The United States has entered into income tax treaties with a number of foreign countries. Under these treaties, residents of foreign countries are taxed at a reduced rate, or are exempt from U.S. income taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income. If a treaty exemption applies to a particular person, and the proper documents are presented, the person will be exempted from the IRS' NRA withholding requirement.
In order to be granted a tax treaty, an individual must have an SSN (social security number) or an ITIN (individual taxpayer identification number.)
For a non-resident alien to avail himself of the benefits of a tax treaty between the United States and his home country, he must first be a "resident" of that country. Some newer tax treaties define "resident," however older tax treaties do not. In that case the US looks to the laws of the home country to define "resident."
If an NRA does not receive a tax treaty, but is eligible, he may claim the treaty exemption on a US income tax return and justify the claim directly with the IRS.
How a treaty benefit is determined:
- Is there an income tax treaty between the home country and the US?
- Does the individual's US tax residency status qualify under the treaty for a possible exemption?
- Does the treaty contain an article that relates to the individual's primary purpose of presence in the US?
- Is the type of income paid to the individual covered in the applicable article of the tax treaty?
- Does the individual meet the specific qualifications set forth in the applicable tax treaty article?
If the answer is no to any item listed above, then the individual does not qualify for the tax treaty benefit.Taxes will be withheld:
- Dependent compensation (i.e. employment): withhold at NRA rate (Single, 1)
- Independent compensation (ie. honorarium): withhold at 30%
- Scholarship/Fellowship (F, J, M, Q visas): withhold at 14%
If the answer is yes to all items listed above, the individual will generally qualify for the tax treaty benefit. The required form to be completed:
- Form 8233: dependent compensation income
- Form 8233: independent compensation income
- Form W8-BEN: noncompensation income (i.e. non-qualified scholarship)
- Form W8-BEN: royalty income
- Form W-9: resident alien with dependent compensation
Reestablishing Residency: IRS policy requires that an individual reestablish residency and physical presence in the treaty country and be absent from the US for one year (365 days) before allowing treaty benefits a subsequent time. The absence is to assure that the individual has become a resident for tax purposes in the treaty country once again. For example, an F-1 student who changes status to H-1B teacher is not eligible for the teacher/researcher treaty article benefit. This is because the teacher/researcher article benefit is not a continuation of the student/trainee article benefit. The student benefit stops with the change of status. The IRS believes that when an individual is in the US for a long period of time in one status, they are unlikely to be tax resident in their treaty country when they change to the new status.
The IRS does allow that B-1/B-2 visits for unrelated reasons during the year the individual must be home to reestablish residency. Such purposes can be ignored for purposes of the IRS policy requiring the reestablishment of residency between treaty claims.
Change of Status: The IRS generally does not allow treaty benefits to individuals who entered the US in one status and eventually change to a different status, unless the treaty indicates otherwise (such as with the combined benefit rule.) The individual would have to reestablish residency before a second treaty benefit would be allowed.
Primary Purpose: The specific job that an individual holds does not determine a person's primary purpose when determining if an individual qualifies for treaty benefits. It is the primary purpose in their supporting immigration documents that determines the primary purpose for a treaty benefit.
Tie-Breaker Rule: Some NRAs may be a citizen of one foreign country and a resident of another foreign country. The NRA may not pick and choose which treaty would offer the better benefits. In this case the "tie-breaker rule" guidelines should be set out in the residency article of the tax treaties. In general, the treaty to use would be the one where the individual has the closer connection (i.e. where the individual has a permanent home, where the economic connections are closer)
Savings Clause: In most treaties the residency article has a savings clause that allows the US to tax its citizens as if the treaty had not come into effect. It is designed to prevent US citizens or residents from using the tax treaty inappropriately to reduce their US tax liability. However, most treaties offer an exception to the "savings clause" provision for certain types of individuals including students, trainees, teachers and researchers.
Back-to-Back Rule: Some tax treaties prevent an individual from claiming an exemption either during a period immediately following one in which another exemption was claimed or for the same purpose on multiple occasions. Typically, in order to claim an additional treaty, the NRA must return to the home country for a period of one or more years before returning to the US.
Retroactive Clause: Most tax treaties specify a time limit or dollar limit for which the treaty benefit is allowed. However, several income tax treaties contain language stating that the benefits provided under a particular article may not be allowed at all if an individual exceeds the time limit or dollar limits set forth in the treaty article. These particular treaties require retroactive taxation to dollar one if the limit is exceeded. (An individual who ends his employment within the treaty time limit, but then stays on as a tourist for a length of time past the time limit stated in the treaty would invoke the retroactive clause, even though his additional time in the US is for unpaid, tourist activities. The retroactive clause covers his entire physical stay in the US.)
An individual who has been granted a tax treaty with an ITIN who then obtains an SSN, must refile the Form 8233 with the SSN. This is so the ITIN unit can be informed that the old ITIN number is no longer needed.
Tax Treaty Countries (as of 06/07): Australia, Austria, Bangladesh, Barbados, Belgium, Canada, China (Peoples Republic of), Commonwealth of Independent States, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Kazakhstan, Korea (Republic of), Latvia, Lithuania, Luxembourg, Mexico, Morocco, Netherlands, New Zealand, Norway, Pakistan, Philippines, Poland, Portugal, Romania, Russia, Slovak Republic, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Thailand, Trinidad & Tobago, Tunisia, Turkey , Ukraine, United Kingdom, Venezuela.
IRS Publication 901 has the full content of all tax treaties negotiated between the US and the countries listed above.