Tax Treaty Information

Where to Find Treaty Information

An income tax treaty is an agreement between two countries under which each country agrees to limit the application of its domestic tax laws for residents of the other country. Therefore, if you have come to the United States from a country with which the U.S. has a tax treaty in effect, you should check the provisions of the treaty to see if any of your income is exempt from U.S. tax under the treaty, or is subject to a reduced rate. A treaty provision will generally override U.S. statutory law.

IRS Publication 901, U.S. Tax Treaties, contains summaries of all the U.S. tax treaties in effect at the time the publication was printed. It can be printed from the U.S. Treasury's Forms and Publications site. See New Developments for updates on new treaties. New income tax treaties with the republics of Estonia, Latvia, Lithuania and Venezuela entered into force on December 30, 1999. For updates from the U.S. Treasury on current treaty ratifications, see its Tax Policy Documents site. For the complete text of all tax treaties in effect with the United States go to the IRS Income Tax Treaties page.

In Publication 901, summary information on special treaty rates for dividends, capital gains, and other non-wage income is in Table 1

beginning on page 27. These rates relate to income that is not effectively connected with a U.S. trade or business, reported on page 4 of Form 1040NR. Summary information on treaty exempt wages and scholarship payments is in Table 2 beginning on page 30. More detailed information is provided for each country in the first part of Publication 901.

Treaty Benefits for Resident Aliens

Generally, all of the tax treaties to which the U.S. is a party contain a "saving clause," which is meant to prevent residents of the treaty partner who are also citizens or residents of the U.S. from using the treaty to reduce their U.S. tax liability. Therefore, as a general rule, those individuals who qualify as a U.S. resident, under either the green card test or the substantial presence test, are not eligible for treaty benefits. However, most tax treaties contain an exception to the "saving clause" provision for individuals who claim tax treaty benefits as students, trainees, teachers and researchers. Therefore, if you are no longer an exempt individual, income you receive as an F, J, M or Q visa holder might be exempt from U.S. taxation under the treaty with your home country, even if you are classified as a resident for U.S. tax purposes.

How to File Your Return

As a resident, you will file Form 1040, Form 1040A or Form 1040-EZ, whichever applies to you. Write at the top of this form, "TAX TREATY BENEFITS" and exclude your treaty exempt income from the form. Attach to the form a completed page 5 of Form 1040NR. Be sure to explain the treaty benefits you are claiming in Item M and provide the treaty article number. Complete the tax return as you normally would as a resident, claiming the standard deduction if applicable. Mail the return to the Internal Revenue Service Center, Philadelphia, PA 19255.

• Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b): If you are classified as a resident for U.S. tax purposes, but qualify to take advantage of treaty provisions, the election generally requires a disclosure statement on this form. However, the filing of Form 8833 is not required of an F, J, M or Q visa holder. Reg §301.6114-1(c)(3).

Some Treaty Provision Examples

Following are some examples that demonstrate the procedures you should use to determine your treaty benefits from IRS Publication 901. First, however, here are some definitions of treaty terms:

• Independent personal services: Self-employment income
  
• Dependent personal services: Wages of employees
  
• Scholarship or fellowship: Does not include compensation for services

Sue from Belgium

Sue is a nonresident who came to the U.S. from Belgium in 1995 on an F-1 visa to study for her master's degree. Sue remained in the U.S. for all of 1999. In 1999 she received a $6,000 scholarship from her university that pays her room and board. She was not required to perform services to receive the money. She also recognized $5,000 in capital gains from the sale of U.S. stocks. How should Sue treat the scholarship and the capital gains for U.S. tax purposes?

Answer:
First, Sue must file Form 1040NR rather than Form 1040NR-EZ because she has capital gain income, which is not effectively connected with Sue's U.S. trade or business. Tax on this income is computed on page 4 of Form 1040NR, and cannot be shown on Form 1040NR-EZ. Sue should receive a Form 1042-S from the university indicating the tax status of her scholarship payments. However, she should check IRS Publication 901 to determine if the university is treating it correctly.

She will look in Table 2 in Publication 901 and find the summary of the U.S./Belgium treaty for effectively connected income on page 30. Income code 15 (column 2), under which scholarship income is reported on Form 1042-S, shows that scholarship income received by an individual who has been in the U.S. for no more than 5 years (column 4) which is paid by any U.S. or foreign resident (column 5) is exempt from tax under Article 21(1) of the treaty (column 7). The maximum amount exempt is unlimited (column 6), so all of her scholarship income is exempt from tax.

With respect to her capital gain income from the sale of stocks, Sue should look in Table 1 in Publication 901 which begins on page 27. Table 1 indicates that capital gains received by a Belgium resident are not taxed (column 9). However, it is important to read the footnotes in the table. Footnote e says capital gains are not taxed only if the taxpayer is in the U.S. for not more than 182 days. Therefore, since Sue was in the U.S. for more than 182 days in 1999, the statutory rate of 30 percent applies to Sue's capital gain income.

Julie from France

Julie is an F-1 student from France who arrived in the U.S. in 1995. In 1999 she received a $10,000 fellowship from the University of Minnesota to serve as a teaching assistant. How is her income treated on her U.S. tax return?

Answer:
A look at Table 2 in Publication 901 indicates that scholarship and fellowship grants received by French residents are tax exempt for up to five years. However, because Julie is performing services for her fellowship, it does not constitute a scholarship or fellowship for treaty purposes. Because Julie is a student, she should look under "studying and training" to see if an exclusion applies. Note that compensation during study or training received for up to five years from a U.S. (or other foreign) resident in the amount of $5,000 annually (p.a.) is excluded under Article 21(1). This should be shown as code 19 on her Form 1042-S.

Frederick from Germany

Frederick is on a J-1 visa from Germany to teach and do research at the University of Minnesota. He plans to stay three years and is paid $15,000 per year. How is his income treated on his U.S. tax return?

Answer:
Looking at Table 2 in Publication 901, it appears that Frederick would qualify for the first two years for the exemption under code 18 (an exemption for teaching generally applies to research too). However, note the limit for the stay in the U.S. is two years. It says on page 13 of Publication 901 that if the stay exceeds two years, the exemption is lost for the entire period. That means Frederick's income would be taxable for the entire period if he stays for his intended duration. He should not submit to the university Form 8233, Exemption From Withholding on Compensation for Independent Personal Services of a Nonresident Alien Individual, but should instead have the university withhold tax from his wages. If Frederick's stay in the U.S. does not exceed two years, he can file amended returns to claim a refund.

Ed from Canada

Ed is a J-1 nonresident from Canada doing post-doctorate work at the University of Minnesota. In 1999 he received $12,000 in wages as a teaching assistant. How is his income treated on his U.S. tax return?

Answer:
Note that Table 2 of Publication 901 says that up to $10,000 of dependent personal services compensation paid by a U.S. resident (or foreign resident) to a Canadian resident is excludable under Article XV of the U.S./Canada treaty. That might imply that Ed can exclude $10,000 of his $12,000 of wages from income. However, on page three of Publication 901, it explains that if the taxpayer earns more than $10,000 the total amount is taxable. Therefore, Ed can not exclude any income under the treaty.