‘Revenge Tax’ Sparks Global Alarm: Section 899 Could Upend Foreign Investment in the U.S.

A controversial provision buried deep in the House-passed “One Big Beautiful Bill” (OBBBA) is rattling global investors. Section 899—dubbed the “revenge tax” by critics—would allow the U.S. to impose punitive taxes of up to 20% on passive income earned by foreign individuals, companies, and even governments if their home countries are deemed to levy “unfair” taxes on American businesses. The measure, championed by House Republicans and backed by President Trump, aims to retaliate against countries that have implemented policies like digital services taxes targeting U.S. tech giants. But it may have unintended consequences that ripple across capital markets, diplomatic relations, and U.S. borrowing costs.

At its core, Section 899 would give the Treasury Department authority to name foreign countries as “discriminatory,” triggering additional U.S. tax burdens on affected investors. These levies would apply to dividends, royalties, and other passive income—notably excluding “portfolio interest” such as payments on Treasurys. The tax would escalate by 5 percentage points annually, up to a ceiling of 20%.

For foreign investors and multinational companies with U.S. exposure, the implications are stark. Barclays estimates that European investors have funneled more than $200 billion into U.S. equities over the past five years. Should Section 899 become law, analysts warn that capital flows could reverse, putting pressure on the U.S. dollar and Treasury market. “We see this legislation as creating the scope for the U.S. administration to transform a trade war into a capital war,” wrote Deutsche Bank’s George Saravelos.

Countries that have implemented or are considering digital services taxes—like France, Germany, and the U.K.—are expected to be high on the Treasury’s retaliatory list. The measure could also be invoked against OECD nations enforcing global minimum tax rules that the Trump administration argues infringe on U.S. sovereignty. Republican lawmakers have expressed frustration that such agreements allow foreign governments to tax U.S. multinationals if they pay too little in America.

Critics argue the measure is at odds with the U.S.’s longstanding open-market philosophy. “Section 899 challenges the open nature of U.S. capital markets by explicitly using taxation on foreign holdings of U.S. assets as leverage,” said Saravelos. Investment firms and trade groups have echoed the concerns. The Investment Company Institute warned that “Section 899, as currently written, could limit foreign investment in the U.S.—a key driver of growth in American capital markets.”

Industries with large foreign footprints in the U.S. are paying close attention. Companies like InterContinental Hotels and Compass Group, which generate significant U.S. revenue but are domiciled abroad, could face higher tax burdens if their home countries fall into the “discriminatory” category. Sovereign investors may also get caught in the net. France and Germany alone held $475 billion in U.S. government debt as of March. A tax on the income they derive from these holdings—even indirectly—could lower their effective yields and reduce demand for Treasurys.

The scope of the proposed tax is broad enough that even Australian pension funds and Swiss asset managers are raising red flags. Max Levine, head of U.S. tax at Linklaters, noted that the language “could significantly increase tax rates applicable to certain non-U.S. individuals and business, governmental, and other entities.”

On Capitol Hill, House Republicans argue the provision is a defensive tool rather than an offensive strike. House Ways and Means Chair Jason Smith described the provision as a deterrent, not a mandate. “We hope it’s never used,” he said. But that assurance has done little to soothe markets. If enacted, the Joint Committee on Taxation estimates Section 899 could raise $116 billion over the next decade—but that revenue advantage begins to shrink by 2033.

The bill still faces scrutiny in the Senate, where several influential lawmakers have ties to foreign-invested businesses in their states. Legal experts at firms like Mayer Brown suggest the Senate may revise or water down the language, particularly clauses that override existing tax treaties. There’s also likely to be a lobbying blitz to exempt U.S. Treasurys and mortgage-backed securities from any downstream tax exposure.

Still, the mere possibility of a capital-targeting tax is proving disruptive. “This is huge—it’s just one piece in the overall plan and completely consistent with what this administration is all about,” said Beat Wittmann of Porta Advisors. “The ultimate judge here is not Congress. It’s the bond market.”

As the Senate moves into markup, investors are watching closely. If Section 899 survives intact, it could mark the most aggressive shift in U.S. tax policy toward foreign capital in decades—weaponizing the tax code to pursue geopolitical objectives, and in the process, redrawing the map of global capital allocation.