The 411 on Tax Treaties for Foreign Investors
United State tax laws have a number of different guidelines that affect foreigners who own property or otherwise earn income in the United States. Depending upon the individual situation, a foreign investor can expect to see 30 percent or more of his or her income and profits go toward paying taxes. With the help of tax treaties, however, this tax burden may be reduced or removed altogether. Therefore, it is important for foreign investors to understand these tax treaties and how they can affect them and their profits.
What is a Tax Treaty?
A tax treaty is an agreement made between the United States and a foreign country to either reduce the rate of taxation on income or eliminate the tax completely. The rate of reduction and whether or not the income tax is exempt varies from one country to the next. Therefore, it is important to explore the tax treaty for the specific country where you reside in order to better understand how the treaty affects you.
What Countries Have a Tax Treaty with the United States?
All of the following countries have a tax treaty in place that affects the Estate Tax:
- Australia
- Austria
- Denmark
- Finland
- France
- Germany
- Greece
- Ireland
- Italy
- Japan
- Netherlands
- Norway
- South Africa
- Switzerland
- United Kingdom
The following countries also have a tax treaty in place that affects the Gift Tax:
- Australia
- Austria
- Denmark
- France
- Germany
- Japan
- United Kingdom
Are Tax Treaties Reciprocal?
In most cases, tax treaties are reciprocal, which means they apply to both countries. Therefore, if you are a U.S. citizen who is interested in purchasing property in one of the countries where a tax treaty is in place, you may be entitled to certain exemptions, credits, deductions or reductions in your tax burden within that country. You may also receive additional treaty benefits and safeguards, such as receiving nondiscrimination provisions within treaty countries. Again, it is important to research information about the tax treaties within the specific country where you are interested in making a purchase in order to know how the treaty may benefit you.
Does Each State Abide by the Federal Tax Treaties?
Many of the states within the United States tax their residents an additional tax on their income. While some states honor the provisions as established by Federal tax treaties, others do not. Therefore, it is essential to consult with the tax authorities within the state where you are considering making a purchase in order to understand how state and other local tax laws may affect you as a foreign investor.
Can Dual Residents Benefit from Tax Treaties?
If you reside in both the United States and another country and are considered a resident of both countries, you are also considered to be a dual resident taxpayer. As a dual resident taxpayer, you can claim the benefits as described in an income tax treaty. The treaty will contain a provision for resolving conflicting claims of residence. You will also need to file a return using Form 1040NR (U.S. Nonresident Alien Income Tax Return) or Form 1040NR-EZ (U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents). You will also need to attach a Form 8833 (Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)) with your return.