Fund Managers Sound Alarm as Trump Tax Bill Threatens Foreign Investment in U.S. Markets

American fund managers are lobbying Congress over a provision in President Donald Trump’s tax bill that could discourage foreign investment in U.S. stock markets. The “One Big Beautiful Bill Act,” passed by the House and under Senate review, includes Section 899 — a measure designed to penalize foreign-owned firms from countries that impose what the U.S. deems unfair taxes.

The Investment Company Institute (ICI), a prominent U.S. fund industry group, is urging lawmakers to amend the bill, warning of potential rapid capital flight from the U.S. if foreign investors pull back in response to this provision.

Retaliatory Tax Could Harm Allies, Trigger Divestment, and Weaken U.S. Market Position

Section 899 is intended as a retaliatory tax mechanism targeting countries that enforce taxes like the Digital Services Tax or align with the OECD’s global minimum tax. If enacted, foreign investors from key allies — including the EU, UK, Canada, Australia, and Switzerland — could be subject to escalating taxes up to 20% on income from U.S. investments.

This would be in addition to any existing taxes under bilateral treaties. The ICI argues this could significantly reduce returns for foreign investors and, in turn, deter them from investing in U.S. equities.

While the bill targets discriminatory foreign tax regimes, the ICI contends that the U.S. mutual fund industry could become unintended collateral damage. These funds, which hold about $18 trillion in U.S. stocks, often include foreign investors who could be penalized under Section 899.

The ICI argues that unless the bill clarifies the exemption of investment funds such as U.S. mutual funds and international equivalents (e.g., UCITS), it could drive significant foreign divestment, hurting both the funds and the broader equity market.

Section 899 Could Trigger Capital Flight and Shake Confidence in U.S. Markets

Foreign investors currently hold approximately $19 trillion in U.S. stocks, $7 trillion in government bonds, and $5 trillion in U.S. credit. Any retreat prompted by Section 899 would not only impact fund managers, who rely on assets under management for fees, but also destabilize markets. The ICI warns that such capital outflows could depress U.S. equity markets and unintentionally benefit foreign markets, which runs counter to the bill’s strategic intentions of defending American economic interests.

Despite the concerns, some market experts suggest that the actual impact may be limited. Yuri Khodjamirian of Tema ETFs notes that many U.S. companies, particularly those in the S&P 500, are not heavy dividend payers, which may reduce the tax’s bite. Most shareholder returns in the U.S. come through buybacks rather than dividends, which may not fall under Section 899’s scope.

Still, the psychological effect on foreign investors, especially those targeting dividend income, could lead them to reconsider their U.S. holdings, injecting uncertainty into an otherwise stable investment environment.