Why the U.S. tax bill’s Section 899 could push European firms to list in the U.S.
The decision by U.K. fintech firm Wise to move its primary stock listing to the U.S. is the latest in a series of blows to the London market — and a new provision tucked inside a U.S. tax bill could make things even worse. Section 899 of President Donald Trump’s spending bill, which passed the House of Representatives in May, threatens to penalize foreign-owned firms domiciled in countries with “unfair foreign taxes,” and experts say it could accelerate the trend for European companies to hop the pond. The provision introduces retaliatory tax measures against corporations and other entities from countries that have levies such as the Digital Services Taxes and the OECD’s global minimum tax rules. The list of affected nations would include most European Union members, the United Kingdom, Canada, Australia, and Switzerland, among others. For publicly traded companies, Section 899 imposes a new withholding tax on U.S.-sourced income for any foreign corporation that is more than 50% owned by non-U.S. entities. The tax would start at 5% and escalate by five percentage points annually to a maximum of 20%, on top of existing taxes, which vary by country and tax treaties. That could dent earnings for companies in the Stoxx Europe 600 index, for instance, by up to 2% in the first year, and as much as 5% over four years, according to Goldman Sachs analysts. How can European firms avoid Section 899? The Wall Street bank has identified a U.S. re-listing as one of many measures that companies could take if the bill becomes law. A listing in the U.S. would provide a direct path to increasing a company’s base of American investors, according to Goldman. This would help companies push their non-U.S. ownership below the critical 50% threshold, taking them out of Section 899’s scope. While there are many U.K. companies with high exposure to the U.S. with a majority-U.S. shareholder base, Goldman Sachs identified consumer credit rating firm Experian and Hikma Pharmaceuticals , among others, as two FTSE 100 companies with more than half their group revenues in the U.S. but falling below the 50% threshold for U.S. ownership. The Wall Street bank suggested that such companies could use a U.S. listing as one avenue to avoid taxes imposed by Section 899. Tax experts cautioned that to avoid the impact of Section 899, it would require significantly more work than simply relisting in the U.S. with an attempt to gain U.S. shareholders. “I’m not sure that listing alone would be sufficient,” said a senior executive at a large European firm with extensive operations in the U.S., who asked not to be named as they were not authorized to comment on the issue. “The proposed language [in the bill] includes a vote or value test for U.S. ownership, including publicly traded companies, and seems to say that if a company [falls under Section 899 tax] for even one day then it is for the year.” The executive also questioned whether companies will be able to identify beneficial owners — or the actual owners that control a business — “with any degree of confidence.” That’s because the tax bill includes “a look-through concept” — which means U.S. fund managers investing on behalf of foreign clients would not count toward the exemption requirements. “The monitoring [of the shareholder register] alone would be resource intensive,” the executive added. Others point out that if European governments dropped what Trump calls their “unfair foreign tax” policies, their companies would automatically be exempted from 899. “Hill Republicans see section 899 not as a revenue-generating measure, but as a tool that gives the Treasury Department additional leverage in negotiations with other countries to encourage changes in behavior,” Pat Brown, a tax expert at the consultancy PwC U.S., told CNBC. “Foreign-headquartered companies considering changes in their capital structure to reduce the impact of section 899 would need to consider that the government of their home country could, with the stroke of a pen, eliminate the need to consider section 899 as an issue,” Brown added. Exacerbating a corporate-migration trend Goldman Sachs also highlighted that Section 899 could also act as a powerful incentive to a corporate migration trend that is already underway. For years, European and U.K. companies have felt disadvantaged by their home markets, a sentiment that has led to a steady flow of buyouts and re-listings elsewhere. Companies have repeatedly pointed to the valuation discount that European equities suffer compared to their U.S. peers to justify their decisions to move their listing to the U.S. Wise debuted on London’s stock market in 2021 in a direct listing that valued the company at £8 billion ($10.84 billion) at the time. It is now valued at £11.07 billion, according to LSEG data. Since then, London has been mired in doubts over whether it can play host to major tech listings. The market is often criticized for lacking the depth of liquidity and industry expertise from investment analysts to accommodate such transactions. Doubts over London’s stock market haven’t been limited to tech, though. Last week, Glencore -backed metals investor Cobalt Holdings announced it was scrapping plans to go public in London. The IPO was expected to be the largest listing in the U.K. capital since early 2024. A spokesperson for London Stock Exchange Group (LSEG) told CNBC last week that London remains the top European exchange in terms of capital raised and the total market cap of the companies listed. They added that they had seen a “noticeable increase in interest from international companies in coming to London with many starting to prepare.” — CNBC’s Ryan Browne contributed reporting.
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