U.S. Income Tax Treaties
Under U.S. Federal Income Tax Laws, an alien is either taxed as a resident alien (subject to U.S. Income Tax on world-wide income) or a non-resident alien (subject to U.S. Income Tax on U.S. source income).
Non-Resident Alien: U.S. Tax Resident
An alien is classified as a resident alien (U.S. tax resident) if:
1. He is a U.S. lawful permanent resident at any time during the calendar year (i.e., has a “green card”).
2. He meets the “substantial presence test” (present in the U.S. for 122 days per year over a 3 year period).
Substantial Presence Test
An alien satisfies the “substantial presence test” for any calendar year (the “current year”) if:
1. He is in the U.S. for at least 31 days during the current year.
2. The sum of the number of days in the U.S. in the current year and two preceding calendar years equals or exceeds 183 days (“183 day test”).
3. For the “183 day test”, each day in the U.S. in the current year is counted as a full day. Each day in the U.S. in the first preceding calendar year is counted as 1/3 of a day, each day of presence in the second preceding calendar year is counted as 1/6 of a day (IRC §7701(b)(3)(A)(ii)).
“Substantial Presence Test”: Closer Connection Exception
An alien who meets the substantial presence test may avoid being classified as a U.S. tax resident if:
1. He is present in the U.S. for fewer than 183 days during the calendar year.
2. He maintains a tax home in a foreign country during the entire current year.
3. He has a closer connection to the foreign country (i.e., his tax home) during the current tax year.
4. He timely files IRS form 8840, and has not applied for a “green card” (IRC §7701(b)(3)(B) and (C)).
The United States has 61 income tax treaties (see below). To be eligible for the benefits of an income tax treaty, an individual must qualify as a resident of either the U.S. or the other country that is a party to the treaty (“the contracting state”).
The U.S. Model Income Tax Treaty (Art 4(1)) defines “resident of a contracting state” as “any person who, under the laws of that state is liable for tax in the state, by reason of his domicile, residence, citizenship, place of management, place of incorporation”.
If an alien is classified as both a U.S. tax resident and a resident of its treaty partner (“dual resident”), the tax treaties contain “tie-breaker” provisions which determine the dual resident’s tax residence status as follows:
1. Tax resident in country with permanent home.
2. If permanent home in both countries, tax resident in country with “center of vital interests” (personal and economic interests).
3. If the center of vital interests cannot be determined, tax resident in country in which he has a habitual abode.
4. If the habitual abode is in both (or neither) countries, he is a tax resident of the country in which he is a national).
An alien who claims the benefit of a treaty, to be classified as a non-resident, will still be subject to U.S. federal income tax as a non-resident alien.
A non-resident alien who relies on a U.S. tax treaty for an exemption from U.S. tax that is effectively connected with a U.S. trade or business is required to file IRS Form 8833 to disclose the tax exemption reliance (IRC §6114; Treas Reg 301.6114-1).
U.S. Income Tax Treaties
1. Australia Income Tax Treaty
2. Austria Income Tax Treaty
3. Bangladesh Income Tax Treaty
4. Barbados Income Tax Treaty
5. Belgium Income Tax Treaty
6. Bermuda Income Tax Treaty
7. Bulgaria Income Tax Treaty
8. Canada Income Tax Treaty
9. China Income Tax Treaty
10. Cyprus Income Tax Treaty
11. Czech Republic Income Tax Treaty
12. Denmark Income Tax Treaty
13. Egypt Income Tax Treaty
14. Estonia Income Tax Treaty
15. Finland Income Tax Treaty
16. France Income Tax Treaty
17. Germany Income Tax Treaty
18. Ghana Income Tax Treaty (Ships and Aircraft)
19. Greece Income Tax Treaty
20. Hungary Income Tax Treaty
21. Iceland Income Tax Treaty
22. India Income Tax Treaty
23. Indonesia Income Tax Treaty
24. Ireland Income Tax Treaty
25. Israel Income Tax Treaty
26. Italy Income Tax Treaty
27. Jamaica Income Tax Treaty
28. Japan Income Tax Treaty
29. Jordan Income Tax Treaty (Shipping and Aircraft)
30. Kazakhstan Income Tax Treaty
31. Korea Income Tax Treaty
32. Latvia Income Tax Treaty
33. Lithuania Income Tax Treaty
34. Luxembourg Income Tax Treaty
35. Malta Income Tax Treaty
36. Mexico Income Tax Treaty
37. Morocco Income Tax Treaty
38. Netherlands Income Tax Treaty
39. New Zealand Income Tax Treaty
40. Norway Income and Property Tax Treaty
41. Pakistan Income Tax Treaty
42. Philippines Income Tax Treaty
43. Poland Income Tax Treaty
44. Portugal Income Tax Treaty
45. Romania Income Tax Treaty
46. Russia Income Tax Treaty
47. Slovak Republic Income Tax Treaty
48. Slovenia Income Tax Treaty
49. South Africa Income Tax Treaty
50. Spain Income Tax Treaty
51. Sri Lanka Income Tax Treaty
52. Sweden Income Tax Treaty
53. Switzerland Income Tax Treaty
54. Thailand Income Tax Treaty
55. Trinidad and Tobago Income Tax Treaty
56. Tunisia Income Tax Treaty
57. Turkey Income Tax Treaty
58. Ukraine Income Tax Treaty
59. United Kingdom Income Tax Treaty
60. USSR Income Tax Treaty
61. Venezuela Income Tax Treaty
U.S. Estate and Gift Tax Treaties
Under U.S. Federal Estate & Gift Tax Laws, an alien is taxed as a U.S. Estate & Gift Tax Resident once he establishes a U.S. domicile. An alien acquires a U.S. domicile by living in the U.S. (for even a brief period of time) with the requisite intention to indefinitely remain (Treas Reg §20.0 – 1 (b)(1) Treas Reg §25.2501 – 1(b))
An alien, who establishes a U.S. domicile, is subject to:
1. A U.S. Gift tax on the donor’s act of making the gift (transfer of asset) (IRC §2501(a))
2. A U.S. Estate tax on the transfer of their taxable estate (worldwide assets) (IRC §2001(a))
Since 1976, a unified tax rate is applied to assets transferred for both estate and gift tax (tax free gifts up to $1M, tax free estate up to $3.5M (2009), which includes gifts).
