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Tax Treaty Tiebreaker And Reporting: Forms 8938, 8621, 5471



John Richardson

Previously, we have look at the tax treaty tiebreaker and how it relates to taxation of Subpart F and PFIC income as well as eligibility for streamlined offshore procedures. This is another in a series of posts on the tax treaty tiebreaker (which is a standard provision in most U.S. tax treaties).

Tax treaty tiebreakers are rules that are used to assign a person’s tax residency to one country when an individual is a tax resident of both countries. In the context of U.S. tax treaties, treaty tie breaker rules are used when an individual is both:

1. A U.S. person for tax purposes (U.S. citizen or U.S. resident); and

2. A tax resident of another country.

The Treaty Tiebreaker allows one to avoid being subject to U.S. taxation but NOT (as a general principle) avoid being subject to U.S. reporting requirements!!

As explained in IRS Publication 519 (U.S. Tax Guide for Aliens):

Effect of Tax Treaties

The rules given here to determine if you are a U.S. resident do not override tax treaty definitions of residency. If you are a dual-resident taxpayer, you can still claim the benefits under an income tax treaty. A dual-resident taxpayer is one who is a resident of both the United States and another country under each country’s tax laws. The income tax treaty between the two countries must contain a provision that provides for resolution of conflicting claims of residence (tie-breaker rule). If you are treated as a resident of a foreign country under a tax treaty, you are treated as a nonresident alien in figuring your U.S. income tax. For purposes other than figuring your tax, you will be treated as a U.S. resident. For example, the rules discussed here do not affect your residency time periods as discussed later under Dual-Status Aliens.

Those treated as nonresidents because of the Treaty Tiebreaker are still required to file the large number of Forms and information returns that are triggered by foreign assets.

When treatment as a nonresident alien (because of the Treaty Tiebreaker) relieves one from the requirement to file these certain information returns:

Form 8938 – Statement of Specified Foreign Financial Assets.

Form 8621 – Statement disclosing non-U.S. mutual funds and other PFICs.

Modification to the requirements to file Form 5471 – in certain circumstances the company financial statements will suffice.

Reg. 1.6038-2(j)(2)(ii)

(ii) If an individual who is a United States person required to furnish information with respect to a foreign corporation under section 6038 is entitled under a treaty to be treated as a nonresident of the United States, and if the individual claims this treaty benefit, and if there are no other United States persons that are required to furnish information under section 6038 with respect to the foreign corporation, then the individual may satisfy the requirements of paragraphs (f)(10), (f)(11), (g), and (h) of this section by filing the audited foreign financial statements of the foreign corporation with the individual’s return required under section 6038.

In summary

The use of the treaty tiebreaker may allow a Green Card Holder to:

– avoid filing certain information returns (including Form 8938 and Form 8621); and

– avoid having to pay U.S. tax on foreign income: including Subpart F and PFIC income.

That said, remember the warning:

Before a Green Card holder uses the Treaty Tiebreaker provision of a U.S. Tax Treaty, he/she must consider what is the effect of using the Treaty Tiebreaker on:

A. His/her immigration status under Title 8 (will he/she risk losing the Green Card?)

B. His/her status under Title 26 (will he expatriate himself under Internal Revenue Code S. 7701(b)) and subject himself to the S. 877A Exit Tax provisions?

A closing comparison between U.S. citizens living outside the USA and Green Card Holders living outside the USA …

Because of the savings clause (which means that U.S.citizens generally do not benefit from tax treaties and cannot make use of the treaty tiebreaker:

The U.S. citizen has to file Forms 8621 and 5471 EVEN IF THEY ARE NOT OTHERWISE REQUIRED TO FILE A U.S. TAX RETURN!

The Green Card holder who makes use of the treaty tiebreaker:

– is NOT restricted by the savings clause and may use the treaty tiebreaker

– is NOT required to file Form 8938, Form 8621 and is may be subject to modified reporting requirements in lieu of Form 5471

– is NOT required to pay U.S. tax on Subpart F income and PFIC income

The Reality of U.S. Citizenship Abroad

My name is John Richardson. I am a dual citizen. I am a lawyer – member of the Bar of Ontario. This means that, any counselling session you have with me will be governed by the rules of “lawyer client” privilege. This means that:

“What’s said in my office, stays in my office.”

I am also a member of the American Citizens Abroad Professional Tax Advisory Council (PTAC). This is an advisory panel focused on assisting American Citizens Abroad in an FBAR and FATCA world.

The U.S. imposes complex rules and life restrictions on its citizens wherever they live. These restrictions are becoming more and more difficult for those U.S. citizens who choose to live outside the United States.

FATCA is the mechanism to enforce those “complex rules and life restrictions” on Americans abroad. As a result, many U.S. citizens abroad are renouncing their U.S. citizenship. Although this is very sad. It is also the reality.

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