Proposed Section 899 – Analysis of both the House and Senate Bills

Both the House and the Senate versions of proposed section 899 would (i) increase U.S. federal income taxes applicable to persons with sufficient connections to a country that has adopted an “unfair foreign tax” and (ii) modify the application of the base erosion and anti-abuse tax (“BEAT”) to non-publicly held corporations that are more than 50 percent owned by such persons. While the House version of section 899 could apply as early as January 1, 2026 (with an effective date as early as the taxable year beginning at least 90 days after the legislation is enacted), the Senate version of section 899 provides a longer transition period with the earliest effective date being the taxable year beginning at least one year after section 899 is enacted.

For a detailed discussion of the House Bill, see our comprehensive client alert. A detailed discussion of the Senate Bill is forthcoming.

What is an Unfair Foreign Tax?

The House version of section 899 targets “discriminatory foreign countries” (“DFCs”)—i.e., countries that impose “unfair foreign taxes”—which are defined as: (i) per se discriminatory taxes, including the undertaxed profits rules under the OECD’s Pillar Two regime (the “UTPR”), digital services taxes (“DSTs”) and diverted profits taxes (“DPTs”); and (ii) any other tax that the Treasury Secretary designates to be an extraterritorial tax, a discriminatory tax or otherwise “unfair” by being economically borne, directly or indirectly, disproportionately by U.S. persons. The definition contains certain exclusions, including for taxes that apply neither to U.S. persons nor controlled foreign corporations (“CFCs”) more than 50 percent owned (by vote or value), directly or indirectly, by U.S. persons. The Treasury Secretary has the discretion to identify unfair foreign taxes and place DFCs on a list to be published and updated quarterly, thus requiring ongoing monitoring by market participants.

The Senate version of section 899 targets “offending foreign countries” (“OFCs”), which it defines as “any foreign country which has one or more unfair foreign taxes.” The definition of “unfair foreign taxes” under the Senate Bill is similar to the House Bill, but there are noteworthy differences between the types of unfair foreign taxes that may cause the rate increases to apply, versus taxes that only cause consequences under the Super BEAT (discussed below).

Similar to the House Bill, the Senate Bill focuses on extraterritorial taxes and discriminatory taxes, providing that: (i) an extraterritorial tax includes the UTPR and any other tax imposed by a foreign country on a corporation (including any trade or business of such corporation) that is determined by reference to any income or profits received by any person (including any trade or business of 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; and (ii) a discriminatory tax includes DSTs and, to the extent provided by the Treasury Secretary, certain other taxes that, for example, (a) do not follow typical U.S. tax norms (e.g., imposed on income that would not be considered sourced to the country under U.S. tax norms), (b) are targeted, in practice or by their terms, at individuals or entities that are not resident in the country based on revenue thresholds, exemptions, exclusions or restrictions for residents, (c) are not treated as income taxes under local law and considered outside the scope of double tax treaties or (d) are economically borne, directly or indirectly, disproportionately by U.S. persons. As with the House Bill, the Senate Bill contains certain exclusions from the definition of unfair foreign taxes, including taxes that apply neither to U.S. persons nor CFCs more than 50 percent owned (by vote or value), directly or indirectly, by U.S. persons.

Significantly, although the definitions of “unfair foreign tax” under the House Bill and the Senate Bill are similar, the consequences of having sufficient connections to a country with an unfair foreign tax under either bill may differ dramatically. Whereas the House Bill may generally apply both the increased tax rates and the Super BEAT in the case of a person with sufficient connections to a DFC, the Senate Bill would apply the rate increases only if the OFC has an extraterritorial tax (including the UTPR) while a person with sufficient connections to an OFC with only a discriminatory tax (including a DST) may only be subject to the Super BEAT (a consequence that would only be relevant to a corporate taxpayer, like a U.S. “blocker” corporation or a non-U.S. “blocker” corporation with ECI).

