Tax Guide, Americans Abroad
Tax Treaty Benefits
The United States has tax treaties or conventions with many countries. Under these treaties and conventions, citizens and residents of the United States who are subject to taxes imposed by the foreign countries are entitled to certain credits, deductions, exemptions, and reductions in the rate of taxes of those foreign countries. U.S. citizens and residents generally will not be able to reduce their U.S. tax based on treaty provisions due to the saving clause. There are exceptions to this general rule but they are based on the exceptions to the saving clause specified in a treaty. That said, regular U.S. tax law generally eliminates double taxation by way of the foreign earned income exclusion and foreign tax credit, along with other provisions.
How to Read a Tax Treaty
Find the saving clause in the treaty (it can be difficult to find) and any
exceptions to it (make sure you see if it's been amended by a protocols).
The purpose of this
clause is to preserve the right of the US to tax its residents as if no tax
treaty were in effect.
However, many tax treaties have an exception to the saving clause that may allow
you to claim certain treaty benefits even if you are a U.S. citizen or resident.
Once you've located the saving clause and the exceptions, you can begin to
determine what part of the treaty may be applicable.
2. Many tax treaties have protocols, which is an amendment to the original tax treaty. You will have to copy the applicable text from the original treaty (latest version) and then replace specific sentences or paragraphs that were amended by a protocol in order to determine the correct treaty text. The technical explanation clarifies certain language.
3. Within the text of the treaty, determine which country is "the Contracting State" versus "Other Contracting State". I add [USA] and [name of other country] to keep the language easier to read.
Examples of a saving clause:
Saving Clause: Article 1(4): Notwithstanding any provision of this Convention except paragraph 5 of this Article, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if this Convention had not come into effect.
Exception: Article 1(5): The provisions of paragraph 4 of this Article shall not affect:
Saving clause: Article 29(2): Notwithstanding any provision of the Convention except the provisions of paragraph 3, the United States may tax its residents, as determined under Article 4 (Resident) and its citizens as if the Convention had not come into effect, and France may tax entities which have their place of effective management and which are subject to tax in France as if paragraph 3 of Article 4 of the Convention had not come into effect.
Exception: Article 29(3). The provisions of paragraph 2 shall not affect:
Saving clause and exception: Article 1(4)(a): Except to the extent provided in paragraph 5, this Convention shall not affect the taxation by the United States of its residents (as determined under Article 4 (Residence)) and its citizens.
U.S./Italy tax treaty:
Saving Clause: Article 1(2)(b) Notwithstanding any provision of this Convention except paragraph 3 of this Article, a Contracting State may tax: (b) its citizens by reason of citizenship as if there were no convention between the Government of the United States of America and the Government of the Italian Republic for the avoidance of double taxation with respect to taxes on income and the prevention of fraud or fiscal evasion.
Exception: 3. The provisions of paragraph 2 shall not affect:
Disclosing Treaty Benefits Claimed
Generally, if you claim treaty benefits that reduce your U.S. tax, you must attach a fully completed Form 8833, Treaty-Based Return Position Disclosure to your tax return.
Please note, tax treaties can be very difficult to read and interpret.
Refer to IRS Publication 901. See also United States Tax Treaties - A to Z.