Tax & Accounting Blog

Residency for Tax Treaty Purposes for Individuals Part 4: The Tax Expatriation Rule

1099, ONESOURCE, Tax Information Reporting, W-8 & W-9 Foreign Reporting, Withholding Management April 27, 2012

Tax code Sections 877 and 877A (the exit tax) impose special provisions on certain U.S. citizens who terminate their citizenship and long-term green-card holders who lose their status through abandonment (whether or not intentional) or revocation provided they meet certain criteria. As a result, most tax treaties include provisions limiting the eligibility of these individuals to use a tax treaty to reduce or eliminate U.S. taxes for a period of time. For example, Article 1(4) (the savings clause) of the U.S. Model Treaty includes the following provision:

“Notwithstanding the other provisions of this Convention, a former citizen or former long-term resident of a Contracting State may, for the period of ten years following the loss of such status be taxed in accordance with the laws of that Contracting State.”

The rules regarding which tax expatriates are covered by these rules have changed over time. As a result, determining whether such an individual’s treaty claim is valid can be complicated.

Employers and payers are required under the tax regulations (stated in the instructions for Form 8233 for claiming withholding exemptions) to deny exemptions from withholding when the facts supporting eligibility for treaty benefits, including a payee’s country of tax residency, are not clear.