Contested Clause 899 in the Big Beautiful Bill Threatens Economic Involvement of International Investors Worldwide
The U.S. has long been a hotspot for foreign investments, raking in over $177 billion in 2022 alone. But things took a turn in 2025 when the U.S. House of Representatives passed the One Big Beautiful Bill Tax Act (OBB). While the Act may influence foreign direct investment in the States as a whole, certain provisions, like Section 899, could have broader repercussions, particularly on common asset protection and wealth planning strategies.
Section 899, in essence, is a retaliatory move against taxes imposed by "discriminatory foreign countries" that the U.S. views unfavorably. The increased rate on withholding, investments, corporate holdings, and more is designed to hit these countries where it hurts. The broader application of Section 899 could create additional reporting obligations, complicate foreign asset protection trust holdings, and subject investors to unexpected penalties and taxes.
Now, let's dive into the nitty-gritty of reporting obligations for foreign-owned U.S. corporations. Foreign individuals or entities that own at least 25% of a U.S. corporation or engage in a trade or business in the U.S. are subject to the reporting requirements under Internal Revenue Code Section 6038A. The IRS requires filing Form 5472 to disclose transactions between the implicated corporations and its holders accurately and on time. Neglecting to do so can lead to hefty penalties of $25,000 in each instance. Corporations may be subject to filing requirements regardless of their level of activity.
Foreign asset protection trusts (FAPTs) often hold U.S. entities with U.S. investments. This structure presents additional challenges with compliance and reporting. Transfers of assets by a U.S. person to a foreign trust are typically treated as a grantor trust, where the U.S. person is taxed on the trust's income. Distributions by the foreign trust, especially to U.S. beneficiaries, also hold tax implications and trigger additional foreign trust reporting requirements, including Forms 3520 and 3520-A. Noncompliance can lead to penalties of $10,000 or 35% of the gross value of any property transferred to the foreign trust.
The proposed Section 899, if passed, could impact wealth planning for multinational beneficiaries and investors abroad or considered foreigners, even those located within the U.S. The underlying investment in U.S. companies or assets where potential beneficiaries or other investors may be foreign and from the list of discriminatory countries would be subject to the additional tax rates ranging from 5% to 20%. To mitigate potential tax exposure, restructuring investments and ownerships could be prudent.
For foreign investors with a stake in the U.S., proactively reviewing existing investment and asset protection structures and ensuring full compliance with U.S. tax reporting requirements is paramount. Filing any overdue or missed returns can help start applicable statutes of limitations on audits, potentially providing relief from certain penalties where reasonable cause for noncompliance exists. Also, preparing for potential legislative changes, including the implementation of proposed Section 899, can prevent additional tax exposure before it's too late.
- Foreign investors with a stake in U.S. businesses, including those subject to Section 899, should carefully analyze their investment and asset protection structures, as the proposed section could impose additional tax rates on foreign investors from 'discriminatory countries'.
- In light of the passing of the One Big Beautiful Bill Tax Act (OBB) and the potential implementation of Section 899, foreign investors need to prioritize compliance with U.S. tax reporting requirements, such as Forms 5472, 3520, and 3520-A, to avoid hefty penalties and potential tax exposure.
