Tax Treaty Benefits For Independent Personal Services
All income tax treaties provide benefits for individuals engaged in dependent personal services (i.e., employment) and independent personal services (i.e., self-employment). Most treaties require employment be paid by a foreign employer to be eligible for employment benefits, unless the treaty allows benefits for certain U.S. employment income of individuals who entered the United States for a specific purpose such as study, training, teaching or engaging in research. Individuals engaged in self-employment activities may be eligible for treaty benefits for pay from U.S. payers if they meet the conditions of the applicable treaty.
Employment vs. Self-Employment
For treaty purposes, whether income is from employment or self-employment services is determined under the tax laws. The tax concept of self-employment depends upon whether an employer-employee relationship exists between the service provider and the payer as established by 20 factors defining employment under the common law. "Employment" and "self-employment" are defined differently for immigration purposes. Under the immigration laws, the concept of "employment" centers around the idea of personal services performed only for the organization(s) that sponsored the service provider's entry and/or stay in the United States.
There are services that the immigration service considers to be legal "employment" but that the IRS considers to be "self-employment." For example, usual academic services provided to a college or university by a B visitor who qualifies under the 9/5/6 B Honorarium Rule, are considered legal "employment" for immigration purposes but "self-employment" for tax purposes.
Independent Personal Services Article
Most tax treaties include an Independent Personal Services Article, referred to in some treaties as "Income from Self-Employment." Older treaties such as the treaties with Greece and the Former USSR (which covers the nine Newly Independent States that have yet to negotiate separate treaties with the United States) combine income from employment and self-employment in the same article.
Individuals who are tax resident in a treaty country and who derive income from the performance of services in an independent capacity in the United States are exempt from federal income tax unless they meet certain conditions. Conditions vary by treaty and may include any combination of the following:
Entertainers and athletes who qualify for treaty benefits under the Income from Self-Employment Article, but whose gross receipts exceed the maximum amount specified in the Artists and Athletes Article of the applicable treaty are ineligible for treaty benefits. Also, directors receiving directors' fees (considered by IRS Rev. Rul. 74-163 to be self-employment income) are typically denied treaty benefits by the Directors' Fees Article of the applicable treaty.
Business Profits Article
Newer treaties, such as the replacement treaties with the United Kingdom and Japan (and the signed but not yet ratified treaty with Belgium) do not have a separate treaty article for Income from Self-Employment. The General Definitions Article of these treaties provides that the term "business" under the Business Profits Article of the treaty includes the performance of professional services and of other activities of an independent character.
Under the Business Profits Article, the profits of an enterprise that is resident in the treaty country are not subject to federal income tax unless the business is carried on though a permanent establishment that the enterprise has in the United States and the income is attributable to that permanent establishment. A "permanent establishment" is defined by the Permanent Establishment Article of the treaties to include a fixed base through which the business of the enterprise is wholly or partly carried on. Individuals from these treaty countries may conclude incorrectly that these treaties provide no self-employment benefit because of the complicated treaty analysis required to identify how income from self-employment is covered by the treaty.
Exemption from Withholding
Income from self-employment paid to nonresident alien recipients is subject to 30 percent withholding and reporting on a Form 1042-S information return (Income Code 16) and on a Form 1042 tax return unless an exception applies.
In order to claim an exemption from withholding, recipients of services income must present to the payer prior to payment a completed and signed Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual (these treaty benefits do not apply to individuals who are resident aliens for U.S. tax purposes). To be valid, Form 8233 must include a U.S. taxpayer identification number (TIN) and must be sent to the IRS by the payer following the form's instructions. Individuals lacking a Social Security number (SSN) or individual taxpayer identification number (ITIN) may submit Form 8233 to the ITIN Unit with a Form W-7, Application for IRS Individual Taxpayer Identification Number in accordance with the form's instructions for pre-tax return applications. Payers who allow such an exemption from withholding, and who fail to receive the ITIN by the due date of their Form 1042 tax return, will be obligated for the underwithheld taxes.
Recipients of self-employment income not exempt from withholding may claim the treaty benefit on their Form 1040NR tax return. To do so, they must include the information requested by Form 8233 with their Form 1040NR.
Paula Singer, Esq. CEO of Windstar Technologies, Inc. and partner in the tax law firm, Vacovec, Mayotte & Singer, Newton, MA has over 25 years of experience providing advice and compliance services to employers on cross-border employment matters. For more information, visit www.windstar.com. For additional information, call 1-800-259-6398 or email: firstname.lastname@example.org.
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