One Big Beautiful Bill Act May Be Hiding a Tax Hit for Foreigners

The U.S. House of Representatives recently passed H.R. 1, the “One Big Beautiful Bill Act” by a narrow margin, with the vote being 215 to 214. Foreign persons (including foreign governments) considering inbound investments should pay close watch as this develops. Buried deep in the more than 1,000-page tax-and-spending bill is an obscure tax measure that could have a profound impact on foreigner investors. Section 899 of the bill introduces retaliatory tax measures targeting foreign individuals, entities and governments that impose what the U.S. deems “unfair foreign taxes,” such as Digital Services Taxes (DSTs) or global minimum tax top-ups, on U.S. companies. For investors from Canada, the implications could be severe, as the recently implemented DST could make Canada fall within Washington’s definition of a “discriminatory foreign country”. How the Proposed Changes Might Impact Canadians Currently, Canadian individuals investing in U.S. securities in non-registered accounts are subject to a 15% withholding tax on U.S. portfolio dividends under the Canada-U.S. Tax Treaty. Section 899 would impose an escalating increase of U.S. tax rates on foreign persons from any discriminatory foreign country. The initial rate increase would be 5 percentage points, and it would rise each year, up to a maximum of 20 percentage points above the applicable tax rate imposed by U.S. tax law. Even rates that are reduced by a treaty would not escape the Section 899 tax increase as the section is designed to explicitly override such treaties if you’re a resident of a discriminatory foreign country. Should Canada be considered a discriminatory foreign country? U.S. withholding taxes on U.S. portfolio dividends could increase by 5% per year on top of the standard 15%, reaching 35% after 4 years and potentially escalating to 50% over time. This is a big tax hit, as under current Canadian law and administrative practice, it is unlikely that Canada would grant extra foreign tax credits to ensure that the recipient of the affected income would not be subject to double taxation. This incremental tax would affect diverse income categories, including the U.S. withholding taxes imposed on items of U.S.-source income such as dividends, interest, royalties, rents and withholding tax on dispositions of U.S. real property interests. The bill now awaits Senate approval where the bill will likely face more debate, with the potential for additional revisions. Congress has set a goal of a final bill signed into law in July, but the final bill could look very different from the initial drafts.

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