Green card holders, the “tax treaty tiebreaker” and reporting: Forms 8938, 8621 and 5471

Before you read this post!! Warning!! 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?

Now, on to the post.

The “Treaty Tiebreaker” and information reporting …

The Internal Revenue Code imposes on “U.S. Persons” (citizens or “residents”):

1. The requirement to pay U.S. taxes; and

2. The requirement to file U.S.forms.

All “U.S. Persons” (citizens or residents) are aware of the importance of “Information Returns” AKA “Forms” in their lives.

What is a U.S. resident for the purposes of taxation?

This question is answered by analyzing Internal Revenue Code S. 7701(b). If one is NOT a U.S. citizen, a physical connection to the United States (at some time or another) is normally required for one to be a “tax resident” of the United States..

What happens if one is a “tax resident” of more than one country?

The “savings clause” ensures that U.S. citizens are the only people in the world who have no defence to being deemed a tax resident of multiple countries. U.S. citizens (“membership has its privileges”) are ALWAYS tax residents of the United States. U.S. citizens who reside in other nations, may also be “tax residents” of their country of residence.

In some cases, a U.S. “resident” (which includes a Green Card holder) may be deemed to be a “nonresident” pursuant to the terms of a U.S. Tax Treaty. A Green Card holder “may” be able to use a “Treaty Tiebreaker” provision to be treated as a “nonresident”.

Warning!! 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?

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 certain information returns

Form 8938 – Statement of Specified Foreign Financial Assets

The above tweet references a post explaining how “nonresidents” pursuant to “Treaty Tiebreaker” are NOT required to file form 8938.

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

The above tweet references a post by Virginia La Torre Jeker explaining how “nonresidents” pursuant to “Treaty Tiebreaker” are NOT required to file form 8621.

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

https://www.law.cornell.edu/cfr/text/26/1.6038-2

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

John Richardson