Pensions funds beware: Section 899 Stirs Concern
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Article Type
Insights
Topic
Macro
Published
June 04, 2025
Read time
5 mins
Authors
Jordy Hermanns, CFA
Jacob Vijverberg, CFA
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Dutch pension funds, with a substantial asset base totaling €1.6 trillion, have nearly €500 billion invested in the United States. This significant exposure to US markets makes them particularly vulnerable to legislative tax changes. Currently, the Trump administration is working on a piece of legislation which might increase tax rates substantially on US assets. 

One Big, Beautiful Bill Act

The "One Big, Beautiful Bill Act" (OBBBA) is a controversial legislative proposal that has generated significant debate concerning its potential impact. The main aim is to extent the 2017 tax cuts initiated by the previous Trump administration. It will further raise the already high US deficit.

However, OBBBA includes many other sections. Especially,  Section 899 could be one of the most impactful for foreign investors. This section proposes additional taxes on foreign entities operating within the US, targeting profits and capital repatriated to foreign parent companies.

Section 899

Section 899 poses significant risks for European investors due to its potential impact on tax rates associated with investments in the US. It creates a legal framework whereby tax rates could be substantially increased, potentially up to an additional 20%, depending on the final provisions ratified by US lawmakers. The strategic design of Section 899 suggests that it will likely serve as a negotiating tool for the US in its dealings with the European Union. Seeking to leverage higher taxation policies to compel the EU to make concessions in areas such as digital service taxes, trade agreements, data privacy regulations, or financial oversight. By applying pressure through increased tax burdens on European investors, the US aims to secure more favorable terms.

Targeting Europe

The legislation appears to be specifically designed to target Europe and the UK, regions with significant investments in the US, and which have implemented measures to curb tax evasion practices by American companies. European countries have introduced several measures, such as the Undertaxed Profits Rules (UTPR) and digital service taxes, to ensure equitable taxation and address unfair competitive advantages. These regulatory frameworks seek to create a more balanced environment by taxing undertaxed profits and digital revenues generated by multinational companies. As companies have become more global, it’s imperative to move towards global tax harmonization, as guided by OECD initiatives, to prevent companies from tax arbitrage which effectively reduces the tax intake for all governments. However, the current US administration has a different view. Section 899 represents the Trump’s administration response, aiming to reduce taxation on US corporations.

Possible Scenarios

Roughly speaking there are two plausible scenarios.

1. Escalation Scenario:

The situation presents a challenge for Europe, which does not perceive its current economic relationship with the US as imbalanced, primarily given the dominance of American companies in European markets and the considerable and growing US services surplus. Concurrently, European manufacturing sectors are grappling with high energy costs and ongoing efforts to reduce emissions. The EU might therefore be unable or unwilling to find a compromise.

Should the negotiations falter, tax rates as outlined in Section 899 may be enforced, leading to increased tax burdens for European investors. This potential financial strain could drive European investors to seek reallocation strategies and diminish their investments in the US. The European Union might pursue reciprocal actions to counteract discriminatory practices.

This scenario would entail a contentious relationship with the US, where both economies will be negatively impacted.

The additional costs for Dutch pension funds will depend on the exact rates implemented and their ability to avoid taxation. However a back of the envelope calculation considering the 500 billion in assets and assuming an dividend of 1.5% would already imply a 1.5 billion cost per annum, which equals 10 bps of total Dutch pension assets.

Clearly, the impact of lower asset values, which is more likely in this scenario, will exceed these direct taxation cost.

2. Negotiation and Resolution Scenario:

US-EU negotiations might arrive at a compromise that curtails the reach and effects of Section 899. However, the US holds significant leverage in these discussions, given the numerous dependencies on energy, foreign investment, and technology. An agreement will likely inhibit the EU from imposing minimum corporate taxations or implementing digital services taxes.

This scenario would be beneficial for investors as it limits the Section 899 taxes and limits other taxes on corporations.

However, such an outcome would present a conundrum for the EU in its aspirations to reduce reliance on the US and US technology companies as these will retain their low taxation regime, further limiting the ability of European companies to compete. 

Important Information

Authors

Jordy Hermanns, CFA
Portfolio Manager

Jordy Hermanns, CFA, is a portfolio manager in the multi-asset group and serves as an investment strategist in the asset allocation team.

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Jacob Vijverberg, CFA
Head of Asset Allocation

Jacob Vijverberg, CFA, is head of asset allocation. He is responsible for both strategic and tactical asset allocation. The team is managing a wide range of multi-asset funds  

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