Practice Points:

• Other Pillar Two Taxes: Not all Pillar Two taxes are automatically considered “unfair foreign taxes” under the House Bill or the Senate Bill. Only UTPRs are expressly treated as per se “unfair foreign taxes” that automatically trigger the imposition of taxes under section 899 under both bills. For instance, a qualified domestic minimum top-up tax is not expected to be considered an unfair foreign tax under either the House Bill or the Senate Bill.
• Exception for taxes not imposed on U.S. persons: The exclusion from the definition of “unfair foreign taxes” for taxes that are not imposed on U.S. persons and their CFCs allows countries that have enacted a UTPR or DST, for example, to avoid being treated as DFCs (House Bill) or OFCs (Senate Bill) by creating an exception for U.S.-parented groups under their domestic legislation.
  • Currently, over 30 countries have implemented the UTPR, including Australia, most European Union countries, Japan, New Zealand, South Korea, the United Kingdom, and Canada. These countries are likely to become DFCs (House Bill) or OFCs (Senate Bill) unless they change their tax laws to prevent them from applying to U.S. persons and their CFCs.
• Identification of DSTs and DPTs: Neither the House Bill nor the Senate Bill defines the term “digital services tax”. Further, while the Senate Bill does not identify “diverted profits taxes” as per se “unfair foreign taxes,” the House Bill does so but fails to define such term. Accordingly, it is unclear which taxes would be subject to the new rule.
  • The White House issued a memorandum on February 21, 2025, however, indicating that the following countries have DSTs: Austria, Canada, France, Italy, Spain, Turkey, and the United Kingdom.
  • With respect to DPTs, Australia and the United Kingdom have taxes called “diverted profits” taxes.
  • Additionally, other countries may be identified by the Treasury Secretary as having such taxes if they impose taxes that have the same or similar effects.
  • As noted above, the consequences of a DST or DPT are particularly onerous under the House Bill, resulting in potential rate increases and the application of the Super BEAT. On the other hand, it appears that only the UTPR and taxes similar to it would cause rate increases under the Senate Bill, while other unfair foreign taxes would be addressed through the application of the Senate’s version of the Super BEAT.

Who would section 899 impact?

Both the House and the Senate versions of section 899 would apply to “applicable persons,” capturing, in each case, a wide array of non-U.S. investors and entities, including: (i) governments of DFCs in the case of the House Bill or OFCs in the case of the Senate Bill, and their controlled entities; (ii) non-U.S. individuals and corporations that are tax residents of a DFC (House Bill) or OFC (Senate Bill) (or the shares of which are more than 50 percent owned (directly or indirectly) by tax residents of a DFC (House Bill) or an OFC (Senate Bill)). In addition to certain other entities, the House Bill also identifies “foreign partnerships, branches, and any other entity identified with respect to a [DFC] by the Secretary” as entities that may be considered applicable persons. Similarly, though with less ambiguity regarding the Treasury Secretary’s obligation to identify relevant entities, the Senate Bill identifies as applicable persons “any other entity (including branches) identified with respect to an [OFC] by the Secretary.”

Practice points:

