A Form 8833 Beginner’s Tax Guide to Treaty Elections (2024)

The (New) Form 8833 Tax Return Treaty Position Explained 2022

Form 8833 Tax Treaty Return Position

Taxpayers who are Lawful Permanent Residents and non-permanent residents who qualify as U.S. persons for tax purposes under the substantial presence test are taxed on their worldwide income similar to U.S. citizens. This is different from how most other countries tax individuals in that they only tax individuals on their worldwide income when they are considered permanent residents of that country — which typically means they reside there for at least 183 days in the tax year. Some U.S. Taxpayers who reside in a treaty country may be able to qualify for treaty benefits to avoid being taxed on their worldwide income. While other tax treaty benefits may be available, the election to be treated as a non-resident alien for tax purposes is the main reason most individual Taxpayers make a treaty election using Form 8833. It is important to note, that making a treaty election will increase the chance of audit in most circumstances and taxpayers should be cautious not to be sold into making a treaty benefit by tax firms that do not specialize in international tax and may be trying just to push you or go to you into making a treaty election so that they can charge you fees. Let’s look at the basics of making a form 8833 treaty election.

What is Form 8833?

The Form 8833 is used to make a treaty-based return position disclosure under section 6114 or 7701(b). To make the treaty election, taxpayers file Form 8833 in conjunction with Form 1040-NR as a nonresident alien.  The reason taxpayers file a form 1040NR instead of 1040 even though they are U.S. persons for tax purposes is to make a treaty election, they are claiming that they should not be treated as U.S. Persons for tax purposes but rather should only be taxed on their U.S. income While the form itself is relatively straightforward, the impact it can have on the Taxpayer’s tax submission can be complicated.

Expatriation Tax Trap

For certain taxpayers, by filing Form 8833 they may be inadvertently expatriating from the United States — which may lead to an exit tax. Most Taxpayers will formally expatriate from the United States and terminate their U.S. status by filing a Form I-407 to terminate their green card or Forms 4079-4083 to renounce their U.S. citizenship. Taxpayers who are already Long-Term Residents may get caught off-guard by filing Form 8833 to be treated as a resident of a foreign country by inadvertently expatriating from the U.S. (without having properly planned for exit tax implications).

As provided by Form 8833:

• • • “Note: If the taxpayer is a dual-resident taxpayer and a long-term resident, by electing to be treated as a resident of a foreign country for purposes of claiming benefits under an applicable income tax treaty, the taxpayer will be deemed to have expatriated pursuant to section 877A. For more information, see the instructions.”

Not all Treaty Elections Require a Form 8833

• • • Positions for which reporting is waived include, but are not limited to, the following. See Regulations section 301.6114-1(c) for other waivers from reporting. 

      • That a treaty reduces or modifies the taxation of income derived by an individual from dependent personal services, pensions, annuities, social security, and other public pensions, as well as income derived by artists, athletes, students, trainees, or teachers;

      • That a Social Security Totalization Agreement or Diplomatic or Consular Agreement reduces or modifies the income of a taxpayer;

      • That a treaty exempts a taxpayer from the excise tax imposed by section 4371, but only if certain conditions are met (for example, the taxpayer has entered into an insurance excise tax closing agreement with the IRS); • That a treaty exempts from tax or reduces the rate of tax on FDAP income, if the beneficial owner is an individual or governmental entity;

      • If a partnership, trust, or estate has disclosed a treaty position that the partner or beneficiary would otherwise be required to disclose; 

      • Unless modified by the instructions below, that a treaty exempts from tax or reduces the rate of tax on FDAP income that is properly reported on Form 1042-S and the amount is received by a: a. Related party (within the meaning of section 6038A(c)(2)) from a reporting corporation within the meaning of section 6038A(a) (a domestic corporation that is 25% foreign owned and required to file Form 5472); b. Beneficial owner that is a direct account holder of a U.S. financial institution or qualified intermediary, or a direct partner, beneficiary, or owner of a withholding foreign partnership or trust, from that U.S. financial institution, qualified intermediary, or withholding foreign partnership or withholding foreign trust (whether the Form 1042-S reporting is on a specific payee or pooled basis); or c. Taxpayer that is not an individual or a State, if the amounts are not received through an account with an intermediary or with respect to an interest in a partnership or a simple or grantor trust, and if the amounts do not total more than $500,000 for the tax year.

Positions of which Reporting is Required

• • • Reporting specifically required.

    • Regulations section 301.6114-1(b) specifically requires reporting on a Form 8833 for the following treaty-based return positions. Note that this is not an exhaustive list of all positions that are reportable on a Form 8833 and that some specifically reportable positions are waived in certain circumstances under Regulations section 301.6114-1(c).

