank debt currently exempt from U.S. withholding taxes under U.S. tax treaties could be subject to full U.S. withholding taxes, plus penalty rates. Based on the House Report, as discussed above, interest paid to private credit funds may still be exempt from U.S. withholding taxes under the portfolio interest exemption.
Dividends paid from U.S. companies to non-U.S. affiliates may be subject to increased U.S. withholding tax under section 899 if such non-U.S. affiliate is resident in a discriminatory foreign country.
Please feel free to contact a member of Dechert's Global Tax Team if you would like to discuss how the proposed changes may affect you.
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