• Increased U.S. Tax Rates for Non-U.S. Blockers (including on all ECI): A non-U.S. blocker corporation that is tax resident in a DFC (House Bill) or OFC (Senate Bill) or is more than 50 percent owned by residents of a DFC or OFC may become taxable at a significantly higher rate than some or all of its owners would be, especially if an owner is not itself an applicable person, introducing new factors to be considered when interposing blockers. Notably, as further discussed below, while the House Bill would apply the rate increases in respect of certain persons with sufficient connections to countries that have either an extraterritorial tax or a discriminatory tax, the Senate Bill would only apply the rate increases in respect of certain persons with sufficient connections to countries that have extraterritorial taxes. An extraterritorial tax appears to be focused mainly on the UTPR. In that vein, the Senate Bill appears to be directly targeting the rate increases at countries with a UTPR, while addressing other discriminatory taxes (like DSTs) through the application of the Super BEAT.
• Uncertainty Regarding Application of the House Version of Section 899 to Non-U.S. Partnerships: It is unclear how the House version of section 899 is intended to apply to non-U.S. partnerships, which are not themselves taxpayers for U.S. federal income tax purposes and are commonly used by funds and other investment structures.
  • The proposed legislation in the House Bill is not clear as to the impact of section 899 on non-U.S. partnerships and treaty claims through (or by) such non-U.S. partnerships. This uncertainty stems from somewhat ambiguous drafting, which may arguably be read as applying the House version of section 899 to any non-U.S. partnership without needing to be identified by the Treasury Secretary. On the other hand, the Senate version of section 899 appears clear that the Treasury Secretary would have to exercise their discretion to identify certain non-U.S. partnerships as subject to section 899.
  • Depending on the treatment of foreign partnerships under the final version of section 899, structuring decisions could be significantly influenced. For example, if the final version of section 899 does not automatically treat all foreign partnerships as “applicable persons,” there could be substantial benefits to making a check-the-box election for certain non-U.S. entities. Specifically, electing to classify a foreign corporation—which would otherwise be treated as an “applicable person”—as a partnership for U.S. tax purposes could limit the application of the increased section 899 tax rates. In this scenario, only the portion of income allocable to “applicable persons” (e., investors from DFCs (House Bill) or OFCs (Senate Bill)) would be subject to the higher tax, rather than 100 percent of the entity’s income if it were treated as a corporation that is an “applicable person.” This approach could be particularly meaningful in the fund context, where investor bases are often mixed—some investors may be from DFCs (House Bill) or OFCs (Senate Bill), while others are not. However, this must be weighed against the traditional reasons for using a foreign “blocker” corporation in U.S. tax planning. The treatment of foreign partnerships under the final version of section 899 should also impact other structuring decisions, such as whether to use above-the-fund or below-the-fund blockers, or to create parallel vehicles for different investor groups.
• Non-U.S. Subsidiaries Owned by U.S. Persons: Under both the House and the Senate versions of section 899, if a non-U.S. corporation is resident in a DFC (House Bill) or OFC (Senate Bill) but is owned 50 percent or more (by vote or value) by U.S. persons directly, indirectly or by attribution, it generally will not be treated as an applicable person. For example, any non-U.S. subsidiary within a U.S.-parented group should not be an applicable person. This exclusion also seems to extend to subsidiaries of certain U.S. entities in sandwich structures, such as where a non-U.S. parent owns a U.S. corporation that, in turn, owns another non-U.S. corporation.
• Privately Held Non-U.S. Corporations Owned by Applicable Persons: By contrast, under both the House and the Senate versions of section 899, a privately held non-U.S. corporation that is more than 50 percent owned by applicable persons is subject to section 899, even if it is not resident in a DFC (House Bill) or OFC (Senate Bill). Notably, under this rule, even corporations that are residents of jurisdictions that have not yet adopted the UTPR—or have not otherwise imposed any tax considered to be an “unfair foreign tax” by the United States (g., the Cayman Islands, Bermuda, BVI, which are common holding company jurisdictions)—may be subject to increased U.S. tax rates under section 899.

What are the potential rate increases under section 899?

Each of the House and the Senate versions of section 899 would increase each “specified rate of tax” by an applicable number of percentage points to the extent the rate increases apply, which in the case of the Senate version only applies to the extent an applicable person is connected to an OFC with an extraterritorial tax like the UTPR but not a discriminatory tax (i.e., a DST). Among the tax rates identified as “specified rates of tax” in both versions of section 899 are (i) the 30 percent tax on U.S.-source FDAP income, (ii) the individual income tax rate imposed on gains from the disposition of a U.S. real property interest, (iii) the 21 percent corporate tax rate on ECI of foreign corporations, (iv) the 30 percent branch profits tax, and (v) the 4 percent excise tax on U.S.-source gross investment income of foreign private foundations.

