Tax Treaties Between the U.S. and Foreign Governments

A tax treaty is an agreement between two governments under which

each agrees to limit or modify its domestic tax laws in an attempt

to avoid double taxation of income. An individual who is a resident

of a country with which the United States has entered into a tax

treaty must look at the provisions of that treaty to determine

his or her tax liabilities.

Tax treaties contain various provisions called "articles."

Most include articles designed to foster educational and cultural

exchanges between the two treaty countries. These articles are

directed at the taxation of students, trainees, teachers and researchers

and, depending on the individual treaty provisions, may completely

exempt or restrict U.S. taxation of scholarship or fellowship

grants and compensation payments made to these individuals.

The United States currently has tax treaties in effect with 46

countries. Most of these countries have a provision that provides

an exemption from U.S. tax on certain types of income received

by students and scholars. Treaties are not all the same and the

foreign national must review the treaty with his/her country to

determine any benefits.

Generally, tax treaty benefits fall into one of three general

categories:

gifts from abroad for purposes of maintenance or study;

grants, allowances and awards from government or tax exempt organizations;

or,

income earned from the provision of personal services up to a

certain amount.

There are usually restrictions about who may qualify to use the

benefits and the amount of money which is exempt from taxation.

Most articles require that the individual be a resident of the

treaty country immediately prior to coming to the U.S.

Student Provisions

Scholar Provisions

Personal Service Income

List of Available Treaties

Student Provisions

Most treaties require that a student be in the United States

temporarily for the primary or sole purpose of study.

A person in the U.S. for another purpose and/or whose intention

is to be here for more than a temporary period of time is not

eligible for benefits under student articles.

Many treaties also limit the benefits either to a specific

number of years, or to a time which is considered reasonable

and customary to complete the activity. While no specific time

limit is set for students, the facts and circumstances determine

how long is reasonable and necessary to complete the education.

For example, to obtain an undergraduate degree an appropriate

time frame would generally be four years. For some advanced degrees,

the period may be longer.

Once a student in F-1 or J-1 visa category has been present

in the U.S. for five years, he/she may qualify to pay income

tax as a resident and therefore may no longer qualify under the

tax treaty provisions.

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Scholar Provisions

The term Scholar refers to professors, researchers, and short-term

scholars working temporarily in U.S. colleges or universities

on J-1 or H-1B visas.

Scholars may be subject to U.S. taxation based on the source

and type of income and the number of years they have been present

in the U.S. In general, teachers, researchers and trainees who

are in the U.S. in J-1 status for less than two calendar years

are considered nonresident for tax purposes. J-1 scholars who

are in the U.S. for more than two calendar years may be considered

residents for tax purposes.

Scholars who are in H-1B status are considered residents for

tax purposes as soon as they meet the "Substantial Presence"

test as described by IRS. (See the section in this manual entitled

"Determining if you are a Resident or Nonresident for Tax

Purposes", or consult IRS publication 519 for information

on "substantial presence.")

It is important to understand that a key factor in determining

an individual's income tax liability is his or her status as a

resident or nonresident for tax purposes as described by the

U.S. Internal Revenue Service. This status may or may not

coincide with their resident or nonresident status for immigration

purposes under U.S. Immigration and Naturalization Service regulations.

Many individuals who are in non-immigrant status for immigration

purposes are considered resident aliens for tax purposes.

In general, individuals who are allowed to file as residents

for U.S. income tax receive a more favorable tax rate than

those who are required to file as nonresident. However, tax treaties

may permit taxation at reduced rates or exempt certain

income altogether for nonresidents. We recommend you consult an

accountant or a tax attorney for advice on how to file your income

tax.

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Personal Service Income

Personal Service Income is any income earned from trade

or business. In general, any individual who receives payment

from an employer is considered to be performing personal service

and, as such, is subject to income tax in the United States. When

applying treaty benefits to personal service income, an individual

must examine the specific language of the treaty to determine

the exact limitations and provision. In most cases, the first

"X" amount of dollars are exempt and anything

above that amount is taxable. In a few cases, the exemption applies

only if the income is below a certain amount. If the income

exceeds this amount, none of the income is exempt from taxation.

It is important to note that some treaties provide for a retroactive

loss of benefits if the individual stays beyond the period covered

by the treaty stipulations. Those who anticipate staying in

the U.S. longer than the treaty time limit may wish to refrain

from obtaining treaty benefits, as they would be subject to the

payment of back taxes once the time limitation as established

under the treaty expires.

Individuals should also be aware that the U.S. Internal Revenue

Service reports amounts claimed as tax treaty benefits to the

officials in their home country. Therefore, an exemption from

U.S. tax on certain portions of your income may make you liable

for home-country tax on those amounts. Before claiming exemption

by virtue of a treaty, the nonresident individual may wish to

obtain and study a copy of the actual treaty or consult Internal

Revenue Service authorities. (Please note: The OISS

does not have copies of individual tax treaties. If you

wish to review the tax treaty between your country and the U.S.,

please consult the Government Documents Section at Dimond Library,

the U.S. Internal Revenue Service, your home country government,

or a competent international tax attorney.)

Individuals from treaty countries who wish to claim partial

or total exemption from withholding must file Form 8233 along

with Form W-4. Form 8233 must be filed annually to

claim treaty exemption for personal services. In some cases, Form

1001 must be filed to claim treaty exemption from service-free

scholarship or fellowship income. Form 1001 is valid for up

to three years. Form 8233 must also be attached to Form 1040NR

(your Income Tax Form) which is filed between January 1 and April

15 of each calendar year.

IRS Publication 901, U.S. Tax Treaties, provides an excellent

summary of the tax treaties in effect in a given year. It is published

annually and should be consulted each year, as new treaties are

constantly being negotiated and existing ones renegotiated. IRS

Publication 519, U.S. Tax Guide for Aliens, provides detailed

information on the filing of U.S. Income Taxes for nonresidents.

Please consult the file folders outside the Office of International

Students and Scholars to see if your country has an applicable

treaty with the U.S. or obtain a copy of IRS Publication 901.

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List of treaties which were in effect

for the most recent tax year for which information is currently

available:

Australia

Finland

Kazakstan

Poland

Austria

France

Korea

Portugal

Barbados

Germany

Luxenbourg

Romania

Belgium

Indonesia

Malta

Russia

Canada

Ireland

Mexico

Slovak Republic

China

Israel

Morocco

Spain

Commonwealth of

Independent States*

Italy

The Netherlands

Sweden

Cyprus

Greece

New Zealand

Switzerland

Czech Republic

Hungary

Norway

Trinidad and Tobago

Denmark

Jamaica

Pakistan

Tunisia

Egypt

Japan

Philippines

United Kingdom

*(The terms of the U.S.-U.S.S.R. income tax treaty applies to

the countries of: Armenia, Azerbaijan, Belarus,Georgia, Kyrgyzstan,

Moldova, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.)

To view the text of the treaty between your country and the U.S.

visit Windstar

Technologies.

Instructions for completion

of Form 8233

Form

8233 (requires Adobe

Acrobat Reader to view)

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