'Collateral damage': Fund managers lobby Congress over Section 899 to avert foreign investors leaving the U.S.

The Investment Company Institute (ICI) is lobbying Congress to amend Section 899 of the "One Big Beautiful Bill Act," warning that the provision, intended to penalize foreign-owned firms from countries with "unfair foreign taxes," could inadvertently trigger significant capital outflows from U.S. equities as foreign investors seek to avoid the tax. The ICI argues that the bill, in its current form, would negatively impact the $18 trillion U.S. fund management industry as well as the broader U.S. equity market, potentially harming both U.S. companies and investors, as foreign investors own $19 trillion in the U.S. stock markets.

Analysis

The U.S. financial markets face a potential disruption from Section 899 of the proposed "One Big Beautiful Bill Act," which, if enacted as currently drafted, could trigger significant capital outflows from U.S. equities. The Investment Company Institute (ICI), representing U.S. fund houses with approximately $18 trillion invested in U.S. stock markets, is actively lobbying Congress for amendments. Their primary concern, articulated in a letter to the Senate Finance Committee, is that the provision, intended to penalize foreign-owned firms from countries with "unfair foreign taxes" such as Digital Services Taxes or those subject to OECD global minimum tax rules, would inadvertently impact passive foreign portfolio investments in U.S. equities. This could lead to foreign investors, who collectively own $19 trillion in U.S. stocks (data from Apollo Global Management), rapidly divesting to avoid a new tax. This tax would start at 5% and escalate annually by five percentage points to a maximum of 20% on top of existing levies, potentially affecting investors from key regions like the European Union, United Kingdom, Canada, Australia, and Switzerland. The ICI warns this could depress U.S. equity markets, harming U.S. companies and investors, and making U.S. investment funds "collateral damage." While the ICI supports addressing discriminatory foreign taxes, it believes Section 899 in its current form could perversely benefit foreign equity markets. Yuri Khodjamirian, CIO for Tema ETFs (manager of the American Reshoring ETF, RSHO), suggests that while European investors focused on dividend-distributing U.S. companies would need to carefully reconsider their holdings, the broader market impact might be somewhat muted given that U.S. companies, particularly in the S&P 500, generally have low dividend yields and favor share buybacks for capital return. Tax experts also indicate earnings paid out to foreign investors are more likely to be impacted than capital gains. The bill has passed the House and is now before the Senate, creating a cautious outlook with a moderately negative sentiment (-0.55) and a moderate market impact score (0.6) associated with this development.

Key Decisions for Investors

• Investors should closely monitor the legislative progress of Section 899 in the U.S. Senate and any potential amendments, given the significant risk of foreign capital flight from U.S. equities if the bill passes without changes.
• Foreign investors holding U.S. equities, particularly those in dividend-focused strategies or domiciled in jurisdictions like the EU, UK, Canada, Australia, or Switzerland, should urgently assess the potential impact of the escalating tax (5% to 20%) on their returns and consider strategic adjustments.
• Holders of shares in U.S. asset management firms should be cognizant of the potential for reduced assets under management and earnings pressure if Section 899 triggers substantial withdrawals by foreign clients from U.S. equity funds.
• Market participants should prepare for increased volatility in U.S. equity markets, especially in stocks with high foreign ownership or significant dividend payouts to foreign entities, should the bill proceed without addressing the fund industry's concerns about discouraging passive foreign investment.