Under the House Bill, the rate increase starts at 5 percentage points in the first year and rises by 5 percentage points each subsequent year, up to a maximum of 20 percentage points above the statutory rate. Furthermore, if a rate of tax applies in lieu of a statutory rate, including pursuant to a treaty obligation of the United States, such other rate is increased by the applicable number of percentage points up to a potential maximum rate of 20 percentage points above the statutory rate.

Under the Senate Bill, the rate increase starts at 5 percentage points in the first year and rises by 5 percentage points each subsequent year, up to a maximum of a 15 percentage points increase above the statutory rate or such other rate of tax that applies in lieu of a statutory rate. Accordingly, different from the House Bill, the rate increase under the Senate Bill is capped at 15 percentage points above the starting rate, whether that is the statutory rate or a tax rate that applies in lieu of a statutory rate under a treaty obligation of the United States.

• Material rate differences between the House Bill and the Senate Bill: Because the rate increase under the House Bill capped at a maximum of 20 percentage points above the statutory rate, while the Senate Bill is capped at a maximum 15 percentage points above the statutory rate or the rate that applies in lieu of the statutory rate, the Senate version of section 899 would be expected to have less onerous consequences than the House version in all circumstances and, in particular, if a taxpayer qualifies for a reduced treaty rate.
  • For example, under the House Bill, if the withholding tax rate on U.S.-source dividends paid to an applicable person is otherwise 5 percent, such rate would be increased by 5 percentage points for each year the country remains classified as a DFC, up to a maximum of 50 percent (e., 20 percentage points above the 30 percent statutory rate).
  • On the other hand, under the Senate Bill, the same withholding tax rate on U.S.-source dividends would be increased up to a maximum of 20 percent (e., 15 percentage points above the 5 percent rate in lieu of the statutory rate).
• No rate increases on amounts exempted from the branch profits tax under a treaty obligation of the United States: Although the Senate Bill seems to be intended to require rate increases to taxes on income that would otherwise be exempt from U.S. tax under a treaty obligation of the United States, the Senate Bill appears to exclude income that is exempt from the branch profits tax under a treaty obligation of the United States from such rate increases. If enacted as currently drafted, this exemption from section 899 rate increases on amounts otherwise exempted from the branch profits tax of section 884(a) under a treaty obligation of the United States would be expected to provide significant relief for non-U.S. corporations in treaty jurisdictions that do business in the United States in branch form. The House Bill does not provide a similar carveout from rate increases for amounts that are exempted from the branch profits tax under a treaty.

How should investors think about risk allocation and information collection?

Both the House and the Senate versions of section 899 rely heavily on ownership and tax residence, introducing new risk allocation and uncertainty for investment vehicles, particularly those with mixed investor bases. Investors are often already subject to broad information collection requirements, and in certain cases are required to provide representations regarding their tax status (e.g., as to hybridity or fiscal transparency). Such requirements can be expected to increase with heightened focus on investors with connections to DFCs (House Bill) or OFCs (Senate Bill).

Practice Points:

