Update – June 27, 2025 – The 899 Penalty Tax has been removed from the “Big Beautiful Bill”:
Introduction – It’s The American (A)Way
The United States tax system is designed to impose punitive tax, reporting and penalties on the non-U.S. income and assets of Americans abroad. Nonresident aliens (those who are neither U.S. citizens nor residents) are taxable ONLY on their U.S. source income.
This reality has driven many U.S. citizens (living abroad) to renounce U.S. citizenship. It has also caused many Green Card holders to abandon their green cards. This is the consequence of U.S. citizenship-based taxation – a system that defines tax residency in terms of one’s citizenship (one may not reside in one’s country of citizenship) – regardless of one’s actual residence. (Green Card holders are deemed to be U.S. tax residents regardless of their residence.)
The United States taxes ALL U.S. source income regardless of the recipient of the income. Therefore, the practical impact of citizenship taxation is to impose U.S. taxation on the non-U.S. source income of individuals who do NOT reside in the United States. To put this in visual terms:
A person born in the United States, with no U.S. source income, is subject to U.S. tax, reporting and penalties on income received from the country where that individual lives.
A Summary Of How Different People Are Subject To U.S. Taxation
1. The United States taxes ALL individuals – regardless of citizenship or residence – on U.S. Source income.
2. The United States taxes its RESIDENTS – regardless of citizenship – on worldwide income.
3. The United States taxes U.S. citizens – regardless of residence – on worldwide income. The United States is the only major country that taxes its citizens on their worldwide income when they do not live in the country.
4. The United States taxes nonresident aliens (those who are neither citizens nor residents) on U.S. source income.
The 2025 “Big Beautiful Bill” proposes a new S. 899 of the Internal Revenue Code. This new section would impose a more punitive U.S. tax regime on the U.S. source income, received by some, but not all, nonresident aliens. The more punitive regime would be imposed on nonresident aliens who are tax residents of countries that are described as “offending foreign countries”. “Offending foreign countries” are countries that the U.S. deems to impose unfair taxes on U.S. corporations or persons. To be clear, the tax paid imposed on the individual, would be based on the tax policies of the country where the individual is resident for tax purposes!
Under the proposed legislation:
All nonresident aliens would continue to be subject to U.S. taxation on U.S. source income under the existing laws; but
Nonresident aliens who are tax residents of countries that the U.S. designates has having unfair taxes will be subject to additional taxes on U.S. source income!
Notably S. 899 is inconsistent with U.S. tax treaties. Therefore, it is certainly a “tax treaty override”!
The Senate Version of the “Big Beautiful Bill” is here.
A PDF is here:
finance_committee_legislative_text_title_vii
How might the new 899 tax impact the renunciation decision?
S. 899 will have implications for U.S. citizens living outside the Unites States who are considering renouncing U.S. citizenship. Similarly, it will have implications for Green Card holders who are considering abandoning their Green Cards.
How It Works – SEC. 899. ENFORCEMENT OF REMEDIES AGAINST UNFAIR FOREIGN TAXES
The 2025 “Big Beautiful Bill” and the Senate revision includes a new section 899 of the Internal Revenue Code which is specifically designed to impose additional tax on the U.S. source income of certain nonresident aliens (referred to as “applicable taxpayers”). I wrote about the House Version of “Big Beautiful Bill” here:
S. 899 is continued in the Senate Version. See the Appendix to this post for the exact text of parts of the Senate version of the Bill. Although somewhat of an oversimplification, with respect to “individuals”, S. 899 operates as follows:
To WHOM does S. 899 apply?
“Applicable taxpayers” include individuals (except U.S. citizens or U.S. residents) who are tax residents of of a country that imposes “unfair taxation” on U.S corporations. “Unfair taxes” mean an “extraterritorial tax” imposed on a U.S. corporation or a “discriminatory tax imposed on “U.S. persons”.
Note that U.S. citizens or U.S. residents CANNOT be “applicable taxpayers”!
What are examples of “discriminatory” or “extraterritorial” taxes?
– Digital Services Taxes are deemed to be a “discriminatory tax”; and
– the OECD UTPR rule is deemed to be an “extraterritorial tax”.
Canada does have a digital services tax and is therefore likely an “offending foreign country”. Because Canada is likely an “offending country”, individual tax residents of Canada, who are NEITHER U.S. citizens NOR U.S. residents (including Green Card holders) would be subject to additional punitive U.S. taxation, on certain U.S. source income streams. It is not clear that these additional U.S. taxes could be used as a tax credit to offset the Canadian taxes owing.
What are the punitive taxes imposed on “applicable persons”?
Generally the existing taxes are increased by an additional 5% per year up to a maximum of an additional 15% (under the Senate version) or 20% under the House version.
Two examples – U.S. Source Dividends:
Brazil – a country that does not have a U.S. tax treaty
Nonresident aliens are taxable at a rate of 30% on U.S. dividends. If Brazil is deemed to be an “offending foreign country”, tax residents of Brazil would see U.S. taxation on their U.S. source dividends rise to as high as 50%!!
Canada – a country that does have a U.S. tax treaty
Nonresident aliens are taxable at a treaty rate of 15% on U.S. source dividends. If Canada is deemed to be an “offending foreign country”, tax residents of Canada would see U.S. taxation on their U.S. source dividends rise to as high as 35%!
