Tax Insights

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Claiming treaty benefits

The United States has income tax treaties with many foreign countries. A treaty has benefits in that they may reduce the U.S. income tax of a resident of a foreign country. The reduced tax rates or exemptions vary between each country and each type of income.

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Many of these foreign countries require proof of U.S. residency in order to claim treaty benefits in the foreign country.  In these cases, the foreign resident may apply for a certification of U.S. residency from the IRS by submitting Form 8802, Application for United States Residency Certification. If the application is accepted, the certificate, Form 6166, is issued on United States Treasury stationary and states that the individual or entity is a resident of the U.S. according to the tax laws of the U.S. The foreign resident may use this certificate as proof of U.S. residency in order to claim treaty benefits in the foreign country.

Before issuing a certificate, the IRS will determine if the applicant is a U.S. resident for the year requested by verifying a U.S. tax return was filed for that year. If a tax return is not yet due for the year in question, the IRS will review the most recent return filed. If a U.S. tax return was not required to be filed, the IRS will determine residency based on other documentation provided by the applicant.

The IRS will most likely deny the request for certification if any of the following apply: a required U.S. tax return was not filed; a nonresident return was filed (Form 1040NR, Form 1120-F, etc); the applicant is a dual resident who used the tie breaker provision of the treaty to determine foreign residency; the applicant is a domestic partnership with no U.S. partners, domestic grantor trust with no U.S. beneficiaries, or domestic LLC with no U.S. owners; or an entity is an exempt organization not formed in the U.S.

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Special rules exist if claiming a foreign tax credit or requesting tax relief from certain countries such as the United Kingdom that may require additional forms or documentation. Be sure to read the instructions to Form 8802 to make sure all required information is submitted.

If a taxpayer has already had U.S. residency approved and needs an additional certificate for the same year, the taxpayer may check the “additional request” box on Form 8802. If the applicant’s information previously submitted remains the same, the IRS will generally not require the applicant to re-submit all documentation.

This information is general in nature and should not be relied on. Please contact a qualified Henry+Horne tax professional to assist with your tax treaty questions.

Jill A. Helm, CPA