• Investor Information Requirements and Risk Allocation: In the fund context, a general partner (GP) typically has broad discretion to allocate and/or deem as distributed any taxes on receipts of the partnership that it determines are allocable to or otherwise attributable to certain partners, and such deemed distributions impact the calculation of carried interest. Regardless of which version of section 899 is enacted, funds may need to collect more detailed information from investors regarding their residency, ownership, and ultimate beneficial owners to determine applicable person status, to comply with increased withholding and reporting obligations and to allocate tax costs. Investors who are not liable to tax under section 899 may seek contractual assurances that they will not bear taxes attributable to the section 899 status of another person.
• Investment Structures: To manage risk and compliance, market practice may evolve toward segregating applicable persons into separate vehicles or creating separate share classes for them or capping their participation in blockers at no more than 50 percent, to prevent section 899 from affecting other investors and simplify compliance and reporting.
  • The use of non-U.S. blockers in DFCs (House Bill) or OFCs (Senate Bill) may become less attractive due to the risk of higher U.S. tax rates. Funds may consider using U.S. blockers, as U.S. corporations and their subsidiaries are not subject to the increased rates under either version of section 899, or otherwise restructuring to avoid tainting non-applicable persons in the structure. However, U.S. blockers also have tax and regulatory implications under both versions of section 899, as well as potential exposure to U.S. corporate and state taxes, and the Super BEAT (discussed below).
• Cross-Border Loan Agreements and Withholding Tax Provisions: Loan agreements, bond offerings, and other cross-border contracts may need to be reviewed and updated to address the risk of increased withholding taxes under section 899, which, if enacted as proposed in either the House Bill or the Senate Bill, may significantly impact both new and existing credit facilities.
  • Section 899 taxes would not be expected to qualify as excluded taxes under a typical gross-up provision. As noted below, the House stated in legislative commentary to the House version of section 899 that it does not override the portfolio interest exemption. Even more explicitly, the Senate version of section 899 explicitly carves the portfolio interest exemption out of the application of section 899. On the other hand, investors claiming treaty exemptions appear to be in a more precarious position under both versions of section 899, with the Senate version addressing that point even more explicitly than the House version.
• Pass-Through Entities Generating ECI: Individuals who are applicable persons and plan to acquire an interest in a partnership or other pass-through entity that will be generating ECI (other than ECI from disposition of a U.S. real property interest) might consider owning such interest directly rather than through a corporate blocker. This is because under both the House and the Senate versions of section 899 ECI recognized by a non-resident individual that does not arise from the disposition of a U.S. real property interest is not subject to the increased rate of tax under section 899. However, the risk of state and local tax exposure should also be considered in connection with the structuring of ECI investments.

How would section 899 apply to income that is currently exempt from U.S. taxes?

Some important exemptions and carve-outs are recognized in the statutory text and legislative commentary for the House version of section 899. The Senate version of section 899 recognizes the same carveouts, but it does so explicitly in the legislation without needing to resort to legislative commentary.

Practice Points:

