Tax treaty tie-breakers

Under many US tax treaties, if a foreign individual is a tax resident of both the US and his home country then certain ‘tie breaker’ rules will apply to determine tax residence for treaty purposes. Generally, the individual will be deemed to be a resident only of the country in which he has a permanent home available to him. If he has a permanent home available to him in both countries, he will be deemed to be a resident only of the country with which his personal and economic relations are closer, his so-called ‘center of vital interests’. If this ‘center of vital interests’ cannot be determined, then he is deemed to be a resident of the country in which he has a ‘habitual abode’; and if he has a ‘habitual abode’ in both countries (or neither of them), then he is a resident of the country of which he is a national. Finally, if he is a national of both countries, or neither of them, the competent authorities (local law) of both states are to settle the question by mutual agreement.  Remember, however, that it is not always better to be treated as a nonresident; sometimes the foreign earned income exclusion or foreign tax credits may yield a better result.

It is important to note that tax treaty benefits do not provide an exemption from filing of most information returns such as IRS Form 8938 or FBARs.

To take advantage of tax treaty benefits, the taxpayer must also file IRS Form 8833 (Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)).  The below steps should be followed:

  1. Check the box indicating disclosure of one’s treaty position under section 301.7701(b)-7 of the Treasury regulations.
  2. Check the box to indicate one is a U.S. citizen or resident.
  3. Then, supply the appropriate treaty info in section 1, including the treaty article, saving clause, and exception to the saving clause citations to qualify for the treaty benefit.
  4. The narrative section will allow for specific details: brief immigration history, substantiation of the continued treaty claim, etc.
  5. Send the return and attachments to the IRS Service Center
  6. Make sure to keep a copy of the complete package, including attachments, for your records. There is an audit risk; As a result taxpayers should keep a good record.

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