A taxpayer who takes a yield position based on a treaty is generally required to disclose that position, unless an exception applies. A treaty-based return position is a tax reporting position, arguing that a U.S. tax treaty overrides or modifies an otherwise applicable provision of the Internal Revenue Code, resulting in lower tax. Generally, a separate IRS Form 8833 must be filed for each treaty-based return position.
While the substantial presence the rules are generally applicable, they do not supersede the applicable rules tax Convention definitions of residence. And, if the individual is dual resident under the tax laws of the United States and a tax treaty country, the taxpayer may still be able to claim benefits under a tax Convention. For example, many U.S. tax treaties contain residency tiebreaker clauses that may make an individual a non-resident of the United States even if they qualify. substantial presence test.
Who should file a Form 8833?
Taxpayers using a treaty-based return position must disclose that position via Form 8833. In addition, dual-resident taxpayers must use Form 8833 to make the disclosure required by Section 301.7701(b)-7 of the US regulations Treasure.
Treasury regulations specifically require a Form 8833 for the following treaty-based return positions:
- That a non-discrimination provision of the treaty precludes the application of an otherwise applicable provision of the Code, except with respect to the exercise of a choice under section 897(i);
- Whether a treaty reduces or modifies the taxation of the gain or loss resulting from the disposition of a American real estate interest;
- That a treaty reduces or modifies the branch profits tax (Section 884(a)) or the excess interest tax (Section 884(f)(1)(B));
- That a treaty exempts from tax or reduces the rate of tax on dividends or interest paid by a foreign corporation that are US-source under section 861(a)(2)(B) or 884(f)(1)(A);
- That a treaty exempts from tax or reduces the rate of fixed or determinable annual or periodic income tax (FDAP) that a foreign person receives from a U.S. person, but only if:
- (1) The amount is incorrectly reported on Form 1042-S and the foreign person is: (a) a controlled foreign corporation (as defined in Section 957) of which the US Person is a US Shareholder (as defined in Section 951(b)); (b) a foreign corporation that is controlled by a U.S. Person as defined in Section 6038; (California foreign company 25% shareholder the US Person under Section 6038A; or (d) a Foreign Related Party, as defined in Section 6038A(c)(2)(B);
- (2) The foreign person is related to the payor under section 267(b) or section 707(b) and receives income greater than $500,000, in the aggregate, from the payor and the treaty contains a limitation of benefits item; Where
- (3) The treaty imposes additional conditions for entitlement to treaty benefits (for example, the treaty requires the foreign corporation claiming preferential dividend rate to meet ownership percentage and ownership period requirements) ;
- This income efficiently connected with a U.S. trade or business of a taxpayer is not attributable to a a permanent establishment or a fixed base in the United States;
- That a treaty alters the amount of a taxpayer’s business profits attributable to a permanent establishment or fixed base in the United States;
- That a treaty changes the source of any item of income or deduction (unless the taxpayer is an individual);
- That a treaty grants a foreign tax credit what is not authorized by the Code;
- That the residence of an individual is determined under a treaty and independently of the Code.
The foregoing list is not exhaustive of all items that must be reported on a Form 8833. In addition, certain specifically reportable items may be excluded under Treasury Regulations.
Exceptions to Form 8833 Reporting
Treasury regulations specifically waive the filing of a Form 8833 for certain treaty-based return positions, including:
- That a treaty reduces or modifies the taxation of income derived by an individual from dependent personal services, pensions, annuities, social security and other public pensions, as well as income derived by entertainers, athletes, students, trainees or teachers;
- That a Social Security Aggregation Agreement or a Diplomatic or Consular Agreement decreases or modifies a taxpayer’s income;
- That a treaty exempts a taxpayer from the excise tax imposed by Section 4371, but only if certain conditions are met (for example, the taxpayer has entered into an insurance excise tax termination agreement with the IRS);
- That a treaty exempts from tax or reduces the income tax rate of the FDAP, if the beneficial owner is an individual or a government entity;
- If a partnership, trust or estate has disclosed a treaty position that the partner or beneficiary would otherwise be required to disclose;
- Except as modified by the instructions below, a treaty exempts from tax or reduces the rate of FDAP income tax that is properly reported on Form 1042-S and the amount is received by a:
- Related Party (as defined in Section 6038A(c)(2)) of a Reporting Company as defined in Section 6038A(a) (a domestic company 25% foreign-owned and required to complete Form 5472 );
- Beneficial owner who holds a direct account with a U.S. financial institution or qualified intermediary, or a direct partner, beneficiary, or owner of a source foreign partnership or trust, with such U.S. financial institution, qualified intermediary, or foreign source partnership or foreign source partnership trust (whether reporting on Form 1042-S is on a specific beneficiary or on an aggregate basis); Where
- Taxpayer who is not an individual or a state, if the monies are not received through an account with an intermediary or in respect of an interest in a partnership or a simple trust or constituent, and if the sums do not total more than $500,000 for the taxation year.
Taxpayers with dual residence
A person who qualifies as both a resident of the United States and of another country is treated as a dual resident taxpayer. A dual-resident taxpayer of the United States and a country that has a tax treaty with the United States will generally resolve conflicting residency claims under the tiebreaker provisions of the treaty. A dual resident claiming treaty benefits as a resident of the foreign country must file Form 1040-NR, Non-U.S. Resident Alien Income Tax Return, with Form 8833 attached.
A dual resident taxpayer may also be eligible for US competent authority assistance.
As a caveat, the IRS position is that a taxpayer who is treated as a resident of a foreign country under a tax treaty continues to be treated as a U.S. resident for purposes other than U.S. income tax calculation and reporting, as information reporting requirements, including the following forms:
and certain other IRS forms.