The US One Big Beautiful Bill could have a material impact on many non-US persons with investments or activities in the US, including withholding taxes on dividends, interest payments and royalties from US to non-US persons, as well as transfers of US branch profits to non-US firms. These withholding taxes may not fall within exemptions in tax treaties.

Key takeaways

• Non-US persons with investments or activities in the US could be subject to a US tax increase of 5% on gross income generated from such investments or activities, beginning 2026 and increasing by 5% annually up to a maximum 50% rate.
• Non-US persons with operating subsidiaries in the US may be subject to increased Base Erosion Anti-avoidance Tax (BEAT) tax liability in the US.

What is the proposed reform?

• An increase in the rate of US federal income tax on income generated on US investments by residents of a “discriminatory foreign country.”
• A “discriminatory foreign country” is a country that imposes one or more “unfair foreign taxes.”
• “Unfair foreign taxes” is defined widely and as a consequence it is expected that a large number of countries will be a “discriminatory foreign country,” including the UK, all of the EU countries, Australia, New Zealand, Canada, Turkey, South Korea, Japan, India, and others.
• The reform proposes a scaled increase in current US tax on income from US investments, starting with a 5% increase in year one potentially scaling to a maximum aggregate tax rate of 50% on relevant US income, and as proposed the additional tax charge would apply on top of any current reduced rates that apply under income tax treaties.
• Income within scope includes:
  • dividend payments from the US;
  • interest payments from the US;
  • royalty payments from the US;
  • US branch profits.
• US subsidiaries of companies that are organized in a discriminatory foreign country also may be subject to additional tax liability under the US BEAT tax rules.

Who will it affect?

The reform will have a wide impact, including:

• non-US corporate groups with US subsidiaries or branches;
• non-US individuals with shares in US companies;
• non-US partnership structures with US investments;
• non-US lenders lending to US borrowers;
• foreign government entities such as sovereign wealth investors (it also looks likely that the new rules will disapply the US sovereign wealth exemption).

The rules are likely to look through multi-tier ownership structures to the ultimate beneficial owners.

The tax increases will not apply to non-US corporate entities that are majority ultimately owned by US persons.

When will it be introduced?

• The tax measure (known as section 899) forms part of the package of tax reforms passed by the House of Representatives in the One Big Beautiful Bill (OBBB).
• The legislation is now in the Senate where the wider bill is expected to be subject to significant modifications.
• It is not yet known what impact the Senate process will have on the s.899 provisions outlined above.
• If the s.899 provisions are passed in broadly their current form, the increased tax charge will apply from the tax year following the latest of:
  • 90 days after s.899 is enacted into law;
  • 180 days after a foreign country adopts a unfair foreign tax;
  • the first day the unfair foreign tax becomes effective.

Contacts in the Tax team: Robert S Chase II, partner, Tax Group Practice Group Leader Washington, DC; Ben Jones, partner, Co-Head of Global Tax, UK; Aaron M Payne, partner, Washington, DC; Deepesh Upadhyay, partner, UK; Stefanie Sahla-Jones, partner, UK; Camilla Spielman, legal director, UK; Benjamin Shem-Tov, principal associate, UK; Thomas E Pritchard, professional support lawyer, UK.