      • That a nondiscrimination provision of the treaty prevents the application of an otherwise applicable Code provision, other than with respect to making an election under section 897(i);

      • That a treaty reduces or modifies the taxation of gain or loss from the disposition of a U.S. real property interest;

      • That a treaty reduces or modifies the branch profits tax (section 884(a)) or the tax on excess interest (section 884(f)(1) (B)); •

      • That a treaty exempts from tax or reduces the rate of tax on dividends or interest paid by a foreign corporation that are U.S.-sourced under section 861(a)(2)(B) or section 884(f)(1)(A);

      • That a treaty exempts from tax or reduces the rate of tax on fixed or determinable annual or periodical (FDAP) income that a foreign person receives from a U.S. person, but only if: (1) The amount is not properly reported on Form 1042-S and the foreign person is: (a) a controlled foreign corporation (as defined in section 957) in which the U.S. person is a U.S. shareholder (as defined in section 951(b)); (b) a foreign corporation that is controlled by a U.S. person within the meaning of section 6038; (c) a foreign corporation that is a 25-percent shareholder of the U.S. person under section 6038A; or (d) a foreign related party, as defined under section 6038A(c)(2)(B); (2) The foreign person is related to the payor under section 267(b) or section 707(b) and receives income exceeding $500,000, in the aggregate, from the payor and the treaty contains a limitation on benefits article; or (3) The treaty imposes additional conditions for the entitlement of treaty benefits (for example, the treaty requires the foreign corporation claiming a preferential rate on dividends to meet ownership percentage and ownership period requirements);

      • That income effectively connected with a U.S. trade or business of a taxpayer is not attributable to a permanent establishment or a fixed base in the United States;

      • That a treaty modifies the amount of business profits of a taxpayer attributable to a permanent establishment or a fixed base in the United States;

      • That a treaty alters the source of any item of income or deduction (unless the taxpayer is an individual);

      • That a treaty grants a credit for a foreign tax which is not allowed by the Code;

      • That the residency of an individual is determined under a treaty and apart from the Code. See Dual-resident taxpayer below.

Reporting specifically required by Form 8833 instructions

• • Reporting specifically required by Form 8833 instructions. The following are amounts for which a treaty-based return disclosure on Form 8833 is specifically required under these instructions.

    • Amounts described in paragraph a or c, above, that are received by a corporation that is a resident under the domestic law of both the United States and a foreign treaty jurisdiction (a dualresident corporation).

    • Amounts described in paragraph a or c, above, that are received by a corporation that is a resident of both the jurisdiction whose treaty is invoked and another foreign jurisdiction that has an income tax treaty with that treaty jurisdiction. See Revenue Ruling 2004-76, 2004-31 I.R.B. 111, available at www.irs.gov/pub/irs-irbs/irb04-31.pdf.

    • Amounts described in paragraph a or c, above, that are received by a foreign collective investment vehicle that is a contractual arrangement and not a person under foreign law. See Example 7 of Regulations section 1.894-1(d)(5).

    • Amounts described in paragraph a or c, above, that are received by a foreign “interest holder” in a “domestic reverse hybrid entity,” as those terms are used in Regulations section 1.894-1(d)(2). Dual-resident taxpayer. An alien individual is a dual-resident taxpayer if that individual is considered to be a resident of both the United States and another country under each country’s tax laws. If the income tax treaty between the United States and the other country contains a provision for resolution of conflicting claims of residence by the United States and its treaty partner, and the individual determines that under those provisions he or she is a resident of the foreign country for treaty purposes, the individual may claim treaty benefits as a resident of that foreign country, provided that he or she complies with the instructions below.

      • If you are an individual who is a dual-resident taxpayer and you choose to claim treaty benefits as a resident of the foreign country, you are treated as a nonresident alien in figuring your U.S. income tax liability for the part of the tax year you are considered a dual-resident taxpayer.

      • If you are eligible to be treated as a resident of the foreign country pursuant to the applicable income tax treaty and you choose to claim benefits as a resident of such foreign country, you must file Form 1040-NR, U.S. Nonresident Alien Income Tax Return, with Form 8833 attached.

      • A dual resident taxpayer may also be eligible for U.S. competent authority assistance. See Rev. Proc. 2015-40, 2015-35 I.R.B. 236, or its successor.

      • If you choose to be treated as a resident of a foreign country under an income tax treaty, you are still treated as a U.S. resident for purposes other than figuring your U.S. income tax liability (see Regulations section 301.7701(b)-7(a)(3)). 

Late Filing Penalties May Be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.