European software companies stand to be hit by a section of a massive Republican budget bill which would tax foreign investors in the United States.
The proposed tax, included in Section 899 of the package, would slap a progressive tax burden of up to 20% on overseas investors’ passive income like dividends and royalties.
Entities such as sovereign funds and companies with operations in the U.S. would be subject to the taxes, along with individuals from countries that Washington deems to have unfair practices, most notably digital services taxes.
Some have referred to the section as a "revenge tax" that can used by the Trump administration as a tool to correct discriminatory taxes against U.S. firms. It could raise $116 billion in taxes over 10 years, according to the Congressional Budget Office, which cited estimates from the Joint Committee on Taxation.
But a range of Wall Street voices have flagged concerns that the proposed change would increase tensions between the U.S. and other countries, possibly denting the appetite for American assets during a time when President Donald Trump’s trade agenda and fiscal deficit have global investors pondering their U.S. exposure.
Demand for U.S. Treasuries and the dollar could be particularly dented, strategists have predicted. Deutsche Bank analysts George Saravelos was widely quoted as warning that the legislation would create "the scope for the U.S. administration to transform a trade war into a capital war."
The provision was tucked into a version of Trump’s so-called "One Big Beautiful Bill Act" that has been passed by the House of Representatives. Senate Republicans are now racing to approve their version of the measure, which will then need to be given final approval by the House. GOP lawmakers face a self-imposed July 4 deadline to have the bill on Trump’s desk for signing.
3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads. Writing in a note to clients, analysts at BofA suggested that, although uncertainties still remain around the timing, scope and implementation of the bill, if passed in its current state there could be a "significant impact" on European software, IT services, and payments groups.
For every incremental 5% hike in U.S. taxes, net income at these companies would take a hit of between 1-2%, the brokerage said.
The strategists added that most of the businesses they cover are headquartered in countries -- including the U.K., France, Italy, Spain and Germany -- which would be subject to the Section 899 taxes.
However, the headwinds could be offset by the possibility of "increased global countermeasures" to the U.S. rule changes and lower taxes in domestic markets, the analysts said.
Among some of the software names with exposure to the Section 899 taxes are Dassault Systemes, Fortnox, Sage, SAP, and Teamviewer. IT groups Alten, Atos and Kainos also stand to be affected by the proposal, along with payments companies like Nexi (BIT:NEXII), Wise (LON:WISEa), and Worldline.
