| Pub. 519, U.S. Tax Guide for Aliens |
2004 Tax Year |
Chapter 9 - Tax Treaty Benefits
This is archived information that pertains only to the 2004 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
A nonresident alien (and certain resident aliens) from a country with which the United States has an income tax treaty may
qualify for certain
benefits. Most treaties require that the nonresident alien be a resident of the treaty country to qualify. However, some treaties
require that the
nonresident alien be a national or a citizen of the treaty country.
See Table 9-1 for a list of tax treaty countries.
You can generally arrange to have withholding tax reduced or eliminated on wages and other income that are eligible for tax
treaty benefits. See
Income Entitled to Tax Treaty Benefits in chapter 8.
Topics - This chapter discusses:
-
Typical tax treaty benefits,
-
How to obtain copies of tax treaties, and
-
How to claim tax treaty benefits on your tax return.
Useful Items - You may want to see:
Form (and Instructions)
-
1040NR
U.S. Nonresident Alien Income Tax Return
-
1040NR-EZ
U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents
-
8833
Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)
See chapter 12 for information about getting these publications and forms.
A nonresident alien's treaty income is the gross income on which the tax is limited by a tax treaty. Treaty income includes,
for example, dividends
from sources in the United States that are subject to tax at a tax treaty rate not to exceed 15%. Nontreaty income is the
gross income of a
nonresident alien on which the tax is not limited by a tax treaty.
Figure the tax on treaty income on each separate item of income at the reduced rate that applies to that item under the treaty.
To determine tax on nontreaty income, figure the tax at either the flat 30% rate or the graduated rate, depending upon whether
or not the income is
effectively connected with your trade or business in the United States.
Your tax liability is the sum of the tax on treaty income plus the tax on nontreaty income, but cannot be more than the tax
liability figured as if
the tax treaty had not come into effect.
Example.
Arthur Banks is a nonresident alien who is single and a resident of a foreign country that has a tax treaty with the United
States. He received
gross income of $25,500 during the tax year from sources within the United States, consisting of the following items:
Arthur was engaged in business in the United States during the tax year. His dividends are not effectively connected with
that business. He has no
deductions other than his own personal exemption.
His tax liability, figured as though the tax treaty had not come into effect, is $3,216 determined as follows:
Arthur's tax liability, figured by taking into account the reduced rate on dividend income as provided by the tax treaty,
is $3,006 determined as
follows:
His tax liability, therefore, is limited to $3,006, the tax liability figured using the tax treaty rate on the dividends.
Some Typical Tax Treaty Benefits
The following paragraphs briefly explain the exemptions that are available under tax treaties for personal services income,
remittances,
scholarships, fellowships, and capital gain income. The conditions for claiming the exemptions vary under each tax treaty.
For more information about
the conditions under a particular tax treaty, see Publication 901. Or, you may download the complete text of most U.S. tax
treaties at
www.irs.gov. Technical explanations for many of those treaties are also available at
that site.
Tax treaty benefits also cover income such as dividends, interest, rentals, royalties, pensions, and annuities. These types
of income may be exempt
from U.S. tax or may be subject to a reduced rate of tax. For more information, see Publication 901 or the applicable tax
treaty.
Nonresident aliens from treaty countries who are in the United States for a short stay and also meet certain other requirements
may be exempt from
tax on their compensation received for personal services performed in the United States. Many tax treaties require that the
nonresident alien claiming
this exemption be present in the United States for a total of not more than 183 days during the tax year. Other tax treaties
specify different periods
of maximum presence in the United States, such as 180 days or 90 days. Spending part of a day in the United States counts
as a day of presence.
Tax treaties may also require that:
-
The compensation cannot be more than a specific amount (frequently $3,000), and
-
The individual have a foreign employer; that is, an individual, corporation, or entity of a foreign country.
Under many income tax treaties, nonresident alien teachers or professors who temporarily visit the United States for the primary
purpose of
teaching at a university or other accredited educational institution are not subject to U.S. income tax on compensation received
for teaching for the
first 2 or 3 years after their arrival in the United States. Many treaties also provide exemption for engaging in research.
Generally, the teacher or professor must be in the United States primarily to teach, lecture, instruct, or engage in research.
A substantial part
of that person's time must be devoted to those duties. The normal duties of a teacher or professor include not only formal
classroom work involving
regularly scheduled lectures, demonstrations, or other student-participation activities, but also the less formal method of
presenting ideas in
seminars or other informal groups and in joint efforts in the laboratory.
