“Today, it takes more brains and effort to make out the income-tax form than it does to make the income.” - Alfred E. Neuman
Double Tax Agreements, or DTAs, also referred to as Bilateral or International Tax Treaties, are intended to help expats avoid double taxation (i.e. being taxed on the same income by two different countries).
As Americans living abroad are often liable to both US taxes as US citizens as well as foreign taxes as residents of a foreign country, double taxation is often an issue.
However, as you’ll see, the DTAs the US has signed don’t often help expats avoid double taxation after all. In this article, we’ll explain why, as well as when tax treaties can help, how to claim tax treaty benefits if you need to, and talk about social security and estate and gift tax treaties, too.
In this section, you’ll learn about:
• Does the US have tax treaties?
• Do tax treaties benefit Americans living abroad?
• When can tax treaties benefit expats?
• How can expats claim tax treaty benefits?
• How to file Form 8833
• What about social security tax agreements?
• What about estate and gift taxes?
Does the US have tax treaties?
The US has signed tax treaties with numerous countries across the world, from Armenia to Vietnam. Each treaty contains a different set of rules regarding reduced rates and exemptions.
Over 60 countries have signed a tax treaty with the US, and each different treaty covers a range of different scenarios and taxes, from corporation taxes to estate taxes.
Many foreign governments want to attract American investors, and to make it easier, foreign countries will often include provisions in tax treaties that reduce withholding taxes on dividends, interest and royalties.
Do tax treaties benefit Americans living abroad?
Tax treaties can help Americans living abroad, but unfortunately only a few expats actually benefit from them.
In most cases, the tax treaties that the US has signed include a Savings Clause that allows them to apply US taxation on Americans living abroad as if the treaty didn’t exist.
Elazar M. Cole, an American resident in Israel, tested the Savings Clause provision when he reported a capital gain of a stock sale in 2010 but didn’t pay tax on it, stating that the US-Israeli DTA meant he didn’t have to pay. The IRS took him to court in 2016, and the court upheld the notion that the Savings Clause in the treaty meant that he would still have to pay US tax on the capital gain.
Instead, most treaties allow Americans living abroad to claim the Foreign Tax Credit when they file their US tax return to avoid double taxation.
It’s also worth noting that most US tax treaties contain a provision that allows the two countries to share and exchange tax information.
When can tax treaties benefit expats?
While rare, tax treaties can benefit expats living abroad. For example, there are some occupations that qualify for exemptions in many US tax treaties, most often for students, teachers, or researchers.
Teachers and researchers are usually exempt from taxes for two to three years, while students and trainees often get four to five years under tax treaty benefits. After these periods of time are finished, the US considers you a resident of the foreign country.
Other professions that can benefit from DTA provisions are professional athletes and sportsmen who are abroad training or competing, and entertainers who are performing overseas, depending on each treaty.
Some tax treaties also have provisions covering the double taxation of dividends, or retirement income, or prevent withholding taxes for independent contractors (including freelancers).
To provide an example, Article 17 of the US/UK tax treaty allows contributions to a qualifying UK pension plan to be tax-deferred like a standard US 401k. Distributions also receive exemptions, while UK state pensions are only allowed to be taxed by the country where their recipient is a resident.
The way IRAs are treated in DTAs is covered in more detail in a separate article.
The first ever tax treaty is thought to be an agreement signed between Great Britain and Switzerland on August 18, 1872 to prevent the double taxation of death (i.e. estate) taxes. The first US tax income tax treaty was signed with France in 1932.There are now over 3000 bilateral international tax treaties signed around the world.
How can expats claim tax treaty benefits?
Expats can claim tax treaty benefits by filing IRS Form 8833. So if you’re an expat living in a country that has a tax treaty with the US that has a provision that you could benefit from, you should attach this form to your annual American tax return.
How to file Form 8833
Filing Form 8833 involves writing a brief description explaining the treaty provision that you want applied to your tax return.
An example of when this may be necessary is if you were a resident in one country but carried out work in others, including the US, that may affect your ability to claim foreign tax credits.
The statement should include information about your country of tax residence, your travel dates and purpose of travel (if relevant), the treaty provision you are invoking, and the types and amount of income that you believe is exempt from taxes, according to the tax treaty.
What about social security tax agreements?
Americans living abroad who are self-employed or who work for a US-based employer are still liable to pay US social security taxes.
Many other countries require residents to pay social security tax too, which can lead to double social security tax liability for Americans.
While double social security taxation isn’t covered in DTAs, the US has signed a separate set of tax treaties with 30 other countries to cover it, known as Totalization Agreements.
If you live in a country that has a Totalization Agreement with the US, you will only pay social security taxes to one country, normally dependent on how long you intend to live abroad for.
So if you are living abroad for less than typically either 3 or 5 years (depending on the treaty), you can continue making social security contributions to the US, and not in your country of residence. If you’re there (or intend to stay there) for more than 5 years though, you will contribute in your new country of residence.
Totalization Agreements also stipulate that contributions made while you’re abroad to either country can be applied to your social security entitlement in either country, depending where you eventually retire.
This means that you usually don’t need to get the full number of credits in the country where you retire to qualify to receive social security benefits in retirement.
What about estate and gift taxes?
While estate and gift taxes aren’t covered in DTAs either, again the US has signed a separate set of international estate and gift tax treaties with 15 other countries to avoid double taxation.
These countries are Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, South Africa, Switzerland, and the UK.
Each treaty is different, with some covering just estate taxes, and others covering gift taxes too.
The majority of Americans living abroad don’t need to use tax treaty provisions, as they can avoid double taxation by claiming either the Foreign Earned Income Exclusion or the Foreign Tax Credit. But there are still plenty of situations where a tax treaty may be useful, so it’s always worth consulting your tax advisor.
If you have any questions, don't hesitate to contact us.
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