Washington, D.C. - A newly proposed tax policy by President Donald Trump has sent ripples through global financial markets. The provision, known as Section 899 within the "One Big Beautiful Bill", aims to raise U.S. withholding taxes on passive income-primarily dividends, interest, and royalties-paid to investors from countries deemed to impose "unfair foreign taxes."
What Is Section 899?
Section 899 is designed as a retaliatory mechanism. Countries implementing digital services taxes, global minimum tax rules (Pillar Two), or similar levies may face higher withholding rates on income earned from U.S. investments. These rates would begin with a 5% increase in 2026 and rise annually to a maximum of 20% over four years.
While some entities such as pension funds and charitable institutions may be exempt, most EU-based investors and ETFs domiciled in Ireland or Luxembourg would be directly affected.
Potential Market Impact
- Capital flight: Foreign investors may shift away from U.S. equities and bonds, impacting liquidity and valuations.
- Higher costs: Popular European-domiciled ETFs holding U.S. stocks, like the Vanguard S&P 500 UCITS ETF, may see reduced net returns due to increased tax drag.
- Dollar pressure: Reduced foreign demand for U.S. assets could put downward pressure on the U.S. dollar.
Corporate and Diplomatic Reactions
More than 70 multinational corporations-including leaders from Shell, Novartis, and Toyota-have mobilized lobbyists in Washington to oppose the measure. Industry groups argue the proposal could undermine the 8.4 million U.S. jobs supported by foreign-owned businesses.
Meanwhile, EU officials are urging restraint but have not ruled out retaliation, potentially via tariffs or reciprocal tax moves. Treasury officials claim the provision gives them leverage in ongoing international tax negotiations.
A Blow to Cross-Border ETF Investors?
Analysts warn that investors relying on foreign-listed ETFs could see a double hit: lower net dividends and potential tracking issues due to U.S. tax drag. For example, an investor holding iShares S&P 500 UCITS ETF (IUSA) might face up to 50% total withholding on dividends if both U.S. and EU layers apply simultaneously.
This makes U.S.-domiciled ETFs more attractive for tax-optimized portfolios-though they're often inaccessible to retail EU investors due to PRIIPs regulations.
What Happens Next?
The bill has passed the U.S. House of Representatives but faces hurdles in the Senate, where bipartisan concerns are growing. If passed without amendments, Section 899 would mark a dramatic shift in the U.S. approach to foreign investment taxation-transforming policy from trade-oriented tariffs to capital-based deterrents.
Disclaimer: This article is for informational purposes only and does not constitute tax or investment advice. Always consult with a licensed financial professional before making international investment decisions.
