Tax & Accounting Blog

Residency for Tax Treaty Purposes for Individuals Part 3: The Savings Clause Exception

1099, ONESOURCE, Tax Information Reporting, W-8 & W-9 Foreign Reporting, Withholding Management April 25, 2012

Because the United States imposes worldwide taxation on its citizens and immigrants (popularly called green-card holders), all U.S. tax treaties include a provision commonly referred to as a savings clause because it saves the right of the U.S. to tax its citizens and residents wherever they reside in the world. For example, Article 1(4), General Scope, of the U.S. Model Treaty states this rule:

“Except to the extent provided in paragraph 5 [listing articles not affected], this Convention shall not affect the taxation by a Contracting State of its residents (as determined under Article 4 (Resident)) and its citizens …”

This provision can be found in the Miscellaneous Provisions Article near the end of some treaties (for example, Article 29(2) of the treaty with France).

Most treaties provide exceptions from the savings clause for articles providing benefits for studying, training, teaching or engaging in research provided the recipient of the income is not a U.S. citizen or green-card holder. Therefore, resident aliens under the 183-day substantial presence test may keep these benefits (except for the oldest treaties with Greece and Pakistan). As a result, payers should not provide benefits under the articles for employment or self-employment without a determination of U.S. nonresidency status of the recipient based on the 183-day substantial presence formula.