A hidden rule in the US budget bill could rock the foundations of the US markets, potentially impacting equity and bond markets. The fine print of the US budget bill reveals that the bill approved by the US House of Representatives includes the possibility of imposing a progressive tax burden of up to 20% on foreign investors’ passive income, such as dividends and royalties.
Section 899 of Trump’s One, Big, Beautiful Bill grants the US the power to impose higher taxes on businesses and investors linked to countries deemed to have hostile or discriminatory tax practices.
So, who is going to pay this foreign tax? The tax will be levied upon entities or individuals from countries imposing ‘unfair taxes’ on the US. Broadly, Section 899 imposes harsh retaliatory taxes on countries and individuals with unfair foreign taxes enacted by “discriminatory foreign countries” (DFCs).
This means, that if you are a resident individuals of a DFC, even you will be subject to this new tax. “It targets not only international firms with a US presence but also foreign investors in American equities and corporate bonds,” says Nigel Green, CEO of deVere Group.
The proposed foreign tax could potentially impose additional charges on various foreign entities, including US-based companies with foreign owners, international firms with American branches, and investors.
The US stock market is starting to take note of this new foreign tax. Wall Street analysts are warning that this provision in Trump’s budget bill allowing the US government to increase taxes on foreign investments could potentially disrupt markets and impact American industry.
“A clause tucked into President Trump’s latest budget bill could prove deeply destabilizing for markets and US industry,” says Green.
Recently, US treasuries saw a big sell-off following which Trump had to delay the implementation of the reciprocal tariffs. A fall in the dollar is also ongoing with the dollar weakening about 8% this year and the dollar index falling below 100.
A spike in the US bond yield and weakness in the dollar shows global investors could be losing trust in holding US assets. Now, this new foreign tax proposal could be another reason for global investors to stay away from the US until certainty prevails.
“There’s already a shift underway—foreign investors are pulling back from Treasuries, equity inflows are cooling, and confidence is more fragile than policymakers seem to understand,” Green explains.
There could be a significant impact on US FDI investments going forward. “The measure risks detonating investor confidence and could set off a damaging pullback of foreign capital just as the US needs it most.
The US government is relying on global capital more than ever to fund its deficit. But with this kind of legislation, they’re actively discouraging that capital from sticking around. This isn’t just bad timing, it’s strategic self-harm,” says Nigel Green.