On July 4, 2025, President Donald Trump signed into law the One Big Beautiful Bill Act (the OBBBA), a comprehensive budget reconciliation bill that brings incremental yet meaningful changes that will impact Canadian investment funds, financial institutions, and multinational corporations with investments or operations in the U.S. This article explores some of the most relevant provisions of the OBBBA, and notes the proposed changes that were ultimately not included in the final version of the OBBBA and other interesting open issues.
Changes impacting inbound investments in the U.S. and the taxation of U.S. corporations
Bonus depreciation for qualified property
The Tax Cuts and Jobs Act (TCJA) of 2017 provided U.S. corporations with the ability to elect 100% bonus depreciation for “qualified property” (generally equipment, machinery, and other short-lived assets); however, the bonus percentage began phasing out in 2023. The OBBBA permanently reinstates the 100% bonus depreciation election for qualified property acquired and placed in service after January 19, 2025.
Immediate expensing for qualifying production property
The OBBBA also provides for a temporary election to take an immediate 100% depreciation deduction for certain non-residential real properties (e.g., manufacturing and agricultural or chemical production facilities) which began construction between January 19, 2025 and January 1, 2029, and are placed in service in the U.S. before January 1, 2031.
Immediate expensing for R&D
Prior to the TCJA, certain domestic R&D expenditures were permitted to be immediately expensed; however, the TCJA generally required such domestic R&D expenses to be capitalized and amortized over five years. The OBBBA permanently reinstates immediate expensing of these R&D expenditures for tax years beginning after December 31, 2024.
Business interest expense limitation
Under prior law, for tax years beginning after January 1, 2022, the deduction for business interest expenses was limited to 30% of adjusted taxable income based on EBIT (i.e., not including depreciation or amortization). The OBBBA permanently restores the pre-2022 rules which apply the 30% limit to adjusted taxable income calculated on an EBITDA basis.
[T]his expansion of favorable asset-level tax treatment may incentivize structuring acquisitions as asset deals rather than stock deals in order to take advantage of bonus depreciation.
Takeaways
These changes for inbound investments are generally favorable for investors and businesses and will incentivize capital expenditures and improve cash flow. Further, this expansion of favorable asset-level tax treatment may incentivize structuring acquisitions as asset deals rather than stock deals in order to take advantage of bonus depreciation under these new rules. The revisions to the business interest expense limitation has the potential to make financing U.S. companies with cross-border debt more attractive in many situations. Nevertheless, there are some limitations and eligibility requirements for these deductions that will require further consideration depending on each investment's particular facts and circumstances.
Additionally, these new benefits are generally geared towards incentivizing domestic spending and will be less beneficial with respect to outbound investments—for example, certain income from CFCs and GILTI are not included in adjusted taxable income for purposes of the business interest expense limitation.
Changes impacting outbound investments and cross-border holding structures
Reinstatement of CFC downward attribution exception
Prior to its repeal under the TCJA, §958(b)(4) of the U.S. Internal Revenue Code (the Code) prevented the “downward attribution” of stock owned by foreign persons to U.S. persons for purposes of the “controlled foreign corporation” (CFC) rules. The OBBBA restores this provision.
This change eliminates many of the unintended consequences of the TCJA's repeal of the downward attribution rule (e.g., where ownership of a single U.S. subsidiary by a non-U.S. parent corporation causes all non-U.S. subsidiaries of the parent corporation to be deemed CFCs). However, the OBBBA also includes a new anti-abuse rule (under new §951B of the Code) which will generally still result in CFC treatment for a “foreign controlled foreign corporation”, which generally is defined to mean a foreign corporation that would be more than 50% owned by a United States shareholder if downward attribution applies. In effect, this rule imposes a limited application of downward attribution that is more consistent with what the TCJA's repeal of §958(b)(4) was intended to achieve.
