Claiming Tax Treaty Benefits
Exemption from Withholding
If a tax treaty between the United States and your country provides an exemption from, or a reduced rate of, withholding for certain items of income, you should notify the payor of the income (the withholding agent) of your foreign status to claim the benefits of the treaty. Generally, you do this by filing Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding with the withholding agent.
A reduced rate of withholding applies to a foreign person that provides a Form W-8BEN claiming a reduced rate of withholding under an income tax treaty only if the foreign person provides a U.S. Taxpayer Identification Number (TIN) (except for certain marketable securities) and certifies that:
- It is a resident of a treaty country;
- It is the beneficial owner of the income;
- If it is an entity, it derives the income within the meaning of Section 894 of the Internal Revenue Code (it is not fiscally transparent); and
- It meets any limitation on benefits provision contained in the treaty, if applicable.
Limitations on benefits provisions generally prohibit third country residents from obtaining treaty benefits. For example, a foreign corporation may not be entitled to a reduced rate of withholding unless a minimum percentage of its owners are citizens or residents of the United States (or the treaty country).
If a nonresident alien individual has made an election with his or her U.S. citizen or resident spouse to be treated as a U.S. resident for income tax purposes, the nonresident alien may not claim to be a foreign resident to obtain the benefits of a reduced rate of, or exemption from, U.S. income tax under an income tax treaty. However, the exceptions to the saving clause in some treaties allow a resident of the United States to claim a tax treaty exemption on U.S. source income.
If the payor knows, or has reason to know, that an owner of income is not eligible for treaty benefits claimed, he must not apply the treaty rate. He is not, however, responsible for misstatements on a Form W-8, documentary evidence, or statements accompanying documentary evidence for which he did not have actual knowledge, or reason to know that the statements were incorrect.
Beginning January 1, 2001, the payor of dividends will no longer rely on your address of record as the basis for allowing you the benefit of the treaty. Give Form W-8BEN to the withholding agent to claim a reduced rate of withholding.
Rules that Apply to Compensation for Personal Services
If you perform personal services as an independent contractor (rather than an employee) and you can claim an exemption from withholding on that personal service income because of a tax treaty, submit Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, to each withholding agent from whom amounts will be received.
Students, trainees, teachers, and researchers
Alien students, trainees, teachers, and researchers who perform dependent personal services (as employees) can also use Form 8233 to claim exemption from withholding of tax on compensation for services that is exempt from U.S. tax under a U.S. tax treaty.
Students, trainees, teachers, and researchers must attach the appropriate statement shown in Appendix A (for students) or Appendix B (for teachers and researchers) at the end of Publication 519, U.S. Tax Guide for Aliens, to the Form 8233 and give it to the withholding agent. For treaties not listed in the appendices, attach a statement in a format similar to those for other treaties.
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 and the payor intends to withhold U.S. income tax on the scholarship, fellowship, or other remittance, you can avoid income tax withholding by giving the payor a Form W-9, Request for Taxpayer Identification Number and Certification, with an attachment that includes the following information:
- Your name and U.S. identification number.
- A statement that you are a resident alien and whether you are a resident alien under the green card test, the substantial presence test, or a tax treaty provision.
- Tax treaty and article number under which you are claiming a tax treaty exemption, and description of the article.
- A statement that you are relying on an exception to the saving clause of the tax treaty under which you are claiming the tax treaty exemption.
If you are not a student, trainee, teacher, or researcher, but you perform services as an employee and your pay is exempt from U.S. income tax under a tax treaty, you may be able to eliminate or reduce the amount of tax withheld from your wages. Provide your employer with a properly completed Form 8233 for the tax year. The Form 8233 must report your Taxpayer Identification Number (TIN), generally your U.S. Social Security Number or your Individual Taxpayer Identification Number (ITIN).
Exemption on Your Tax Return
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, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), 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 change to the source of an item of income or a deduction 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 determining alien tax status.
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 exemption that 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.
For recent changes to the requirements for filing Form 8833, refer to the instructions attached to the Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b).
Penalty for failure to provide required information on Form 8833
If you are required to report the treaty benefits but do not, you are subject to a penalty of $1,000 for each failure.
Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.