A taxpayer taking a treaty-based return position is generally required to disclose that position, unless an exception applies. A treaty-based return position is a tax reporting position, maintaining that a U.S. tax treaty overrules or modifies an otherwise applicable provision of the Internal Revenue Code, resulting in a lower tax. Generally, a separate IRS Form 8833 must be filed for each treaty-based return position.
While the substantial-presence rules are generally applicable, they do not override applicable tax treaty definitions of residency. And, if the individual is a dual-resident under the tax laws of both the U.S and a tax treaty country, the taxpayer may still be able to claim benefits under an income tax treaty. For example, many U.S. tax treaties contain residency tie-breaker provisions that may render an individual a nonresident of the U.S. even though that individual meets the substantial presence test.
Our Freeman Law interactive tax treaty map provides a link to tax treaty materials for each U.S. treaty partner:
Who Must File a Form 8833?
Taxpayers utilizing a treaty-based return position must disclose that position through a Form 8833. In addition, dual-resident taxpayers must utilize a Form 8833 to make the disclosure required by Treasury Regulation section 301.7701(b)-7.
What is a Treaty-Based Return Position?
Treasury regulations specifically require a Form 8833 for the following treaty-based return positions:
- That a nondiscrimination provision of the treaty prevents the application of an otherwise applicable Code provision, other than with respect to making an election under section 897(i);
- That a treaty reduces or modifies the taxation of gain or loss from the disposition of a U.S. real property interest;
- That a treaty reduces or modifies the branch profits tax (section 884(a)) or the tax on excess interest (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 U.S.-sourced under section 861(a)(2)(B) or section 884(f)(1)(A);
- That a treaty exempts from tax or reduces the rate of tax on fixed or determinable annual or periodical (FDAP) income that a foreign person receives from a U.S. person, but only if:
- (1) The amount is not properly reported on Form 1042-S and the foreign person is: (a) a controlled foreign corporation (as defined in section 957) in which the U.S. person is a U.S. shareholder (as defined in section 951(b)); (b) a foreign corporation that is controlled by a U.S. person within the meaning of section 6038; (c) a foreign corporation that is a 25-percent shareholder of the U.S. person under section 6038A; or (d) a foreign related party, as defined under 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 exceeding $500,000, in the aggregate, from the payor and the treaty contains a limitation on benefits article; or
- (3) The treaty imposes additional conditions for the entitlement of treaty benefits (for example, the treaty requires the foreign corporation claiming a preferential rate on dividends to meet ownership percentage and ownership period requirements);
- That income effectively connected with a U.S. trade or business of a taxpayer is not attributable to a permanent establishment or a fixed base in the United States;
- That a treaty modifies the amount of business profits of a taxpayer attributable to a permanent establishment or a fixed base in the United States;
- That a treaty alters the source of any item of income or deduction (unless the taxpayer is an individual);
- That a treaty grants a credit for a foreign tax which is not allowed by the Code;
- That the residency of an individual is determined under a treaty and apart from the Code.
The foregoing list is not exhaustive of every position that must be reported on a Form 8833. Moreover, some specifically reportable positions may be excepted under the Treasury Regulations.
Exceptions from Form 8833 Reporting
The 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 artists, athletes, students, trainees, or teachers;
- That a Social Security Totalization Agreement or Diplomatic or Consular Agreement reduces or modifies the income of a taxpayer;
- 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 closing agreement with the IRS);
- That a treaty exempts from tax or reduces the rate of tax on FDAP income, if the beneficial owner is an individual or governmental entity;
- If a partnership, trust, or estate has disclosed a treaty position that the partner or beneficiary would otherwise be required to disclose;
- Unless modified by the instructions below, that a treaty exempts from tax or reduces the rate of tax on FDAP income that is properly reported on Form 1042-S and the amount is received by a:
- Related party (within the meaning of section 6038A(c)(2)) from a reporting corporation within the meaning of section 6038A(a) (a domestic corporation that is 25% foreign-owned and required to file Form 5472);
- Beneficial owner that is a direct account holder of a U.S. financial institution or qualified intermediary, or a direct partner, beneficiary, or owner of a withholding foreign partnership or trust, from that U.S. financial institution, qualified intermediary, or withholding foreign partnership or withholding foreign trust (whether the Form 1042-S reporting is on a specific payee or pooled basis); or
- Taxpayer that is not an individual or a State, if the amounts are not received through an account with an intermediary or with respect to an interest in a partnership or a simple or grantor trust, and if the amounts do not total more than $500,000 for the tax year.
An individual who qualifies as a resident of both the United States and 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 the conflicting claims of residency under the treaty’s tie-breaker provisions. A dual-resident claiming treaty benefits as a resident of the foreign country must file a Form 1040-NR, U.S. Nonresident Alien Income Tax Return, with Form 8833 attached.
A dual- resident taxpayer may also be eligible for U.S. competent authority assistance.
As a word of caution, it is the IRS’s position that a taxpayer who is treated as a resident of a foreign country under an income tax treaty continues to be treated as a U.S. resident for purposes other than calculating and reporting U.S. income tax—such as information-return reporting obligations, including the following forms:
- IRS Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations
- IRS Form 3520, Reporting Transactions with Foreign Trusts and the Receipt of Foreign Gifts
- Form 3520-A, Information Return of Foreign Trusts With a U.S. Owner
- Form 8865, U.S. Persons and Foreign Partnerships
and certain other IRS forms.
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