Tax residence

How residence is set

Each country defines tax residence under its own law, so a person can be resident in two countries at once. Most income tax treaties settle dual residence with tie-breaker rules that look in turn to a permanent home, the centre of vital interests, habitual abode and nationality. The United States taxes its citizens on worldwide income whatever their residence, so a foreign tax residence changes the foreign result but not the U.S. filing duty.

Meaning in treaty materials

The IRS's Publication 901 uses residence to identify people treated as residents of a foreign country under an income tax treaty, whose treaty treatment can depend on the country and income item. The OECD describes its Model Tax Convention as a model for bilateral tax conventions, which address common problems of international double taxation.^[1][2]

The IRS treaty tables explain that a treaty may require income to be remitted to the country of residence. They also explain that a treaty's requirements must be met before an item of income qualifies for a treaty rate or exemption. The relevant treaty text and protocol provide the country-specific terms.^[4]

Where the term matters

Residence determines treaty treatment for income received from U.S. sources by residents of treaty countries. Publication 901 says the rates and exemptions vary by country and by income item. Treaties also contain reciprocal provisions for a U.S. citizen or resident who receives income from a treaty country.^[1]

For a U.S. citizen, treaty residence does not by itself remove U.S. tax on worldwide income. Publication 901 states that U.S. citizens and residents are generally subject to U.S. income tax on that income, with certain exceptions for treaty provisions. Most treaties contain a saving clause concerning U.S. citizens and residents.^[1][3]

A treaty-based position that reduces U.S. tax generally has a disclosure requirement. Publication 901 says the position must generally be reported on Form 8833 attached to the return. It describes exceptions, including reduced withholding on certain income and reduced tax on employee pay, pensions, annuities, or Social Security.^[1]

Conditions and related terms

The IRS tables are summaries, not a substitute for the full treaty requirements. For example, a treaty may require income to be remitted to the country of residence. The requirements for a particular treaty benefit are found in the treaty text and any applicable protocol.^[4]

Tax residence is distinct from citizenship. Publication 901 says residents of foreign countries are not necessarily citizens, and the treaty tables similarly say treaty-country residents are not always citizens.

The neighboring term "country of residence" can also appear in an income remittance condition. A separate neighboring concept is limitation on benefits. The IRS tables describe this as an article that can require an entity resident in a treaty country to satisfy an objective test or obtain a competent authority determination for specified benefits.^[4]

In more detail

Under the CRS, an entity's tax residence depends on the laws of the relevant jurisdiction. Those laws may look to where the entity is established, incorporated or managed.^[5]

Key points

Financial institutions applying the CRS ask entity account holders to certify their tax residence and CRS classification and may request supporting documents to confirm that information.^[5]

Under the CRS, reportable account information may pass from the account jurisdiction's tax authority to the tax residence jurisdiction of the entity or its controlling persons.^[5]

Related reading

Income tax treaty explains treaty treatment of specified income, a separate context for residence. Limitation on benefits covers conditions that may apply to treaty benefits. Controlling person connects residence reporting to controlling persons under the CRS. Reportable account explains the account category mentioned in CRS reporting. Foreign grantor trust covers a distinct U.S. tax classification for foreign trusts.

Questions and answers

Related terms

• Income tax treaty: An income tax treaty may provide reduced U.S. tax rates or exemptions for specified U.S.-source income. Rules vary by country and income type under each treaty.
• Treaty-based return position: A treaty-based position claims that a U.S. treaty overrides or reduces U.S. tax.
• Withholding tax: The IRS tax treaty tables describe withholding tax on chapter 3 income payments. Such payments may be exempt under a treaty or taxed at a reduced rate.
• Treaty rate table: A treaty rate table summarizes income categories and tax rates or exemptions under U.S. income tax treaties.

Related guides and articles

• How income tax treaties are structured: Income tax treaty terms and structure, related U.S. reporting for U.S. citizens, the OECD Model Tax Convention description and IRS guidance on treaty positions.
• The OECD Common Reporting Standard: The Common Reporting Standard sets rules for financial account reporting and the annual exchange of that information between jurisdictions, for U.S. citizens.
• The court and control tests for foreign trusts: The court test and the control test classify a trust as domestic or foreign, and foreign trust status connects to U.S. reporting rules for U.S. citizens.

Related pages

• Glossary: All terms.
• Permanent establishment
• Treaty rate table
• Treaty-based return position
• IRS forms