Tax treaties are bilateral agreements between two countries that generally provide relief from taxation for individuals who are covered. The U.S. has tax treaties with more than 50 different countries. The U.S. has a formulated a Model Income Tax Treaty to assist in negotiations of future tax treaties. In general, treaties will grant one country primary taxing rights to items of income, and the other country will be required to give a credit for taxes paid.
Primary taxing rights typically depend on either the residency of taxpayers, or the presence of a permanent establishment in a treaty country. A permanent establishment generally is defined to be a branch, factory, office, workshop, mining site, warehouse, or other fixed places of business.
Under most tax treaties, residents (and sometimes, citizens or nationals) of foreign countries will be exempt from U.S. taxes on certain items of income, and taxed at a reduced rate on other specified items. For example, many U.S. tax treaties reduce the withholding tax rate on interest and dividends, and other certain kinds of investment income. The rates and items of taxation vary according to the terms of each treaty. If there is no tax treaty between the U.S. and another country, or a treaty does not cover a certain type of income, a resident (national or citizen, if applicable) of a country will be subject to U.S. taxes.
Under these same tax treaties, though U.S. residents or citizens are subject to U.S. income tax on their worldwide income, they will be exempt from tax, or taxed at a lower rate, in general on certain items of income sourced from another country subject to the tax treaty. Many treaties utilize savings clauses to prevent U.S. residents or citizens from using provisions of a treaty to avoid paying taxes on U.S. source income.
Do you have questions concerning international tax issues? Contact Sherayzen Law Office at (952) 500-8159 to discuss your tax situation with an experienced tax attorney.