This summary focuses on practical issues under proposed section 899, a new tax provision that was originally included in the House budget reconciliation bill (H.R. 1) (the "House Bill") passed on May 22, 2025.
On June 16, 2025, the Senate released its own version of a tax reconciliation package (the "Senate Bill"), which includes a proposed section 899 that is in many respects similar to the House version of section 899. In this summary, we consider practical issues under proposed section 899 and point out certain similarities and material differences between the versions of section 899 included in the House Bill and the Senate Bill. We will continue to monitor developments with respect to this important change in U.S. tax law and update this summary on a rolling basis as the legislation continues to work its way through both chambers of Congress.
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).
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