How Foreign Students Claim Treaty Benefits
All U.S. income tax treaties include provisions (called “articles”) exempting income of students from tax. Treaties may eliminate U.S. tax on 1) payments from abroad for maintenance, education, and training, 2) U.S. or foreign scholarship and fellowship grants, or both, and 3) a limited amount of earned income. Foreign students engaged in optional practical training or academic training at corporations may qualify for treaty benefits, as well as students working on campus. Treaty exempt income is reported on Form 1042-S (not on Form W-2 or 1099).
Foreign students claim treaty exemptions in two different ways: 1) by requesting an exemption from withholding by providing the payer or employer with reliable documentation (Form 8233, W-8BEN, or W-9, or 2) or by claiming a refund of withheld taxes on a tax return.
Exemption from tax on compensation for services is requested by eligible nonresident students by presenting a completed and signed Form 8233, Exemption from Withholding on Compensation of a Nonresident Alien Individual accompanied by a statement certifying to the facts and circumstances supporting the treaty claim. The IRS has provided statements for foreign students making treaty claims for treaties, which became effective prior to 1994. Statements are in IRS Publication 901, U.S. Tax Treaties. Statements may be drafted in accordance with the treaty articles for treaties, which came into effect after 1993.
For the claim to be valid for employment compensation, Form 8233 must include a U.S. social security number (SSN) or proof of application for the SSN, such as a receipt from SSA. A foreign student’s employer has 5 days to review the form, which is then sent by mail or fax to the IRS. If the Form 8233 is not sent to the IRS, the withholding exemption is invalid. A new Form 8233 must be submitted to employers annually.
Employers are deemed to know whether or not there is a treaty in force as claimed and whether or not the treaty claim is valid based on the documentation provided. Employers may reject treaty claims if they know or have reason to know that the claim is not valid.
Claims for a treaty exemption from withholding on taxable non-service scholarship or fellowship grants are claimed by presenting a completed and signed Form W-8BEN with parts 1 and 2 completed. The form must include an SSN or individual taxpayer identification number (ITIN). There are no exceptions. Alternatively, students who also have treaty exempt compensation may add the taxable grant to their Form 8233 treaty claim.
Under the ITIN application procedures, the IRS requires treaty claims requiring an ITIN to be sent with a Form W-7 ITIN application to the ITIN Unit with evidence supporting the treaty claim. Because the IRS failed to describe treaty claims on Form W-8BEN for taxable grants in the Form W-7 instructions, these ITIN applications are routinely rejected. As a result, recipients of taxable grants with treaty claims who have no TIN are forced to apply for the ITIN and tax refunds with their tax return.
Once students have a TIN to record on Form W-8BEN, the form is valid indefinitely, or until facts change, as long as it is used at least annually for income reported on a Form 1042-S. Form W-8BEN is not sent to the IRS.
Foreign students with treaty claims must submit a Form 1040NR-EZ tax return regardless of whether they were exempt from withholding on the treaty exempt income. They must complete the questions asked on page 4 of the return to support the claim. Payers and employers who routinely give treaty benefits collect better information to assess treaty benefit eligibility than does the IRS. Therefore, students are frequently granted refunds by the IRS in situations in which they are not eligible for the treaty exemptions.
Form W-9 and Form 1040
Foreign students who are resident aliens may claim treaty exemptions under a student article using a Form W-9 with a statement explaining the treaty article and saving clause exception under which the treaty claim is made. Resident aliens claim treaty benefits on Form 1040 using instructions explained in IRS Publication 519, U.S. Tax Guide for Aliens. Form W-9 is not sent to the IRS.