Form 8833 Tax Treaty Return Position
Form 8833: When a U.S. Taxpayer wants to rely on an international tax treaty that the United States has entered into regarding tax law, sometimes they have to file an additional form with their tax return when filing with the IRS. The Form is referred to as Form 8833. Technically, the form is referred to as Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b). If the taxpayer does not properly lodge the form when filing their tax return, the IRS may disregard the position, and the Taxpayer would lose their opportunity to take the position.
They may also be subject to IRS offshore penalties.
26 U.S.C. section 6114
(a) In general
Each taxpayer who, with respect to any tax imposed by this title, takes the position that a treaty of the United States overrules (or otherwise modifies) an internal revenue law of the United States shall disclose (in such manner as the Secretary may prescribe) such position—
(1) on the return of tax for such tax (or any statement attached to such return), or
(2) if no return of tax is required to be filed, in such form as the Secretary may prescribe.
The Secretary may waive the requirements of subsection (a) with respect to classes of cases for which the Secretary determines that the waiver will not impede the assessment and collection of tax.
26 U.S.C. section 7701(b)
(b) Definition of resident alien and nonresident alien
(1) In general
For purposes of this title (other than subtitle B)—
(A) Resident alienAn alien individual shall be treated as a resident of the United States with respect to any calendar year if (and only if) such individual meets the requirements of clause (i), (ii), or (iii):
(i) Lawfully admitted for permanent residence
Such individual is a lawful permanent resident of the United States at any time during such calendar year.
(ii) Substantial presence test
Such individual meets the substantial presence test of paragraph (3).
(iii) First year election
Such individual makes the election provided in paragraph (4).
(B) Nonresident alien
An individual is a nonresident alien if such individual is neither a citizen of the United States nor a resident of the United States (within the meaning of subparagraph (A)).
Understanding How IRS Form 8833 Works
Let’s say you are a U.S. person that resides in the U.S., but are receiving some sort of benefit from a foreign country, and the benefit is non-taxable and that foreign country.
Since you are a U.S. Person and taxed on your worldwide income, the U.S. will tax you – even if it is tax free in the foreign jurisdiction.
Therefore, your decide to take a treaty position to try to get the income excluded on your U.S. tax return.
Completing Form 8833
Completing the form can seem a bit daunting, but overall it is generally not that bad.
First, it is important understand what treaty you are referring to. For example, if you were in the United Kingdom and making a claim based on the United Kingdom treaty, you should identify on form 8833 that the treaty is the UK treaty.
Then, it is also important to understand which portion (aka Article) of the treaty you are relying in taking your position.
It is also important to understand which Internal Revenue Code is overruled, modified or excepted by the treaty position.
In other words, what code section does the IRS rely on to tax you, and what portion of the treaty are you relying to reduce/avoid U.S. Tax.
Explaining your Form 8833 Treaty Position
This is very important.
This is the part of the form in which you are explaining in to the IRS why you believe your position permits you to avoid US tax on a particular type of income you are earning.
Are All Treaty Positions Reported on 8833?
No, as with most things related tax, there are various exceptions, exclusions, and limitations the person may be able to rely on in order to avoid having to file the form.
IRS Form 8833 Exceptions
“Regulations section 301.6114-1(c) waives reporting on a Form 8833 for certain treaty-based return positions. In some instances, the waiver narrowly applies to exempt from reporting a treaty position that is specifically reportable, and thus careful review of the regulations is advised. In addition, some waivers do not apply to positions that are specifically required to be reported under these form instructions
– Positions for which reporting is waived include, but are not limited to, the following. See Regulations section 301.6114-1(c) for other waivers from reporting.
– That a treaty reduces or modifies the taxation of income derived by an individual from dependent personal services, pensions, annuities, social security, and other public pensions, as well as income derived by artists, athletes, students, trainees, or teachers;
– That a Social Security Totalization Agreement or Diplomatic or Consular Agreement reduces or modifies the income of a taxpayer
– That a treaty exempts a taxpayer from the excise tax imposed by section 4371, but only if certain conditions are met (for example, the taxpayer has entered into an insurance excise tax closing agreement with the IRS);
– That a treaty exempts from tax or reduces the rate of tax on FDAP income, if the beneficial owner is an individual or governmental entity
– If a partnership, trust, or estate has disclosed a treaty position that the partner or beneficiary would otherwise be required to disclose
– Unless modified by the instructions below, that a treaty exempts from tax or reduces the rate of tax on FDAP income that is properly reported on Form 1042-S and the amount is received by
– Related party (within the meaning of section 6038A(c)(2)) from a reporting corporation within the meaning of section 6038A(a) (a domestic corporation that is 25% foreign owned and required to file Form 5472)
– Beneficial owner that is a direct account holder of a U.S. financial institution or qualified intermediary, or a direct partner, beneficiary, or owner of a withholding foreign partnership or trust, from that U.S. financial institution, qualified intermediary, or withholding foreign partnership or withholding foreign trust (whether the Form 1042-S reporting is on a specific payee or pooled basis); or
– Taxpayer that is not an individual or a State, if the amounts are not received through an account with an intermediary Form 8833 (Rev. 9-2017) Page 4 or with respect to an interest in a partnership or a simple or grantor trust, and if the amounts do not total more than $500,000 for the tax year.”