Employees of Foreign Governments
All treaties have provisions for the exemption of income earned by certain employees of foreign governments. However, a difference
exists among
treaties as to who qualifies for this benefit. Under many treaties, aliens admitted to the United States for permanent residence
do not qualify. Under
most treaties, aliens who are not nationals or subjects of the foreign country do not qualify. Employees of foreign governments
should read the
pertinent treaty carefully to determine whether they qualify for benefits. Chapter 10 of this publication also has information
for employees of
foreign governments.
Students, Apprentices, and Trainees
Under many income tax treaties, students, apprentices, and trainees are exempt from tax on remittances (including scholarship
and fellowship
grants) received from abroad for study and maintenance. Also, under some treaties, a limited amount of compensation received
by students, apprentices,
and trainees may be exempt from tax.
If you entered the United States as a nonresident alien, but are now a resident alien, the treaty exemption may still apply.
See Students,
Apprentices, and Trainees Who Became Resident Aliens, later, under Resident Aliens.
Most treaties provide for the exemption of gains from the sale or exchange of personal property. Generally, gains from the
sale or exchange of real
property located in the United States are taxable.
Resident aliens may qualify for tax treaty benefits in the situations discussed below.
U.S. Residency Under Tax Treaty “Tie-Breaker” Rule
In certain circumstances, individuals who are treated as residents of the United States under an income tax treaty (after
application of the
so-called “tie-breaker” rule) will be entitled to treaty benefits. (The “tie-breaker” rule is explained in chapter 1 under Effect of
Tax Treaties.) If this applies to you, you generally will not need to file a Form 8833 for the income for which treaty benefits are claimed.
This is because the income will typically be of a category for which disclosure on a Form 8833 is waived. See Exceptions, later, under
Reporting Treaty Benefits Claimed.
In most cases, you also will not need to report the income on your Form 1040 because the income will be exempt from U.S. tax
under the treaty.
However, if the income has been reported as taxable income on a Form W-2 or other information return, you should report it
on the appropriate line of
Form 1040 (for example, line 7 in the case of wages or salaries). Enter the amount for which treaty benefits are claimed in
parentheses on Form 1040,
line 21. Next to the amount write “Exempt income” and give the treaty country and treaty article. On Form 1040, subtract this amount from your
income to arrive at total income on Form 1040, line 22.
Also follow the above procedure for income on which the treaty only reduces the amount of U.S. tax instead of providing a
complete exemption from
U.S. tax. Attach a statement to Form 1040 showing a computation of the tax at the reduced rate. Also show the treaty country
and treaty article that
provides for the reduced tax rate. Include this tax on Form 1040, line 62. On the dotted line next to line 62, write “Tax from attached
statement” and the amounts.
Example.
Jacques Dubois, who is a resident of the United States under Article 4 of the U.S.-France income tax treaty, receives French
social security
benefits. Under Article 18(1)(b) of the treaty, French social security benefits are not taxable by the United States. Mr.
Dubois is not required to
file a Form 8833 for his French social security benefits or report the benefits on Form 1040.
Special Rule for Canadian and German Social Security Benefits
Under income tax treaties with Canada and Germany, if a U.S. resident receives social security benefits from Canada or Germany,
those benefits are
treated for U.S. income tax purposes as if they were received under the social security legislation of the United States.
If you receive social
security benefits from Canada or Germany, include them on line 1 of your Social Security Benefits Worksheet for purposes of
determining the taxable
amount to be reported on Form 1040, line 20b or Form 1040A, line 14b. You are not required to file a Form 8833 for those benefits.
Students, Apprentices, and Trainees Who Became Resident Aliens
Generally, you must be a nonresident alien student, apprentice, or trainee in order to claim a tax treaty exemption for remittances
from abroad
(including scholarship and fellowship grants) for study and maintenance in the United States. However, if you entered the
United States as a
nonresident alien, but you are now a resident alien for U.S. tax purposes, the treaty exemption will continue to apply if
the tax treaty has an
exception to the treaty's saving clause. If you qualify under an exception to the treaty's saving clause, you can avoid income
tax withholding by
giving the payor a Form W-9 with the statement required by the Form W-9 instructions.
In most cases, you also will not need to report the income on your Form 1040 because the income will be exempt from U.S. tax
under the treaty.
However, if the income has been reported as taxable income on a Form W-2 or other information return, you should report it
on the appropriate line of
Form 1040 (for example, line 7 in the case of wages or salaries). Enter the amount for which treaty benefits are claimed in
parentheses on Form 1040,
line 21. Next to the amount write “Exempt income” and give the treaty country and treaty article. On Form 1040, subtract this amount from your
income to arrive at total income on Form 1040, line 22.
Example.
Mr. Yu, a citizen of the People's Republic of China, entered the United States as a nonresident alien student on January 1,
2000. He remained a
nonresident alien through 2004 and was able to exclude his scholarship from U.S. tax in those years under Article 20 of the
U.S.-China income tax
treaty. On January 1, 2005, he became a resident alien under the substantial presence test because his stay in the United
States exceeded 5 years.
