Tax & Accounting Blog

Residency for Treaty Purposes for Individuals – Part 1

ONESOURCE, Tax Information Reporting, W-8 & W-9 Foreign Reporting, Withholding Management April 19, 2012

The United States has income tax treaties with over 60 countries for the primary purpose of avoiding double taxation. Double taxation occurs when an individual’s country of residence (or citizenship, in the case of U.S. citizens) taxes an individual on worldwide income and the country where income is derived also taxes the individual’s income, typically by withholding tax from the payment at the time it is made (called withholding at source).

The 30 percent withholding that payers are required to collect from most non-wage U.S.-source income payments to foreign persons (individuals and entities) is withholding at source, which may be reduced or eliminated under an applicable income tax treaty provision. Table 1 of IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, is a chart by country of the reduced rates of tax on fixed or determinable annual or periodic (FDAP) income.

A treaty claim for exemption from withholding on this type of payment is made on a Form W-8BEN, which must, in the case of individual beneficial owners, include a U.S. social security number (SSN) or individual taxpayer identification number (ITIN). The Form W-8BEN instructions define beneficial owner as “the person who is required under U.S. tax principles to include the gross income on a tax return.”

For policy reasons, tax treaties also include tax exemptions (called benefits) for income related to studying, training, teaching or engaging in research in the U.S. provided that the recipient of the income entered the U.S. primarily for such purpose. Also, treaty benefits are provided for income from dependent personal services (i.e., employment) and independent personal services (i.e., self-employment) provided specified criteria are met.

Most treaties limit such treaty benefits for entertainers and sportsmen if their gross receipts exceed the maximum amount specified by the treaty. Table 2 of IRS Publication 515 provides an overview of these treaty benefits. A treaty claim for exemption from withholding on compensation for personal services of an individual is made on a Form 8233, which must be reviewed and signed by the withholding agent and submitted timely to the IRS for review in order to be valid. A claim for exemption from tax on a scholarship or fellowship grant is made on a Form W-8BEN. A SSN or ITIN is required for such treaty claims. Instructions for Form 8233 (but not Form W-8BEN) allow for evidence that a SSN or ITIN has been applied for to be attached to the form.

You can read overviews of all the tax treaties by clicking here.