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Tax Treaty Benefits For Scholarships And Fellowships

by Paula N. Singer, Esq.

Scholarship and fellowship payments that are not for qualified items are taxable to the recipient. Qualified items include tuition and fees required for enrollment, and fees, books, supplies, and equipment required for a course of study received by a candidate for a degree at a qualifying educational institution.

Scholarships and fellowships for nonqualified items such as room and board or research are taxable and, in the case of nonresident alien recipients, subject to NRA withholding at a 30 percent rate or a lower 14 percent rate for certain recipients in F, J, M, or Q status. For more details on these rules, see the articles about scholarships, fellowships, and stipends in the September/October, 2008, November/December, 2008, and March/April 2009 editions of the Crow’s Nest.

US Tax Treaty Policy
It is not the policy of the United States to provide tax treaty benefits for taxable scholarships and fellowships, as illustrated by Article 20 of the 2006 US Model Treaty. Article 20 grants benefits on payments received by a student, apprentice, or business trainee who is present in the United States for his or her full-time study at an accredited educational institution or for his or her full-time training provided that such payments arise outside the United States and are for the purpose of his or her maintenance, education, or training. (Article 20 limits payments for apprentices and business trainees to two years.) A similar provision was included in the 1996 U.S. Model Treaty.

As a result of this policy, the majority of tax treaties in effect provide a benefit only for foreign-source scholarship and fellowship grants. New treaties that have come into effect since 2006 replacing existing tax treaties (e.g., the treaties with Belgium and Iceland) have eliminated benefits for U.S.-source taxable scholarships and fellowships that were in the prior treaties. Treaties with new treaty partners such as Bulgaria also include the U.S. Model Treaty provision. 

Since nonresident alien recipients of foreign-source scholarships and fellowships are not subject to tax on foreign-source income, this treaty benefit is of no utility for the majority of grant recipients who are nonresident aliens. It is important for the minority of recipients of foreign-source scholarships and fellowships who become resident aliens subject to U.S. income tax on their worldwide income, including their grants from foreign organizations and governments. However, these grant recipients may not understand that their foreign grants are subject to U.S. tax, either because such grants may not be taxable by the treaty country or because there is no specific line for reporting taxable grants on Form 1040 (grants are recorded on the wages line with “SCH” on the dotted line), or both.

Tax Treaties with Benefits
Many older tax treaties include in the Student/Trainee Article benefits for “a grant, allowance, or award.” The treaties with Kazakhstan, Russia, and Ukraine use the wording “grant, allowance, or other similar payments.” The IRS interprets this wording to apply to taxable scholarship and fellowship grants, both U.S.- and foreign-source. (Awards as defined by Section 74 might be covered by the Other Income Article.) These benefits apply to both U.S.- and foreign-source grants.

Article 21 of the treaty with South Korea is typical. It provides benefits for an individual from South Korea who is temporarily present in the United States for the primary purpose of:

  1. Studying at a university or other recognized [i.e., accredited] educational institution,
  2. Securing training required to qualify for a profession or professional specialty, or
  3. Studying or doing research as the recipient of a grant, allowance, or award from a governmental, religious, charitable, scientific, literary, or educational organization.

Under treaties that follow this model, benefits are available for researchers as well as for students and trainees. (For more details, see “Tax Treaty Benefits for Research,” in the July/August 2008 edition of the Crow’s Nest.)

Benefits are typically available for five taxable years from the date of arrival for the purpose of the treaty. A few treaties allow benefits for a slightly longer period by providing benefits for five years from date of arrival instead of limiting the benefit period to tax years.

Grant Recipient
In order for students, trainees, and researchers to be eligible for a treaty benefit on a scholarship or fellowship grant, the grant must be made by the grantor to the individual. (See, for example, the Treasury Explanation for Article 21(1)(a) of the treaty with France and for Article 20(3) of the treaty with Germany.) The fact that an individual is paid a salary that is funded by a grant is not sufficient to support treaty benefits although they may be eligible for a compensation benefit provided by the treaty, if any.

Because the treaty with Russia does not include a compensation benefit for engaging in research, post docs from Russia working for institutions that use grant monies to pay their salaries frequently try to claim eligibility for treaty benefits because their salaries are funded by grants. At least two such researchers have taken their claims to court. In 2005, the U.S. Court of Federal Claims in Sarkisov v. the United States held for the IRS ruling that to be eligible for a treaty benefit, the grant must be made directly to the individual by the grantor. In its ruling, the Court held that a contingency based on funding included in contracts by the employer to protect itself from a shortfall of funds for research “in no manner converted Mr. Sarkisov’s salary into a grant.” More recently, on March 30, 2009, the U.S. Tax Court reached the same result in Ratnikov v. Commissioner on very similar facts. The Tax Court stated that “if the modern funding environment has shifted to providing grants to universities instead of to individuals, we agree with the Court of Federal Claims that the contracting states have the responsibility to modify their treaty terms if they choose, not the judiciary.

ęCopyright 2009 by Windstar Technologies, Inc. Windstar reserves all rights to this electronic material. Information contained in this publication is based on the best information available at the time of publication. While believing the information in this publication to be accurate, Windstar accepts no legal responsibility for its accuracy

About The Author

Paula N. Singer, Esq. chairman 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. She is also the editor of "US Tax Compliance For Immigrants And Employers: The Lawyer's Complete Guide". To learn more, see: For more information, visit For additional information, call 1-800-259-6398 or email:

The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.

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