The U.S. has dropped plans for a controversial tax provision that would have targeted foreign investors, but tax experts say the risk of fiscal retaliation hasn’t gone away.
Section 899, dubbed the “revenge tax,” was removed from President Donald Trump’s 1,000 page “One, Big, Beautiful” tax proposal following a deal between the U.S. and other G7 countries. The White House said the agreement ensures the U.S. will remain outside the scope of the OECD’s global minimum tax, also known as the Pillar Two framework.
On Tuesday, the Senate approved tax bill following an overnight debate, sending it back to the House of Representatives for a further vote ahead of the July 4th adoption deadline imposed by Trump.
Back in January, Trump issued an executive order stating that “Pillar Two taxes will not apply to US companies,” effectively withdrawing from the 2021 global tax deal negotiated under the Biden administration with nearly 140 countries. Section 899 was intended to back that stance by giving the U.S. Treasury the authority to raise withholding taxes on investors from jurisdictions seen as discriminating against U.S. firms through measures such as digital services taxes or top-up levies under Pillar Two.
For global investors, especially in Europe, the repeal came as a relief.
“The proposed clause would have led to a significant increase in withholding tax, up to 20 percentage points over four years, and therefore possibly lower returns for European-domiciled funds and ETFs investing in U.S. equities,” said Detlef Glow, head of EMEA research at LSEG Lipper.
The tax would have affected both treaty and non-treaty countries. According to tax advisory firm RSM, withholding rates could have risen from the standard 30 percent to as high as 50 percent for some foreign investors. Physically replicating ETFs domiciled in Ireland, which currently benefit from a reduced 15 percent rate under the U.S.-Ireland tax treaty, would have seen that rate rise to 35 percent. Luxembourg-domiciled funds would have faced similar treatment.
‘Materially adverse’
“The provisions in the bill would have materially adversely affected returns on U.S. investments and likely would have led to the withdrawal of capital from the U.S. by impacted investors,” said Gareth Bryan, a partner at KPMG in Dublin. “As such, their removal is a real positive for both investors and U.S. foreign direct investment,” he told ETF Stream.
Still, tax specialists caution that the removal of Section 899 does not mean the threat is gone.
“It is far from guaranteed that what the G7 has agreed on can quickly be translated into a broader or global deal,” said Will Morris, global tax policy leader at PwC. “The G7 has antagonized many countries by appearing to shape the Pillar One and Pillar Two rules in its own interests.”
Morris also pointed to domestic political friction in Europe that could slow implementation of the agreement.
“In France, for example, President Macron does not control a majority in the French National Assembly, and the parties of the right and the left might not necessarily react well to a request that might be portrayed as a giveaway to U.S. business.”
Strong inflows into Europe
The policy uncertainty has already been reflected in investor behavior. According to LSEG’s fund flow data, European equity funds have attracted over 100 billion dollars in net inflows so far this year, more than triple the figure from the same period last year. In contrast, outflows from U.S. equity funds have more than doubled to nearly 87 billion dollars.
Glow noted that the uncertain U.S. tax environment was likely one of several reasons behind this shift.
“We saw that European investors increased their positions in mutual funds and ETFs with an investment focus on Europe over the course of the first five months of 2025,” he said. “The question is whether that trend continues now that the immediate threat from Section 899 has been removed.”
“The question is whether that trend continues now that the immediate threat from Section 899 has been removed.”
Detlef Glow, LSEG Lipper
Despite recent reallocations, European institutions remain heavily exposed to U.S. assets. Dutch pension funds alone manage 1.6 trillion euros in assets, of which nearly 500 billion dollars is invested in the United States.
Trump’s strategy has shifted from tariffs to tax. Section 899 was intended not just to raise revenue, but to pressure countries like Canada and France to scale back tax policies seen as targeting U.S. companies. That pressure has already had an impact. Canada recently paused its planned digital services tax to resume trade talks with the U.S.
Republicans in Congress made clear last week that they are prepared to bring Section 899 back if the deal with the G7 falters.
Standing ready
“Congressional Republicans stand ready to take immediate action if the other parties walk away from this deal or slow walk its implementation,” said Senate Finance Committee Chairman Mike Crapo and House Ways and Means Committee Chairman Jason Smith in a joint statement.
For now, the market reaction has been positive. U.S. equities climbed to record highs following the announcement, and Treasury yields edged lower as fears of cross-border tax frictions eased. But many fund managers remain cautious.
As one New York-based tax adviser put it, “Section 899 is shelved, not dead.”