- Congress is proposing to tax foreign companies and investors to counter what are deemed “unfair foreign taxes” imposed by other countries
- U.S. net operating losses may be limited when ownership changes occur within a foreign parent corporation
- Stock repurchases by foreign corporations with U.S. subsidiaries may trigger an excise tax
Background
The current presidential administration’s actions on world-wide tariffs and the current Congressional debate surrounding foreign tax regimes have impacted foreign owned companies and their strategies for owning and operating U.S. based subsidiaries in effort to avoid the possible unfavorable effects of such policies. This article briefly explores a few tax provisions and proposals that foreign companies and investors should be aware of concerning U.S. tax policy that may affect them.
Proposed Measures Against “Unfair Foreign Taxes”
As of the date of this article, both the House of Representatives and the Senate have proposed an increased tax imposed on certain foreign corporations, non-resident individuals, and others who reside in “discriminatory foreign countries.” The proposed new Internal Revenue Code (IRC) Section 899 would define a country as “discriminatory” if they impose “unfair tax regimes” against U.S. corporations and individuals. Such foreign discriminatory taxes include the under taxed profits rule, digital service taxes, diverted profits taxes, and others.
Both chambers of Congress have proposed this so called “retaliatory tax” as part of their landmark tax legislation known as the “One Big, Beautiful Bill Act.” The Senate’s version is different than the House’s and ultimately the differences will have to be reconciled before a final bill can be enacted. Congress hopes to pass the bill in July 2025.
The House’s version would be effective as soon as January 1, 2026. The U.S. tax rate would increase by 5% each year a foreign country’s discriminatory tax is in place, capping at 20%. Furthermore, modifications would be made to base erosion and anti-abuse taxes (BEAT) by eliminating the $500 million threshold and the 3% base erosion percentage test, resulting in more U.S. corporations potentially subject to the tax. For deeper insight into the House’s proposal, read this FORsights™ on the topic.
The Senate’s version delays the tax until the 2027 calendar year, likewise increases by 5% each year, but would be capped at 15%. Additionally, the BEAT rate is proposed to increase from 10% to 14% and the base erosion threshold would decrease from 3% to 2%. The Senate’s version of Section 899 would also remove the $500 million threshold and reduce the base erosion percentage to 0.5%.
Ownership Changes May Limit U.S. Net Operating Losses
IRC Section 382 limits net operating loss (NOL) carryforwards when there is a change in ownership involving shareholders owning 5% or more of a corporation and the change exceeds 50% of the ownership over a three-year period.
This issue is often overlooked by foreign parent companies with U.S. subsidiaries. Direct and indirect ownership changes should be tracked by foreign companies—including widely held foreign corporations whose stock is traded on foreign exchanges to determine if the ownership thresholds are exceeded for purposes of the NOL limitation rules.
Excise Tax on Stock Repurchases
Beginning in 2023, a new excise tax equal to 1% was imposed on the fair market value of stock repurchased by certain corporations. This tax may apply to a publicly traded foreign parent (even if traded on a foreign exchange) of a U.S. subsidiary that uses U.S. sourced funds to redeem its shares.
Please see our following FORsights for more information on this excise tax:
How Forvis Mazars Can Help
Operating multi-national companies can be perplexing and the considerations mentioned in this article are only a small sample of a more complex situation. Our professionals can help you navigate these complexities in a quickly changing U.S. tax policy environment. Contact us today for assistance.