Claiming Tax Treaty Benefits
For international students and scholars to be exempt from federal and state income tax withholding certain criteria must be met.
- First and foremost, there must be a treaty provision that exists between the United States and individual's country of residence.
- Secondly, the individual must meet the treaty eligibility requirements for the particular treaty article being claimed. See Tax Treaty Countries for a list of treaty countries and types of treaty exemptions available with each country. Also see IRS Publication 901 (pdf) for more information.
- Third, the individual must have either a Social Security number or ITIN number to be eligible for treaty benefits.
- Fourth, the correct tax treaty exemption forms must be completed properly.
Each tax treaty has a variety of terms and clauses that will affect the eligibility of foreign students and scholars to use the treaty Article to claim exemption from withholding. Below are examples of the various treaty terms and clauses that may appear in different treaties.
- Primary Purpose - Must be present in the US for the "primary purpose" studying or doing research…
- Abroad Clause - Shall not be taxed in the U.S. provided that such payments arise from sources outside the United States…
- Once in a Lifetime Clause - "An individual shall be entitled to the benefits of this treaty article only once…"
- Back to Back Clause - "The benefits provided in this paragraph shall not be granted to an individual who, during the immediately preceding period enjoyed the benefits of one of the preceding paragraphs of this Article…"
- Retroactive Clause - "If the visit exceeds two years, the first-mentioned State (United States) may tax the individual under its national law for the entire period of the visit…"
- Combination Clause - "In a case where an individual qualifies for benefits under both provisions (Studying and Teaching), the benefits provided therein shall not extend for more than a total of 5 years from the date of arrival…"
- Re-establish Residency Clause - "If following the period in which a person claimed student benefits, that person resumes residence and physical presence in his original home country of residence before returning to the United States as a teacher, he may claim the benefits as a teacher." Note: IRS considers re-establishing residency as at least a full year (365 consecutive days) before being eligible to use the tax treaty benefits again.
- Not for Profit Clause - "This Article shall not apply to income from research if such research is undertaken not in the public interest by primarily for the private benefit of a specific person or persons."
- Exception to the Saving Clause - Most treaties contain a Saving Clause which prevents citizens or residents from using treaty benefits to reduce their tax liability. However, virtually all treaties also contain an exception to the Saving Clause for foreign students and scholars to allow them to claim tax treaty benefits after becoming residents for tax purposes, as long as they would otherwise qualify for those benefits.
The type of form used to claim treaty benefits depends upon the type of income being paid under the treaty provision, and whether the individual is a Nonresident Alien or U.S. Resident for tax purposes.
For personal services income
- Use forms 8233 and Tax Treaty Affidavit if the individual is a nonresident alien for tax purposes - Form 8233 expires at the end of each calendar year. A new one MUST be submitted each year that the nonresident alien is eligible to claim treaty benefits.
- Use forms W-9 and Attachment to form W-9 if individual is a resident for tax purposes * - Valid indefinitely until the individual's circumstances change so as to cause the information reported to no longer be valid (e.g. resident becomes a "green card" holder or citizen, or treaty time limits run out).
For Scholarship/Fellowship grants and Royalty income
- Use form W-8BEN if the individual is a nonresident alien for tax purposes - Valid as long as the individual is eligible for treaty benefits, as long as the individual receives a reportable payment at least once a year.
- Use forms W-9 and Attachment to form W-9 if individual is a resident for tax purposes * - Valid indefinitely until the individual's circumstances change so as to cause the information reported to no longer be valid (e.g., resident becomes a "green card" holder or citizen, or treaty time limits run out).
*Note: Treaty claims made by U.S. Residents for tax purposes must be made on form W-9 - not on forms 8233 or W-8BEN. (cf. Treas. Reg. 1.1441-6(b)(5)) Thus, foreign students and scholars who have passed the Substantial Presence Test becoming Resident Aliens, and who rely upon the exception to the saving clause of a tax treaty to continue to claim a treaty exemption, MUST submit form W-9 (with attachment) to Payroll Services to claim the treaty exemption. See Substantial Presence Test for more information.
Social Security Number/ITIN Number Requirements
Effective for payments made on or after January 1, 2001, any tax treaty claim made on forms 8233 or W-8BEN without a permanent U.S. Taxpayer Identification Number (TIN) cannot be accepted.
A permanent TIN is:
- SSN Social Security Number - Used for employees, independent contractors and Scholarship/Fellowship recipients
- ITIN Individual Taxpayer Identification Number - Used for independent contractors and some Scholarship/Fellowship recipients
- EIN Employer Identification Number (NOTE: IRS will not issue an EIN to an alien who does not have a business purpose for needing an EIN (e.g. he needs to file employment tax returns)
For treaty claims on form 8233, if the nonresident alien does not yet have a SSN or ITIN , a copy of the receipt from the Social Security Administration, or from IRS in the case of an ITIN, should suffice to accept the treaty claim.
However for treaty claims on form W-8BEN, the SSN or ITIN MUST be reported. The absence of the SSN or ITIN renders the form completely invalid for purposes of claiming treaty benefits.
For more detailed information about tax treaties and IRS regulations see International Taxpayer - Tax Treaties on the IRS web site.