Fund managers are urging Congress to reconsider Section 899, a provision in the “One Big Beautiful Bill Act” currently under review in the Senate. This section recommends raising significant new revenue by taxing foreign passive income from U.S. equity investments. This provision has the potential to greatly benefit fund managers and their investors alike.
Section 899 is laser-pointed at this narrow class of earnings paid out to foreign investors, namely dividend-distributing U.S. companies. The new tax would start at 5%, raising it in five-point increases annually until reaching 20%. This tax would be applied in addition to existing taxes, which differ based on international tax treaties and the specific countries of the foreign investors.
On June 5, the Investment Company Institute (ICI) sent a letter to Senator Mike Crapo, the chairman of the Senate Finance Committee, expressing concerns over the implications of Section 899. As a result, American fund managers are concerned that the new tax will drive foreign investors away from the U.S. market. Right now, these investors own the most— $19 trillion in U.S. stock markets, $7 trillion in U.S. government bonds, $5 trillion in U.S. credit.
Yuri Khodjamirian, chief investment officer for Tema ETFs, highlighted that European investors would likely reconsider their positions in U.S. dividend-paying companies if faced with additional taxes. He stated, “If suddenly you have to pay tax on that income, why would you hold that?” This sentiment is indicative of the larger concern among many investors over the capital flight that would surely be caused by Section 899.
U.S. firms—particularly large firms listed in the S&P 500—have a strong anti-dividend political culture. Rather, they just send most of their capital back to shareholders via stock buybacks. Even foreign investors are coming under increased taxation pressure, a story that’s become all too familiar stateside. With relatively low dividend yields in the U.S., that could further complicate their decision making.
The ICI has articulated its stance on Section 899, emphasizing that sustained selling by foreign investors could depress U.S. equity markets. In a statement, they noted, “If sustained selling by foreign investors depresses US equity markets, this would harm both US companies and investors.” The organization pointed out that some foreign governments might welcome this capital outflow since it could benefit their local equity markets—a situation contrary to the intentions behind Section 899.
Despite their concerns, the ICI expressed support for the U.S. government’s objectives to protect domestic business interests abroad and address discriminatory foreign taxes. They are concerned that the current drafting of Section 899 is too ambiguous. With these clarifications, foreign investment in U.S. equity markets—especially through mutual funds and ETFs—will not be discouraged.
As we noted recently, fund managers are busy lobbying Congress. They are seeking to amend Section 899 before it does irreparable damage to foreign investment in U.S. markets. Khodjamirian remarked on the potential impact of these changes by questioning whether such a tax would even be a significant issue: “Is that actually going to be that big of an issue then?” Bill Sullivan His comments reflect a cautious optimism. He’s hopeful that the cumulative effect of Section 899 ends up not being as bad as we feared.