The United States has income tax treaties with many different countries. These treaties allow for various forms of tax relief or exemption from tax for U.S. citizens and permanent residents. Some examples of treaty benefits are reduced tax rates, exemption from U.S. tax, and exemption from foreign tax. There are many different types of income that fall under treaty benefits, such as earned income (from employment), passive income (interest and dividends), and pension and retirement income, just to name a few.
Here is a theoretical example to illustrate how tax treaties work:
Laura is a U.S. citizen who occasionally works as a consultant abroad in Italy. She receives income from a company in Italy for consulting work performed. Since Italy has an income tax treaty with the United States, Laura can avoid double taxation of the consulting income under the treaty. In order to avoid double taxation, Laura needs to provide proof of U.S. residency to the company in Italy to ensure that they do not withhold taxes on the consulting income. The form that Laura needs to provide is the Form 6166 – Certification of U.S. Tax Residency.
The Certificate of U.S. Tax Residency is provided by the IRS to the individual claiming the tax treaty benefits. This certificate is provided for a certain tax year and needs to be issued for each year the individual is claiming treaty benefits in the foreign country. In our example, if Laura receives income from Italy in 2017, she will need to obtain Form 6166 – Certificate of U.S. Residency from the IRS for tax year 2017. If she continues to receive income during 2018, she will need to apply again to receive the certificate for tax year 2018. The Form 6166 is not eligible for individuals who have not filed a required U.S. tax return or individuals who filed a U.S. tax return as a nonresident.
The certificate is obtained by completing Form 8802 – Application for United States Residency Certification and submitting it along with a user fee of $85. The application should be mailed to the IRS at least 45 days before the submission due date for the Form 6166 certificate.
It is always important to consult your tax advisor regarding treaty benefits and the important steps to take. Contact us if you think you may need to obtain a U.S. Certificate of Residency.
By Sarah Acker, CPA