• Section 892 Exemption: Both the House and the Senate versions of section 899 explicitly override the section 892 exemption, subjecting sovereign wealth funds of DFCs (House Bill) or OFCs (Senate Bill) to U.S. tax on U.S.-source income that would otherwise be exempt.
• Statutory Exemptions:
  • For the House version of section 899, the House Budget Committee report confirmed that section 899 is not intended to apply to income that is explicitly excluded by the Code from the application of the specified tax, such as the exemption for portfolio interest under sections 871(h) and 881(c), the exemption for bank deposit interest under sections 871(i) and 881(d), the exemption for interest-related dividends or short-term capital gain dividends under sections 871(k) and 881(e), and the exemption from FIRPTA for qualified foreign pension funds under section 897(l).
  • The Senate version of section 899 also addresses statutory exemptions, but it does so in the legislation itself and not through legislative commentary. Specifically, the Senate version of section 899 provides that increased rates of tax shall not apply to amounts that are otherwise exempt from tax under certain statutory exemptions, including the original issue discount income exclusion under sections 871(a)(1) and 881(a)(1), portfolio interest income exclusion under sections 871(h) and 881(c), the bank deposit interest income exclusion under sections 871(i) and 881(d), and the interest-related dividends or short-term capital gain dividend income exclusions under sections 871(k) and 881(e). Although not explicitly referenced, the exemption from FIRPTA for qualified foreign pension funds under section 897(l) would also appear to continue to apply under the Senate version of section 899 because that exemption relies on the treatment of a qualified foreign pension fund as if it were a U.S. person for purposes of the FIRPTA rules and thus not subject to section 897.
• Non-FIRPTA Capital Gains: Because capital gains that are not considered gains from U.S. real property interests are generally sourced to the residence of the seller and not subject to U.S. income tax, such gains recognized by a non-U.S. person—whether directly or through partnerships—appear to be outside the scope of both the House and the Senate versions of section 899. This may encourage some U.S. corporations to retain earnings or otherwise issue preferred equity interests on which dividends accrue but are not immediately paid, which raises other questions under certain U.S. anti-deferral rules (g., accumulated earnings tax, section 305(c) deemed dividends).
• Tax Treaty Reductions and Exemptions:
  • For purposes of the House Bill, legislative commentary indicates that section 899 would apply not only to increase the rate of tax imposed on income otherwise subject to a reduced rate of tax under a treaty but also to impose taxes on income otherwise exempt from U.S. income taxation under a treaty.
  • Although the Senate has not yet released legislative commentary to the Senate Bill, the Senate version of section 899 appears to address the point more directly by providing that most of the specified taxes subject to rate increases will be subject to rate increases even if there is an exemption or exception, or if the applicable rate would otherwise be zero. While the Senate version of section 899 explicitly carves certain statutory exemptions out of section 899 (as noted above), it does not provide any similar carveouts for treaty exemptions from tax. Notably, however, the Senate version of section 899 provides that the override of exemptions from tax does not apply to exemptions to the branch profits tax under section 884(a).
  • Questions around the interaction of any enacted version of section 899 with treaties are a significant source of current complexity and market uncertainty regarding the impact of section 899. For instance, overriding treaty exemptions would materially impact the withholding tax treatment of cross-border interest on bank loans and intragroup debt structures, including cash pooling arrangements commonly used by non-U.S. parented groups. However, it appears that there is a conflict that arguably exists between the text of section 899 under both the House and Senate version and how treaty “exemptions” are generally approached in U.S. tax treaties. For instance, while the text of the Senate version of section 899 and the legislative commentary to the House version of section 899 discuss exemptions or zero rates of tax, based on the language used in U.S. tax treaties—providing that certain U.S.-source payments (g., dividends, interest, royalties) “shall be taxable only in” the other Contracting State (i.e., as opposed to a reduced rate of tax or exemption)—arguably the rate increases prescribed by section 899 should not override treaty exemptions. Stated differently, there appears to be an argument that treaties do not generally provide an “exemption” from tax but rather cede taxing jurisdiction to the country of tax residence.

What is the “Super BEAT”?

The BEAT is designed to prevent large multinational corporations from eroding the U.S. tax base through deductible payments to foreign affiliates. Under current rules, the BEAT imposes an additional tax to the extent 10 percent of the taxpayer’s modified taxable income (very generally, taxable income without regard to deductions for payments or accruals to foreign related parties, subject to certain exceptions) exceeds its regular tax liability reduced by some, but not all, tax credits. Generally, a taxpayer is subject to the BEAT if the taxpayer and its aggregate group have average annual gross receipts of at least $500 million over the prior three years, and the taxpayer’s base erosion percentage (i.e., the ratio of certain deductible payments to foreign related parties over total allowable deductions) is at least 3 percent (or 2 percent for certain banks and securities dealers).

Both the House and the Senate versions of section 899 modify the application of the BEAT for privately held corporations that are more than 50 percent owned (by vote or value), directly or indirectly, by applicable persons. In addition to U.S. corporations and certain non-U.S. corporations in foreign-parented groups, this could include investors’ U.S. “blocker” corporations and non-U.S. “blocker” corporations with ECI, if they are majority-owned by applicable persons.

For these entities, under the House version of section 899, (i) the BEAT applies regardless of whether such entities meet the average annual gross receipts and base erosion percentage tests, (ii) the BEAT rate is increased to 12.5 percent for such entities, (iii) in computing the base erosion minimum tax amount, the regular tax liability is reduced by all credits allowed under chapter 1 of the Code, and (iv) important exemptions from the regular BEAT would not apply (e.g., exceptions for cost of goods sold, payments under the service cost method, and payments subject to full withholding tax).