Top Tax Rate (2009): 45%
The United States has 18 estate & gift tax treaties (see below). To qualify for the treaty tax benefits, an alien must be domiciled in either the U.S. or a U.S. Treaty Country i.e., country of origin (or choice), at the time of his death or at the time of the gift.
The treaties contain special tax rules which may reduce the alien’s U.S. Federal estate and gift tax liability. The treaties are designed to prevent double taxation on the transfer of the same asset (which is the subject of the estate or gift tax).
1. Australia Estate Tax Treaty
2. Australia Gift Tax Treaty
3. Austria Estate and Gift Tax Treaty
4. Canada Estate Tax Treaty
5. Denmark Estate and Gift Tax Treaty
6. Finland Estate Tax Treaty
7. France Estate and Gift Tax Treaty
8. Germany Estate and Gift Tax Treaty
9. Greece Estate Tax Treaty
10. Ireland Estate Tax Treaty
11. Italy Estate Tax Treaty
12. Japan Estate and Gift Tax Treaty
13. Netherlands Estate Tax Treaty
14. Norway Estate and Inheritance Tax Treaty
15. South Africa Estate Tax Treaty
16. Sweden Estate, Inheritance and Gift Tax Treaty
17. Switzerland Estate and Inheritance Tax Treaty
18. United Kingdom Estate and Gift Tax Treaty
EB-5 Investor Visa
On November 2, 2007, the Wall Street Journal published an article: “Got $500,000? The U.S. Awaits (Government’s EB-5 Program Offers Foreign Investors Green Cards for Job Creation)”.
A Federal program known as EB-5 (Immigrant-Investor Visa), administered by the U.S. Citizenship & Immigration Services (“USCIS”), encourages foreign investors to invest their way into the U.S.A.
Morrie Berez, chief of the EB-5 program at USCIS, stated: “The opportunity is truly beautiful to individuals who want to live and contribute their energy in the United States, and it creates economic growth and especially jobs for Americans.”
There are 10,000 EB-5 visas available every year, and only 867 issued in 2007. Based on the favorable currency arbitrage (Euro/Dollar, UK Pound/Dollar) the EB-5 visa is a cost-effective, time-efficient way to immigrate to the U.S.
An investor (and immediate family) can now obtain green cards (Permanent US Residency) with an EB-5 visa by investing $500,000 into a Government approved Regional Center (currently, over 30 Regional Centers). Investors receive the security of permanent US residence without repeated visa applications. Citizenship may be obtained after five years.
There are three forms of the investment that is made with the EB-5 visa:
1. Invest $1,000,000 into a business and hire ten employees anywhere in the USA, or
2. Invest $500,000 and hire ten employees in an area where the unemployment rate exceeds the national average by 150% or the rural population is less than 20,000, or
3. Invest $500,000 into a Government designated Regional Center and avoid direct employment.
The $500,000 investment is the least expensive way to satisfy the visa requirements in order to receive the permanent green card after the two-year period. Although the first two types of investment lead to permanent green card status, they require an additional showing that at the end of the two year period, ten qualified individuals have maintained jobs in the targeted employment area.
The minimum period of the investment is approximately three years. Once an investor emigrates they may apply to have ‘conditions’ removed after 1 year and 9 months in the USA. Processing takes up to six months. ‘Conditions removal’ means that the investment is no longer tied to the EB5, and the investor is then free to sell the investment.
With a green card via an EB-5 investment visa investors have the flexibility to take any job, run any business, retire and live anywhere in the USA, with the benefits enjoyed by U.S. citizens including property ownership or education.
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