Modifications to GILTI, BEAT, and FDII tax regimes
Prior to the OBBBA, the global intangible low-taxed income (GILTI) of U.S. corporations would have been subject to a 13.125% effective tax rate (the 21% U.S. corporate tax rate with a 37.5% deduction) beginning in 2026, and foreign derived intangible income (FDII) would have been subject to a 16.406% effective tax rate (as a result of a 21.875% deduction).
Under the OBBBA, for tax years beginning after December 31, 2025, GILTI (now renamed Net CFC Tested Income, or NCTI) is subject to an effective tax rate of 12.6% (the 21% U.S. corporate tax rate with a 40% deduction), and FDII (now renamed Foreign-Derived Deduction Eligible Income, or FDDEI) is subject to an effective tax rate of 14% (as a result of a 33.34% deduction).
The Base Erosion and Anti-abuse Tax (BEAT) rate is permanently set at 10.5% for taxable years beginning after December 31, 2025. Under previous law, the BEAT rate was 10% and would have increased to 12.5% in 2026.
Takeaways
These changes to the GILTI, FDII, and BEAT regimes are not as broad as in earlier proposed versions of the bill and are generally favorable compared to the rate that would have come into effect if the OBBBA was not enacted. However, there are also some potentially restrictive changes to how income, expenses, deductions, and foreign tax credits are calculated and allocated for these purposes. Canadian investment funds and multinational group members will need to assess the ultimate U.S. tax impact on U.S. portfolio companies and/or corporate subsidiaries.
Other changes impacting specific sectors
Renewable energy
The OBBBA significantly reduces and phases out tax credits for renewable energy projects, particularly wind and solar projects, although certain tax credit benefits relating to specific industries (e.g., credits relating to clean fuel and agri-bio diesel production, fuel cells, and geothermal leasing arrangements) have been enhanced and/or extended.
In addition, the OBBBA introduces new restrictions for renewable energy projects with respect to “foreign entities of concern” (FEOCs). Projects that receive “material assistance” or are controlled by or affiliated with FEOCs past certain thresholds may be ineligible (and required to pay back any previously claimed) renewable energy tax credits.
Manufacturing/technology
The OBBBA increases the Advanced Manufacturing Investment Credit from 25% to 35% for semiconductor manufacturing facilities placed in service after December 31, 2025. It also expands and/or extends the phaseout period for the Advanced Manufacturing Production Credit for certain eligible facilities (e.g., facilities producing batteries, critical minerals, etc.), subject to restrictions relating to FEOCs.
Healthcare
The near-to-mid-term impacts of the OBBBA on the healthcare sector generally are somewhat unclear. On one hand, the OBBBA includes new restrictions on Medicare eligibility; on the other, there are provisions to fund grants for rural hospitals, and the new provisions for immediate R&D expensing may provide substantial immediate benefit to companies in the pharmaceutical, health technology, and biotech sectors.
Real estate
For taxable years beginning after December 31, 2025, the OBBBA increases the asset limit for taxable REIT subsidiaries to 25% of the REIT's assets (currently 20% pursuant to the TCJA). This change will improve flexibility in REIT structuring.
Remittance transfers
The OBBBA introduces a new excise tax on outbound “remittance transfers” from U.S. accounts, effective January 1, 2026. However, this excise tax only applies where the sender provides cash or physical instruments such as a money order or cashier's check to the transfer provider to fund the transfer. Moreover, it does not apply to transfers of funds withdrawn from certain listed financial institutions or from a U.S.-issued debit or credit card. Accordingly, this excise tax generally is not expected to impact transfers relating to cross-border business operations and transactions.
Looking ahead
Proposed Section 899 of the Code, the so-called “revenge tax”, would have provided for punitive tax rates on residents of “discriminatory foreign countries” that were determined to impose “unfair foreign taxes” on U.S. taxpayers or their foreign subsidiaries. As a result of negotiations between the U.S. and other countries, this provision was ultimately omitted from the final version of the OBBBA. However, any of the various tax proposals considered but not ultimately included in the OBBBA could be raised in future proposed legislation. In addition, many of the changes in the OBBBA will require further guidance and clarification (including the issuance of new Treasury Regulations) to implement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