Under the Senate version of section 899, (i) the BEAT applies regardless of whether the entity meets the average annual gross receipts test but only if it has a base erosion percentage of at least 0.5 percent (rather than the 2-percent threshold proposed in another part of the Senate Bill for the regular BEAT), (ii) in computing the base erosion minimum tax amount, the regular tax liability is reduced by all credits allowed under chapter 1 of the Code, (iii) a new proposed exception under the regular BEAT for payments to high-tax related parties would not apply, and (iv) other important exemptions from the regular BEAT would not apply (e.g., exceptions for cost of goods sold, payments under the service cost method, and payments subject to full withholding tax). Further, among other changes to the regular BEAT proposed under the Senate Bill, the regular BEAT rate would be increased to 14 percent and, thus, expanded application of the BEAT in the case of certain applicable persons may be even more onerous under the Senate Bill than the House Bill.

Practice Points:

• The automatic application of the BEAT under the House Bill without the need for the corporation to meet the average annual gross receipts and base erosion percentage tests, or under the Senate Bill without the need to meet the average annual gross receipts test and with a significantly lower base erosion percentage threshold, would bring many more non-U.S. parented groups and investment vehicles into the BEAT regime under either version of section 899, with significant structuring and compliance implications.
• The Super BEAT under both versions of section 899 removes exceptions for payments subject to withholding or eligible for the services cost method, and certain capitalized expenses would be treated as deductions for BEAT purposes. This would bring more payments into the scope of the rules and further increase the BEAT exposure for affected entities.
• Notably, under both the House and the Senate versions of section 899, the Super BEAT only applies to privately held corporations that are more than 50 percent owned by applicable persons. Accordingly, as currently drafted, the Super BEAT would not apply to a “publicly held corporation.”

When would section 899 apply?

Under both the House and the Senate versions of section 899, the effective date for section 899 is the date of enactment of the legislation. However, under the House Bill, the increased tax rates and BEAT modifications generally apply to taxable years beginning after the later of (i) 90 days after enactment of section 899, (ii) 180 days after the enactment of the unfair foreign tax or (iii) the first date the unfair foreign tax applies.

With slightly more breathing room, under the Senate Bill, the increased tax rates and BEAT modifications generally apply to taxable years beginning after the later of (i) one year after enactment of section 899, (ii) 180 days after the enactment of the unfair foreign tax or (iii) the first date the unfair foreign tax applies.

Importantly, there is generally no grandfathering principle for existing investments included in section 899 under either the House or the Senate Bill.

The House and Senate versions of section 899 provide two similar safe harbor rules, under which (i) increased withholding tax rates do not apply if the relevant country is not listed as a DFC (House Bill) or OFC (Senate Bill) in Treasury guidance, and (ii) for privately held non-U.S. corporations or trusts that are applicable persons because they are majority-owned by “applicable persons,” the higher withholding tax rates apply only after the relevant country has been listed for at least 90 days. Additionally, withholding agents will not face penalties or interest for failures to withhold before January 1, 2027, if they can show they made best efforts to comply with the new rules on time.

Practice Points:

• Given that many foreign countries adopted the UTPR and other per se “unfair foreign taxes” in 2025 or earlier, under the House version of section 899, if new section 899 is adopted before October 2, 2025, applicable persons with respect to such foreign countries may be subject to the rate increases as early as January 1, 2026. Conversely, under the Senate version of section 899, the rate increases would not be expected to take effect until at least one year after enactment, at the earliest.
• The potential delayed application of section 899 under the safe harbors in both the House and the Senate versions of section 899 applies only to withholding taxes under sections 1441, 1442 and 1445.
• U.S. persons will need to closely review whether any non-U.S. persons to which they make a payment subject to withholding qualifies as an applicable person (including as a result of being controlled by one or more applicable persons).