The Removal of Section 899: A Catalyst for Foreign Capital Inflows and Fixed Income Opportunities

The removal of Section 899 from the U.S. budget bill in June 2025 marks a pivotal shift in U.S. tax policy, signaling a retreat from punitive measures toward foreign investors and aligning with global tax reforms. This decision, driven by Treasury Secretary Scott Bessent's negotiations with G7 nations, eliminates the threat of retaliatory “revenge taxes” on foreign capital—a move that could reignite demand for U.S. fixed income assets. For investors, the implications are profound: reduced tax friction, stabilized cross-border flows, and fresh opportunities in Treasuries and corporate debt.

How the Removal of Section 899 Benefits Foreign Investors

Section 899 had proposed incremental withholding tax hikes of up to 15% on income from U.S. bonds, dividends, and real estate for investors from countries deemed to impose “unfair” taxes on Americans. Its removal eliminates this risk, restoring confidence in U.S. fixed income markets. Key benefits include:
- Lower Effective Tax Rates: Foreign investors, particularly those from Canada and Europe, no longer face the specter of rising withholding taxes on U.S. Treasury and corporate bonds.
- Preservation of Treaty Benefits: Tax treaties that reduce rates on dividends and interest remain intact, ensuring foreign capital retains its cost advantage.
- Reduced Compliance Burden: Withholding agents, such as banks and mutual funds, avoid the costly task of tracking “offending countries” and recalibrating systems to enforce escalating tax rates.

This clarity is critical for global investors, who had expressed concerns over $55 billion in potential GDP losses and 360,000 U.S. jobs at risk due to deterred investment under Section 899.

Fixed Income Markets: A New Era of Stability and Demand

The removal of Section 899 directly supports U.S. Treasuries and corporate bonds, which have long relied on foreign demand. Key trends to watch:

1. Treasury Markets: A Safe-Haven Rally

With reduced tax friction, foreign central banks and sovereign wealth funds may accelerate purchases of U.S. Treasuries, traditionally a cornerstone of global reserve holdings.

Data shows TLT's outperformance in 2025 amid declining yields, signaling increased demand as tax uncertainty fades.

2. Corporate Debt: Narrowing Spreads, Growing Appetite

Foreign investors, especially in high-yield and investment-grade corporate bonds, will benefit from reduced tax costs. This could narrow credit spreads between corporate and government bonds, as demand for riskier debt rises.

3. Real Estate and REITs: A Second Wind

The exclusion of FIRPTA (Foreign Investment in Real Property Tax Act) from Section 899's penalties also removes a barrier to foreign investment in U.S. real estate. REITs, which distribute 90%+ of taxable income to shareholders, stand to gain as withholding taxes on dividends stabilize.

Aligning with Global Tax Reforms: A Strategic Win

The removal of Section 899 underscores the U.S. commitment to the OECD's Global Tax Deal, which aims to set a 15% global minimum corporate tax rate. By avoiding unilateral measures, Washington reduces the risk of retaliatory tariffs and strengthens ties with G7 partners.

Stable growth forecasts suggest reduced trade friction will support cross-border investment.

Investment Strategy: Capitalizing on the Shift

For growth-oriented portfolios, the removal of Section 899 opens opportunities in:
1. U.S. Treasuries: Consider long-duration bonds (e.g., TLT) to benefit from capital inflows and yield stability.
2. High-Quality Corporate Debt: Look to investment-grade ETFs like LQD (iShares iBoxx $ Investment Grade Corp Bond) for steady income and narrowing spreads.
3. REITs: Select diversified REITs such as Vanguard Real Estate ETF (VNQ) to capture demand for U.S. real estate.

Risks to Monitor

While the removal is positive, investors should remain vigilant:
- Fed Policy: Rate hikes or inflation spikes could still pressure bond yields.
- Geopolitical Tensions: Ongoing disputes over digital services taxes (e.g., Canada vs. Amazon) could reignite tax conflicts.

Conclusion

The removal of Section 899 is a win for global capital markets, removing a major hurdle for foreign investors in U.S. fixed income. With tax certainty restored, Treasuries, corporates, and REITs are poised to attract inflows, bolstering portfolio resilience and growth. For investors, now is the time to capitalize on these opportunities while monitoring broader macroeconomic trends. The U.S. fixed income landscape, once clouded by punitive threats, is now clearer—and brighter—for the long term.