European dividend investors are bracing for potential fallout from Section 899, a provision in Donald Trump’s proposed One Big, Beautiful Bill Act (OBBB) that could sharply raise US withholding taxes on dividends and interest income. Experts warn the threat has put dividend-heavy portfolios on edge, particularly in the Benelux region.
The measure, part of a broader tax overhaul coming in at 1,116 pages that Trump wants Congress to adopt by July 4, would empower the US Treasury to raise withholding tax rates for entities in “discriminatory” jurisdictions, even overriding long-standing bilateral tax treaties.
The provision could potentially deal a heavy blow to dividend and credit fund structures that rely on legal certainty and investor protection frameworks to channel global capital into US markets. Although the US Treasury has yet to specify which countries would be subject to this “revenge tax”, the Benelux region appears highly vulnerable.
Ucits and Ucits ETFs most at risk
If enacted, Section 899 would allow the US Treasury to impose withholding tax rates “as high as 50 percent,” Reuben John, managing director at Geneva-based WTax, told Investment Officer. “Double tax treaties do not shield investors, as treaty rates are subject to the increase as well. For EU investors, this could materially impact net returns on US equity investments.”
Christophe Joosen, tax partner at EY Luxembourg, described the proposal as a disruptive force with “potentially significant adverse effects” on Luxembourg’s flagship fund industry. He said retail funds investing in listed US securities, especially Luxembourg Ucits and Ucits ETFs, would be the most at risk.
“A material number of Luxembourg Ucits –primarily non-ETF– are investing in US stocks and will adversely be impacted by the enactment of the proposed section 899 legislation,” he explained.
Preferences for structures seen shifting
In the Netherlands, fund managers working for high-net-worth clients have long relied on domestic structures such as the Fonds voor Gemene Rekening (FGR) to minimise dividend tax exposure. These structures allow investors to channel US investments through pooled arrangements that are tax-transparent under Dutch law. The fund itself is not a legal entity, and it is fiscally transparent, meaning that profits and losses are taxed at the level of the participants, not at the fund level. This transparency helps limit the effective taxation on US dividend income.
The financial stakes are considerable. Aegon Asset Management has estimated Dutch investors hold around 500 billion dollars in US assets. A modest 1.5 percent dividend yield would translate into 1.5 billion euro in additional tax annually if protective structures were caught in the Section 899 net.
Joosen said Luxembourg asset managers are actively exploring alternatives: “Expect greater use of synthetic ETFs via derivatives and a shift toward fiscally transparent structures such as Fonds Commun de Placement (FCPs), despite their limited marketability in some jurisdictions. There’s also renewed interest in portfolio strategies that prioritise capital gains over dividends.”
An FCP vehicle such as used in Luxembourg, Belgium, and France is roughly similar to an FGR in the Netherlands. In Ireland this structure is known as a common contractual fund.
Potential treaty override sparks alarm
Fueling particular concern is a clause in the bill stating that Section 899 would apply “notwithstanding any treaty obligation.” This implies that long-standing bilateral tax treaties could be overridden at the discretion of the US Treasury, raising profound questions for legal certainty and global capital flows.
This could set a dangerous precedent, according to Kevin Stickle, tax partner at Larson Gross. It could “undermine long-standing agreements that reduce or eliminate tax on certain income streams”.
Even funds that currently comply with US rules may not be safe. Those structured as partnerships, or with investor bases dominated by residents of targeted jurisdictions, could fall within scope. Only corporate-style funds majority-owned by US persons appear definitively excluded.
Political resistance in Washington
Despite the aggressive tone of the bill, its passage is far from certain. At last Thursday’s Morningstar Global Insights event in Luxembourg, Amy Greene, senior fellow for American politics at the Institut Montaigne, pointed to rising opposition within the Republican Party itself.
“You only need four senators to block this,” she said. “And the most vocal critics—like Rand Paul, Lisa Murkowski, Josh Hawley or Ron Johnson—aren’t facing re-election next year. That insulates them politically and gives them the space to challenge Trump on fiscal responsibility grounds.”
Greene sees the bill as a litmus test for the GOP’s direction post-Trump. “There’s a growing tension between Trump’s short-term political theatre and the long-term need to safeguard economic credibility,” she said.
The sovereign wildcard
One unresolved issue is how foreign official institutions, such as central banks and sovereign wealth funds, will be treated. “That’s the biggest question right now,” said Ron Temple, chief market strategist at Lazard. “These investors hold about 15 percent of US Treasuries. Even if they’re not price-sensitive, taxing their interest income could alter global demand for US debt.”
Temple added that such a shift, in combination with trade tensions and fiscal deficits, could raise US borrowing costs. “If Treasury yields rise back toward 5 percent, as we saw in October 2023, equity markets could face renewed volatility as asset allocations shift.”
Strategic realignments underway
Regardless of the bill’s fate, European asset managers are already recalibrating. Some already have been redomiciling funds to Ireland due to the applicable US tax treaty there, others are shifting from dividend-based to total-return strategies. The message from the industry is clear: structural neutrality is no longer guaranteed, and legal certainty is at risk.
Section 899 is forcing a rethink in how fund managers engage with US markets, in particular among alternative credit funds, Joosen said.
“Luxembourg Ucits managers are exploring ways to mitigate the tax leakage that may result from this,” he said. “It is seemingly inevitable that the yields derived by investors from US assets would adversely be affected by the enactment of the draft bill in its current form.”
Further reading on Investment Officer:
- Dull dividend stocks are making a comeback
- WTax: Vivendi case shows it pays to watch your tax exposure
- Dividend investing 2.0: Balancing growth and yield
