U.S. Tax Treaty Update for January 1, 1998


The United States has exchanged instruments of ratification, the last step in the treaty negotialion process for new treaties with Austria, Ireland, South Africa, Switzerland, Thailand and Turkey and a protocol with Canada. All the new treaties except Austria are effective for individual?s tax years beginning January 1, 1998. The treaty with Austria is effective for individuals? tax years beginning January 1, 1999. The new treaty with Austria is effective for withholding taxes on income such as royalties as of April 1, 1998. The protocol with Canada, which covers withholding on social security taxes, is retroactive to January 1, 1996. A new treaty with Luxembourg that has been ratified is expected to become effective sometime in 1998. Before the United States and Luxembourg can exchange instruments of ratification, they must first exchange instruments of ratification on a mutual legal assistence treaty that includes agreements on information exchange.

The following explains the application of the new treaties to payments to foreign national students and scholars.

Austria. The Students and Trainee Article of the new treaty with Austria limits benefits to payments that arise outside the United States. The benefits for business trainees are limited to three years unlike the old treaty which has no time limit. The old treaty with Austria also exempts from tax U.S. source grants, allowances and awards from non-profit organizations. Unlike the old treaty, the new treaty does not include a 2-year exemption from tax for teachers. The Other Income Article of the new treaty exempts prizes and awards paid to a resident of Austria from tax where the old treaty does not. The new treaty is more favorable for independent contractors allowing exemption from tax if the individual does not have a fixed base in the United States. The new treaty, unlike the old treaty, includes a residency tie-breaker rule. A tie-breaker rule allows an individual who is a resident alien for U.S. tax purposes and tax resident in Austria to be treated as a nonresident for U.S. tax purposes if his or her facts support residency in Austria rather than the United States under the tie-breaker criteria. The Entry In Force Article allows the election to have the old treaty apply for the first taxable year of the new treaty (1999), if the old treaty results in a greater relief from tax which it will for U.S. scholarship and fellowship payments and remuneration paid to teachers.

Ireland. The Students and Trainee Article of the new treaty with Ireland limits benefits to payments that arise outside the United States as does the old treaty. The benefits for business trainees are limited to one year unlike the old treaty which has no time limit. Unlike the old treaty, the new treaty does not include a 2-year exemption from tax for teachers. The new treaty is more favorable for independent contractors allowing exemption from tax if the individual does not have a fixed base in the United States. The Other Income Article of the new treaty exempts prizes and awards paid to a resident of Ireland from tax where the old treaty does not. The new treaty, unlike the old treaty, includes a residency tie-breaker rule. The Entry In Force Article allows the election to have the old treaty apply for the first taxable year of the new treaty (1998), if the old treaty results in a greater relief from tax which it will for remuneration paid to nonresident teachers.

South Africa. The Students and Trainee Article of the treaty with South Africa limits benefits to payments that arise outside the United States. The benefits for business trainees are limited to one year. The treaty does not include an article exempting remuneration paid to teachers and researchers from tax. The treaty exempts U.S. payments to independent contractors allowing exemption from tax if the individual does not have a fixed base in the United States. The Other Income Article of the treaty exempts prizes and awards paid to a resident of South Africa from tax.

Switzerland. The Students and Trainee Article of the new treaty with Switzerland limits benefits to payments that arise outside the United States as does the old treaty. Unlike the old treaty, the new treaty does not include a 2-year exemption from tax for teachers. The new treaty is more favorable for independent contractors allowing exemption from tax on U.S. payments if the individual does not have a fixed base in the United States. The Other Income Article of the new treaty exempts prizes and awards paid to a resident of Switzerland from tax where the old treaty does not. The new treaty, unlike the old treaty, includes a residency tie-breaker rule. The Entry In Force Article allows the election to have the old treaty apply for the first taxable year of the new treaty (1998), if the old treaty results in a greater relief from tax as it will for remuneration paid to nonresident alien teachers.

Thailand. The Student and Trainee Article of the treaty with Thailand allows an exemption from tax for U.S. source grants, allowances, and awards and for compensation not in excess of $3,000 paid to a student, certain trainees, and recipients of grants. Benefits are limited to five taxable years from date of arrival. The treaty includes a Teacher and Researcher Article exempting remuneration paid for teaching or engaging in research for a period of two years. The Treasury Explanation of the treaty makes it clear that the benefit is lost retroactively if the 2-year period is exceeded. An individual who has claimed the benefits of the Student and Trainee Article must reestablish tax residency in Thailand before claiming benefits under the Teacher and Researcher Article. The Student and Trainee Article and teacher and Researcher Article have a combined limitation period of 5 years from date of arrival. The treaty includes exceptions from the Saving Clause for benefits conferred by these Articles on individuals who are neither U.S. citizens nor U.S. lawful permanent residents (?green card? holders). An independent contractor will be subject to U.S. tax if he or she has a fixed base in the United States, or her period of time in the United States exceeds 90 days in the calendar year or or her remuneration, not including reimbursed expenses, exceeds $10,000. The Other Income Article of the treaty does not exempt prizes and awards paid to a resident of Thailand from U.S. tax.

Turkey. The Students and Trainee Article of the treaty with Turkey limits benefits to payments that arise outside the United States. The treaty includes a Teacher and Researcher Article exempting remuneration paid for teaching or engaging in research for a period of 2 years but only to the extent that the remuneration arise outside the United States. An independent contractor will be subject to U.S. tax if he has a fixed base regularly available in the United States or his or her period of time in the United States exceeds 183 days in a continuous 12-month period. The Other Income Article of the treaty exempts prizes and awards paid to a resident of Turkey from U.S. tax.