Even though Mr. Yu is now a resident alien, the provisions of Article 20 still apply because of the exception to the saving
clause in paragraph 2 of
the Protocol to the U.S.-China treaty dated April 30, 1984. Mr. Yu should submit Form W-9 and the required statement to the
payor.
Reporting Treaty Benefits Claimed
If you claim treaty benefits that override or modify any provision of the Internal Revenue Code, and by claiming these benefits
your tax is, or
might be, reduced, you must attach a fully completed Form 8833 to your tax return. See Exceptions, below, for the situations where you are
not required to file Form 8833.
You must file a U.S. tax return and Form 8833 if you claim the following treaty benefits.
-
A reduction or modification in the taxation of gain or loss from the disposition of a U.S. real property interest based on
a
treaty.
-
A credit for a specific foreign tax for which foreign tax credit would not be allowed by the Internal Revenue Code.
You must also file Form 8833 if you receive payments or income items totaling more than $100,000 and you determine your country
of residence under
a treaty and not under the rules for residency discussed in chapter 1.
These are the more common situations for which Form 8833 is required.
Exceptions.
You do not have to file Form 8833 for any of the following situations.
-
You claim a reduced rate of withholding tax under a treaty on interest, dividends, rent, royalties, or other fixed or determinable
annual or
periodic income ordinarily subject to the 30% rate.
-
You claim a treaty reduces or modifies the taxation of income from dependent personal services, pensions, annuities, social
security and
other public pensions, or income of artists, athletes, students, trainees, or teachers. This includes taxable scholarship
and fellowship
grants.
-
You claim a reduction or modification of taxation of income under an International Social Security Agreement or a Diplomatic
or Consular
Agreement.
-
You are a partner in a partnership or a beneficiary of an estate or trust and the partnership, estate, or trust reports the
required
information on its return.
-
The payments or items of income that are otherwise required to be disclosed total no more than $10,000.
Penalty for failure to provide required information on Form 8833.
If you are required to report the treaty benefits but do not, you may be subject to a penalty of $1,000 for each failure.
Additional information.
For additional information, see section 301.6114-1(c) of the Income Tax Regulations.
Table 9–1. Table of Tax Treaties (Updated through December 31, 2004)
|
Country |
Official Text
Symbol
1 |
General
Effective Date |
Citation |
Applicable Treasury Explanations
or Treasury Decision (T.D.) |
|
Australia
2 |
TIAS 10773 |
Dec. 1, 1983 |
1986-2 C.B. 220 |
1986-2 C.B. 246 |
|
Protocol |
TIAS |
Jan. 1, 2004 |
|
|
|
Austria |
TIAS |
Jan. 1, 1999 |
|
|
|
Barbados |
TIAS 11090 |
Jan. 1, 1984 |
1991-2 C.B. 436 |
1991-2 C.B. 466 |
|
Protocol |
TIAS |
Jan. 1, 1994 |
|
|
|
Protocol |
TIAS |
Jan. 1, 2005 |
|
|
|
Belgium |
TIAS 7463 |
Jan. 1, 1971 |
1973-1 C.B. 619 |
|
|
Protocol |
TIAS 11254 |
Jan. 1, 1988 |
|
|
|