Specific Treaty Positions that Must be Reported
Regulations section 301.6114-1(b) specifically requires reporting on a Form 8833 for the following treaty-based return positions. Note that this is not an exhaustive list of all positions that are reportable on a Form 8833 and that some specifically reportable positions are waived in certain circumstances under Regulations section 301.6114-1(c).
“- That a nondiscrimination provision of the treaty prevents the application of an otherwise applicable Code provision, other than with respect to making an election under section 897(i);
– That a treaty reduces or modifies the taxation of gain or loss from the disposition of a U.S. real property interest
– That a treaty reduces or modifies the branch profits tax (section 884(a)) or the tax on excess interest (section 884(f)(1) (B))
– That a treaty exempts from tax or reduces the rate of tax on dividends or interest paid by a foreign corporation that are U.S.-sourced under section 861(a)(2)(B) or section 884(f)(1)(A);
– That a treaty exempts from tax or reduces the rate of tax on fixed or determinable annual or periodical (FDAP) income that a foreign person receives from a U.S. person, but only if:
(1) The amount is not properly reported on Form 1042-S and the foreign person is:
– (a) a controlled foreign corporation (as defined in section 957) in which the U.S. person is a U.S. shareholder (as defined in section 951(b));
– (b) a foreign corporation that is controlled by a U.S. person within the meaning of section 6038;
– (c) a foreign corporation that is a 25-percent shareholder of the U.S. person under section 6038A; or
– (d) a foreign related party, as defined under section 6038A(c)(2)(B);
(2) The foreign person is related to the payor under section 267(b) or section 707(b) and receives income exceeding $500,000, in the aggregate, from the payor and the treaty contains a limitation on benefits article; or
(3) The treaty imposes additional conditions for the entitlement of treaty benefits (for example, the treaty requires the foreign corporation claiming a preferential rate on dividends to meet ownership percentage and ownership period requirements):
– That income effectively connected with a U.S. trade or business of a taxpayer is not attributable to a permanent establishment or a fixed base in the United States
– That a treaty modifies the amount of business profits of a taxpayer attributable to a permanent establishment or a fixed base in the United States
– That a treaty alters the source of any item of income or deduction (unless the taxpayer is an individual)
– That a treaty grants a credit for a foreign tax which is not allowed by the Code
– That the residency of an individual is determined under a treaty and apart from the Code. See Dual-resident taxpayer below.”
Reporting specifically required by Form 8833 Instructions
The following are amounts for which a treaty-based return disclosure on Form 8833 is specifically required under these instructions.
“- Amounts described in paragraph a or c, above, that are received by a corporation that is a resident under the domestic law of both the United States and a foreign treaty jurisdiction (a dual resident corporation).
– Amounts described in paragraph a or c, above, that are received by a corporation that is a resident of both the jurisdiction whose treaty is invoked and another foreign jurisdiction that has an income tax treaty with that treaty jurisdiction.
– Amounts described in paragraph a or c, above, that are received by a foreign collective investment vehicle that is a contractual arrangement and not a person under foreign law. See Example 7 of Regulations section 1.894-1(d)(5). •
– Amounts described in paragraph a or c, above, that are received by a foreign “interest holder” in a “domestic reverse hybrid entity,” as those terms are used in Regulations section 1.894-1(d)(2).”
– If you are an individual who is a dual-resident taxpayer and you choose to claim treaty benefits as a resident of the foreign country, you are treated as a nonresident alien in figuring your U.S. income tax liability for the part of the tax year you are considered a dual-resident taxpayer.
– If you are eligible to be treated as a resident of the foreign country pursuant to the applicable income tax treaty and you choose to claim benefits as a resident of such foreign country, attach Form 8833 to Form 1040NR, U.S. Dual-resident taxpayer.
– An alien individual is a dual-resident taxpayer if that individual is considered to be a resident of both the United States and another country under each country’s tax laws. If the income tax treaty between the United States and the other country contains a provision for resolution of conflicting claims of residence by the United States and its treaty partner, and the individual determines that under those provisions he or she is a resident of the foreign country for treaty purposes, the individual may claim treaty benefits as a resident of that foreign country, provided that he or she complies with the instructions below.
– Nonresident Alien Income Tax Return, or Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents. In order to be treated as a resident of the foreign country, you must timely file (including extensions) Form 1040NR or Form 1040NR-EZ with the Form 8833 attached. If you choose to be treated as a resident of a foreign country under an income tax treaty, you are still treated as a U.S. resident for purposes other than figuring your U.S. income tax liability (see Regulations section 301.7701(b)-7(a)(3)).
Termination of U.S. Residency
If you are a dual-resident taxpayer and a long-term resident (LTR) and you are filing this form to be treated as a resident of a foreign country for purposes of claiming benefits under an applicable U.S. income tax treaty, you will be deemed to have terminated your U.S. residency status for federal income tax purposes.
Because you are terminating your U.S. residency status, you may be subject to tax under section 877A and you must file Form 8854, Initial and Annual Expatriation Statement.
You are an LTR if you were a lawful permanent resident of the United States in at least 8 of the last 15 tax years ending with the year your status as an LTR ends.
For additional information, see the Instructions for Form 8854, Initial and Annual Expatriation Statement, and Pub. 519, U.S. Tax Guide for Aliens
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.