Exemption from Withholding If a tax treaty between the United States and the foreign individual's (payee's) country of residence provides an exemption from, or a reduced rate of, withholding for certain items of income, the payee should notify the payor of the income (the withholding agent) of the payee's foreign status to claim the benefits of the treaty. Generally, the payee does this by filing Form W-8 BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding or W-8 BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities) or Form 8233, Exemption from Withholding on Compensation for Independent (& Certain Dependent) Personal Service of a Nonresident Alien Individual with the withholding agent. For income that is not earned from personal services, the payee files Form W-8BEN. For income earned from personal services, the payee files Form 8233. A reduced rate of withholding applies to a foreign person that provides a Form W-8BEN or W-8BEN-E claiming a reduced rate of withholding under an income tax treaty only if the foreign person provides a U.S. or foreign Taxpayer Identification Number (TIN) (except for certain marketable securities) and certifies that the foreign person: Is a resident of a treaty country; Is the beneficial owner of the income; If an entity, it derives the income within the meaning of Section 894 of the Internal Revenue Code (it is not fiscally transparent); and 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, the payor must not apply the treaty rate. However, the payor is not responsible for misstatements on a Form W-8, documentary evidence, or statements accompanying documentary evidence for which the payor 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 the payee's address of record as the basis for allowing the payee the benefit of the treaty. The Form W-8 BEN or Form W-8 BEN-E must be provided to the withholding agent to claim a reduced rate of withholding. Rules that Apply to Compensation for Personal Services Independent contractors If the payee performs personal services as an independent contractor (rather than an employee) and the payee can claim an exemption from withholding on that personal service income because of a tax treaty, submit Form 8233 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, the payee 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 the payee entered the United States as a nonresident alien, but is 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 the payee qualifies 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, the payee 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: The payee's name and U.S. identification number. A statement that the payee is a resident alien and whether the payee is a resident alien under the green card test, the substantial presence test, or a tax treaty provision. Tax treaty and article number under which the payee is claiming a tax treaty exemption, and description of the article. A statement that the payee is relying on an exception to the saving clause of the tax treaty under which the payee is claiming the tax treaty exemption. Refer to Resident Alien Claiming a Treaty Exemption for a Scholarship or Fellowship. Employees If the payee is not a student, trainee, teacher, or researcher, but performs services as an employee and the pay is exempt from U.S. income tax under a tax treaty, the payee may be able to eliminate or reduce the amount of tax withheld from the payee's wages. Provide the payor with a properly completed Form 8233 for the tax year. The Form 8233 must report the payee's Taxpayer Identification Number (TIN), generally the payee's U.S. Social Security number or Individual Taxpayer Identification Number (ITIN). Exemption on the Payee's Tax Return If the payee claims treaty benefits that override or modify any provision of the Internal Revenue Code, and by claiming these benefits the payee's tax is, or might be, reduced, the payee must attach a fully completed Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), to the payee's tax return. See Exceptions, below, for the situations where the payee is not required to file Form 8833. The payee must file a U.S. tax return and Form 8833 if claiming 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. The payee must also file Form 8833 if the payee receives payments or income items totaling more than $100,000 and determines the country of residence under a treaty and not under the rules for determining alien tax status. Exceptions The payee does not have to file Form 8833 for any of the following situations: The payee can 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. The payee can 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. The payee can claim a reduction or modification of taxation of income under an International Social Security Agreement or a Diplomatic or Consular Agreement. The payee is 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. Penalty for failure to provide required information on Form 8833 If the payee is required to report the treaty benefits but does not, the payee is subject to a penalty of $1,000 for each failure. References/Related Topics Tax Treaties 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.