Canada
3 |
TIAS 11087 |
Jan. 1, 1985 |
1986-2 C.B. 258 |
1987-2 C.B. 298 |
|
Protocol |
TIAS |
Jan. 1, 1996 |
|
|
|
China, People's Republic of |
TIAS 12065 |
Jan. 1, 1987 |
1988-1 C.B. 414 |
1988-1 C.B. 447 |
|
Commonwealth of Independent States
4 |
TIAS 8225 |
Jan. 1, 1976 |
1976-2 C.B. 463 |
1976-2 C.B. 475 |
|
Cyprus |
TIAS 10965 |
Jan. 1, 1986 |
1989-2 C.B. 280 |
1989-2 C.B. 314 |
|
Czech Republic |
TIAS |
Jan. 1, 1993 |
|
|
|
Denmark |
TIAS |
Jan. 1, 2001 |
|
|
|
Egypt |
TIAS 10149 |
Jan. 1, 1982 |
1982-1 C.B. 219 |
1982-1 C.B. 243 |
|
Estonia |
TIAS |
Jan. 1, 2000 |
|
|
|
Finland |
TIAS 12101 |
Jan. 1, 1991 |
|
|
|
France |
TIAS |
Jan. 1, 1996 |
|
|
|
Germany |
TIAS |
Jan. 1, 1990
5 |
|
|
|
Greece |
TIAS 2902 |
Jan. 1, 1953 |
1958-2 C.B. 1054 |
T.D. 6109, 1954-2 C.B. 638 |
|
Hungary |
TIAS 9560 |
Jan. 1, 1980 |
1980-1 C.B. 333 |
1980-1 C.B. 354 |
|
Iceland |
TIAS 8151 |
Jan. 1, 1976 |
1976-1 C.B. 442 |
1976-1 C.B. 456 |
|
India |
TIAS |
Jan. 1, 1991 |
|
|
|
Indonesia |
TIAS 11593 |
Jan. 1, 1990 |
|
|
|
Ireland |
TIAS |
Jan. 1, 1998 |
|
|
|
Israel |
TIAS |
Jan. 1, 1995 |
|
|
|
Italy |
TIAS 11064 |
Jan. 1, 1985 |
1992-1 C.B. 442 |
1992-1 C.B. 473 |
|
Jamaica |
TIAS 10207 |
Jan. 1, 1982 |
1982-1 C.B. 257 |
1982-1 C.B. 291 |
|
Japan (old treaty)
6 |
TIAS 7365 |
Jan. 1, 1973 |
1973-1 C.B. 630 |
1973-1 C.B. 653 |
|
Japan (new treaty)
6 |
TIAS |
Jan. 1, 2005 |
|
|
|
Kazakhstan |
TIAS |
Jan. 1, 1996 |
|
|
|
Korea, Republic of |
TIAS 9506 |
Jan. 1, 1980 |
1979-2 C.B. 435 |
1979-2 C.B. 458 |
|
Latvia |
TIAS |
Jan. 1, 2000 |
|
|
|
Lithuania |
TIAS |
Jan. 1, 2000 |
|
|
|
Luxembourg |
TIAS |
Jan. 1, 2001 |
|
|
|
Mexico |
TIAS |
Jan. 1, 1994 |
1994-2 C.B. 424 |
1994-2 C.B. 489 |
|
Protocol |
TIAS |
Jan. 1, 2004 |
|
|
|
Morocco |
TIAS 10195 |
Jan. 1, 1981 |
1982-2 C.B. 405 |
1982-2 C.B. 427 |
|
Netherlands |
TIAS |
Jan. 1, 1994 |
|
|
|
Protocol |
TIAS |
Jan.1, 2005 |
|
|
|
New Zealand |
TIAS 10772 |
Nov. 2, 1983 |
1990-2 C.B. 274 |
1990-2 C.B. 303 |
|
Norway |
TIAS 7474 |
Jan. 1, 1971 |
1973-1 C.B. 669 |
1973-1 C.B. 693 |
|
Protocol |
TIAS 10205 |
Jan. 1, 1982 |
1982-2 C.B. 440 |
1982-2 C.B. 454 |
|
Pakistan |
TIAS 4232 |
Jan. 1, 1959 |
1960-2 C.B. 646 |
T.D. 6431, 1960-1 C.B. 755 |
|
Philippines |
TIAS 10417 |
Jan. 1, 1983 |
1984-2 C.B. 384 |
1984-2 C.B. 412 |
|
Poland |
TIAS 8486 |
Jan. 1, 1974 |
1977-1 C.B. 416 |
1977-1 C.B. 427 |
|
Portugal |
TIAS |
Jan. 1, 1996 |
|
|
|
Romania |
TIAS 8228 |
Jan. 1, 1974 |
1976-2 C.B. 492 |
1976-2 C.B. 504 |
|
Russia |
TIAS |
Jan. 1, 1994 |
|
|
|
Slovak Republic |
TIAS |
Jan. 1, 1993 |
|
|
|
Slovenia |
TIAS |
Jan. 1, 2002 |
|
|
|
South Africa |
TIAS |
Jan. 1, 1998 |
|
|
|
Spain |
TIAS |
Jan. 1, 1991 |
|
|
|
Sri Lanka |
TIAS |
Jan. 1, 2004 |
|
|
|
Sweden |
TIAS |
Jan. 1, 1996 |
|
|
|
Switzerland |
TIAS |
Jan. 1, 1998 |
|
|
|
Thailand |
TIAS |
Jan. 1, 1998 |
|
|
|
Trinidad and Tobago |
TIAS 7047 |
Jan. 1, 1970 |
1971-2 C.B. 479 |
|
|
Tunisia |
TIAS |
Jan. 1, 1990 |
|
|
|
Turkey |
TIAS |
Jan. 1, 1998 |
|
|
|
Ukraine |
TIAS |
Jan. 1, 2001 |
|
|
|
United Kingdom
7 |
TIAS |
Jan. 1, 2004 |
|
|
|
Venezuela |
TIAS |
Jan. 1, 2000 |
|
|
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