Proposed U.S. Section 899 Rule Could Disrupt International-Owned U.S. Businesses

A proposed provision in the 2025 U.S. tax reform—Section 899—has raised serious concerns for international clients with business operations and investments in the United States. If enacted as drafted, the rule could deny deductions and tax credits and increase withholding rates to U.S. companies with foreign ownership.

This would represent one of the most aggressive anti-base erosion moves in recent history—and could have broad, unexpected implications for legitimate, commercially driven cross-border structures.

What Is Proposed Section 899?

Section 899, as currently drafted:

• Targets “discriminatory foreign countries” with “unfair foreign taxes,” which may include Canada;
• Increases the withholding rate on U.S. sourced income, such as interest, dividends, rents, and royalties, paid to foreign related parties;
• Denies U.S. tax deductions for payments to foreign related parties, through broadened application of the Base Erosion and Anti-Abuse Tax (BEAT) regime; and
• Applies even if the company’s income is taxed at normal U.S. rates and fully sourced within the U.S.

It also includes vague language that grants the Treasury authority to “look through” entity structures and apply the rule to partnerships and other pass-throughs under regulatory guidance.

Why This Matters

If passed, Section 899 could:

• Increase the effective tax rate for your U.S. operations and investments.
• Create uncertainty about withholding tax rates applicability of Tax Treaty provisions.
• Apply retroactively or with limited guidance, creating compliance risks.

What You Should Do Now

While the rule is not yet law, its scope and vagueness are causing concern. Now is the time to:

• Review your U.S. entity structures and ownership percentages.
• Analyze potential loss of deductions or credits under this proposal.
• Consider alternative structures or planning strategies to reduce impact.

Proposed Section 899 isn’t finalized—but it signals a growing scrutiny of cross-border ownership. We're watching it closely and will continue to provide insights as it evolves.