What is Section 899 of the Big Beautiful Bill?

 

What is Section 899 of the Big Beautiful Bill?

When major legislation like the “Big Beautiful Bill” passes, it’s natural to feel overwhelmed by all the legal and tax jargon. One section that’s getting a lot of attention is Section 899, and today we’re breaking it down simply—who it affects, what income it covers, and what it might mean for you.

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What is Section 899 All About?

Section 899 is a new provision that proposes higher U.S. tax rates and tighter rules for foreign investors, companies, and workers who earn U.S.-sourced income.

Historically, the U.S. has offered certain tax breaks, exemptions, or treaty benefits to foreigners. Section 899 seeks to close loopholes, reduce benefits, and ensure foreigners are paying their "fair share" when they earn income from U.S. sources.

Section 899 is designed to increase U.S. taxes on foreigners who earn income tied to the U.S. economy. If you live outside the U.S.—especially in countries like Australia or Canada—this section may impact your investments, real estate, or even your retirement fund

Who Will Be Impacted?

Section 899 will primarily affect:

• Foreign investors (individuals) holding U.S. stocks, bonds, or real estate

Example: A German investor earning dividends from U.S. tech stocks.

• Foreign businesses with U.S. customers or presence

Example: A Canadian software firm with U.S. clients or servers hosted in California.

• Remote workers or contractors living overseas and earning from U.S. companies

Example: An Indian freelancer coding for a Silicon Valley startup.

• Foreign landlords with U.S. property

Example: A UK citizen who owns rental property in Florida.

• Foreign retirement and sovereign wealth funds

Especially those that invest heavily in U.S. assets or real estate.

• Residents of countries with U.S. tax treaties—like Australia and Canada
  

What Types of Income Are Affected?

Section 899 targets U.S.-sourced income earned by foreigners, including:

• Dividends from U.S. companies
• Interest from U.S. bonds and bank accounts
• Rental income from U.S. property
• Capital gains from selling U.S. assets
• Royalties from U.S.-based IP
• Business income from U.S. clients or sales

It also targets foreign pension funds and sovereign wealth funds that have enjoyed tax-exempt or reduced-tax status.

Let us look at some everyday examples

📈 Investor with dividend income:

Lars, a Norwegian citizen, earns $50,000 annually in dividends from shares in U.S. tech companies. Under current treaty rules, his tax rate is 15%. Section 899 could raise that to 30% and remove treaty relief if his country doesn’t meet new reciprocity conditions.

🏠 Investor with Real Estate income:

Aisha, a Dubai-based investor, owns a rental apartment in New York. She currently pays a flat 30% withholding tax on net rental income. Under Section 899, the calculation method could change, increasing her tax bill—or forcing her to file a full U.S. tax return.

💻 Freelancer Income:

Carlos, a software engineer in Mexico, earns $90,000/year from a U.S. tech startup. While he works remotely, the IRS may consider this U.S.-connected income under revised "economic nexus" rules in Section 899—subjecting him to U.S. self-employment taxes.

Retirement Savings

Priya, a Sydney-based investor, holds U.S. stocks in her personal portfolio and in her SMSF (Self-Managed Super Fund). Currently, she pays a 15% withholding tax on dividends due to the U.S.–Australia tax treaty. Under Section 899:

• The treaty rate could be revoked or reduced if Australia doesn't meet new U.S. transparency standards.
• Her super fund may lose its tax-exempt status if it doesn’t qualify under newly defined "qualified foreign pension fund" rules.
• She may be subject to 30% default withholding on her U.S. dividends.

Business Earnings

Marc runs a digital marketing firm in Toronto with clients in the U.S. Currently, he doesn’t pay U.S. tax because he has no physical presence in the U.S., and the U.S.–Canada treaty protects his earnings. Under Section 899:

• His “economic nexus” to the U.S. (client base, servers, remote access) may be enough to trigger U.S. taxation.
• Treaty protection could be limited.
• He might have to file U.S. returns and pay taxes on his U.S. client revenue.

🏦 What About Retirement and Sovereign Funds?

🧓 Foreign Retirement Funds

Section 899 may redefine or tighten the criteria for tax-exempt retirement accounts.

If a fund doesn’t meet strict qualifications (like being government-recognized, non-discriminatory, or non-commercial), it may lose:

• Its U.S. tax exemption on capital gains or dividends
• Its eligibility for reduced withholding tax rates

Example: An Australian super fund or a Canadian RRSP may be taxed on U.S. stock dividends if they don’t qualify under the new rules—even if they are tax-deferred or exempt in their home country.

🏛️ Sovereign Wealth Funds

Historically, sovereign wealth funds (SWFs) from countries like Norway, Singapore, or the UAE have been exempt from U.S. tax under Section 892 of the tax code.

Under Section 899, SWFs may:

• Face higher scrutiny or reclassification as “commercial investors”
• Lose their Section 892 protection if they engage in certain investment types
• Be taxed on portfolio investments like U.S. real estate or private equity

This is especially important for Australian Future Fund or Canada Pension Plan Investment Board (CPPIB), which invest billions into U.S. assets.

💹 How about Capital Gains from U.S. Stocks

🧾 How It Works Now (Pre-899):

Under current U.S. tax law, most foreign individuals are not taxed on capital gains from selling publicly traded U.S. stocks (unless they are present in the U.S. for 183+ days in the tax year). This has made U.S. markets attractive to foreign investors.

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🚨 What Could Change Under Section 899:

Section 899 proposes changes that may include:

• Removing the capital gains exemption for foreign investors.
• Reclassifying certain gains as U.S.-effectively connected income (ECI) if they are derived through U.S. brokers, funds, or digital platforms.
• Imposing withholding taxes on capital gains similar to those on dividends (potentially 15%–30% depending on treaty status).
• Limiting or revoking treaty protections unless the foreign country meets new disclosure standards.

📉 What That Means in Practice:

• If you’re a foreign resident holding U.S. stocks and you sell for a profit, that gain could now be taxed by the IRS.
• If your brokerage is U.S.-based or the transaction involves U.S. financial infrastructure, you may automatically have taxes withheld from the sale proceeds.
• This could reduce your net return from investing in the U.S. markets.

📍 Example:

Anh, an Australian resident, sells her $100,000 position in a U.S. tech ETF with a $20,000 gain.

• Under current law: She pays no U.S. capital gains tax unless she was physically in the U.S. for over 183 days that year.
• Under Section 899: She may face a 15%–30% U.S. withholding tax on that $20,000 gain—meaning up to $6,000 withheld before she even gets her money.

⚠️ Why Is This Happening?

The U.S. government wants to ensure that:

• Foreigners who profit from U.S. markets contribute to U.S. tax revenues
• Tax treaties aren’t being exploited unfairly
• The IRS can track and tax digital, remote, or cross-border income more effectively

This shift is also partly a response to growing U.S. deficits, and a global move toward tightening international tax enforcement.

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