(Note also the possibility that the 899 tax could not be used as a tax credit against either Brazil’s or Canada’s taxes. This would result in pure double taxation in the amount of the 899 penalty tax! I will discuss this in a separate post.)
U.S. citizenship or resident status protects individuals from the 899 tax
Having U.S. citizenship or Green Card status protects individual Canadian tax residents (or their CFCs) from the proposed U.S. 899 tax! Is this a reason to retain U.S. citizenship or Green Card status? It is certainly a consideration.
How S. 899 will impact the decision to expatriate
When considering renunciation it is important to consider one’s U.S.income sources and U.S. assets. Renouncing citizenship (or abandoning the Green Card) means one will become a nonresident alien. To the extent that a nonresident alien is a “tax resident” of an offending country, that nonresident alien will be an “applicable person” subject to the 899 penalty taxes proposed in the “Big Beautiful Bill”.
Therefore, the likely effect of the new 899 revenge/penalty tax would be:
For U.S. citizens:
U.S. citizens abroad can remain U.S. citizens and have their non-U.S. source income taxed punitively or;
U.S. citizens abroad can renounce U.S. citizenship and have their U.S. source income taxed more punitively.
S. 899 would increase the significance of one’s income sources on the renunciation decision!
For Green Card Holders:
Green Card holders (who are NOT “long term residents”) can get the best of both worlds because:
By using the treaty tie break they can avoid taxation on their non-U.S. source income; and
Because they are defined as U.S. residents, they can avoid the 899 tax!
In summary, the spectre of S. 899 raises the following questions:
Q. How does the proposed 899 penalty tax bear on whether to renounce U.S. citizenship or abandon the Green Card?
A. It depends on (1) whether you are a tax resident of an offending country and (2) how much U.S. source income you have. The greater the amount of U.S. source income, the greater the cost of expatriation!
Remember: U.S. citizenship or Green Card status protect individuals from the proposed 899 penalty tax.
John Richardson – Follow me on X.com @Expatriationlaw
Appendix – Excerpts from the text of the Senate Proposed New Internal Revenue Code 899
Section 899 is complicated and has many provisions. For the purposes of simplicity I have excerpted the two sections that demonstrate the intent of the United States to impose ADDITIONAL taxes on U.S. source income received by individuals who are:
1. NEITHER U.S. citizens NOT residents; and
2 TAX Residents of an “offending foreign country”.
Canada has a digital services tax. Section 899 specifically designates countries with a digital services taxes as “unfair taxes” – making those countries “offending foreign countries”.
‘‘SEC. 899. ENFORCEMENT OF REMEDIES AGAINST UNFAIR FOREIGN TAXES.
‘‘(a) TAX TREATMENT OF PERSONS CONNECTED TO OFFENDING FOREIGN COUNTRIES.—In the case of—
‘‘(1) an applicable person with respect to any foreign country which is an offending foreign country by reason of such country having an unfair foreign tax which is an extraterritorial tax—
JR Commentary: Interestingly this describes an “unfair foreign tax” which IS “an extraterritorial tax”. Yet, paragraph (d) below describes the trigger as either an “unfair tax” OR an “extraterritorial tax”.
‘‘(A) the rate of any tax described in paragraph (1) or (2) of subsection (e) which is imposed on such person or on any payment to such person shall be increased by the applicable number of percentage points during the periods, and in such manner, as provided under such subsection, and
JR Commentary: This paragraph generally imposes increased taxes on the U.S. source income received by “applicable persons”.
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‘‘(b) APPLICABLE PERSON.—For purposes of this section—
‘‘(1) IN GENERAL.—Except as otherwise provided by the Secretary, the term ‘applicable person’ means—
‘‘(A) any foreign government (within the meaning of section 892) of any offending foreign country,
‘‘(B) any individual (other than a citizen or resident of the United States) who is a tax resident of an offending foreign country
…
JR Commentary: This paragraph defines the categories of recipients of U.S. source income who are defined as “applicable persons”. This post will focus only on “individuals”.
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‘‘(d) UNFAIR FOREIGN TAX.—For purposes of this section—
‘‘(1) UNFAIR FOREIGN TAX DEFINED.—
‘‘(A) IN GENERAL.—The term ‘unfair foreign tax’ means an extraterritorial tax or a discriminatory tax. …
‘‘(3) EXTRATERRITORIAL TAX.—Except as provided in paragraph (5), the term ‘extraterritorial tax’ means any tax imposed by a foreign country ona corporation (including any trade or business of such corporation) which is determined by reference to any income or profits received by any person (including any trade or business of any person) by reason of such person being connected to such corporation through any chain of ownership, determined without regard to the ownership interests of any individual, and other than by reason of such corporation having a direct or indirect ownership interest in such person. Such term shall include any tax im posed under a UTPR or an undertaxed profits rule.
‘‘(4) DISCRIMINATORY TAX.—Except as provided in paragraph (5), the term ‘discriminatory tax’ means—
‘‘(A) any digital services tax,
Because Canada has a digital services tax, Canada has an “Unfair Foreign Tax”.
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What are the implications of 899 for those considering renouncing U.S. citizenship or abandoning their Green cards
1. Note that Green Card holders who are tax residents of Canada will NOT be subject to the new 899 Tax!! This is because Green Card holders ARE U.S. residents!!
2. Note that U.S. citizens resident in Canada will NOT be subject to the new 899 tax.
3. Tax residents of Canada who renounce U.S. citizenship or abandon their Green Cards WILL be subject to the 899 tax.