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Tax Treaty Considerations for Expats in the United States Of America

Submitted: October 2013

Tax treaties exist to protect taxpayers from being taxed twice on certain money flows between two countries. Treaties are particularly important if you have investments outside the USA, and intend bring money earned from them into the USA during your stay. They also apply if you build up some investments in the USA during your stay, and intend to leave them here after you have left. The USA has the wide network of tax treaties in force with over 60 countries worldwide.

Most tax treaties will conform to the OECD Model Treaty and typically will state how the various forms of income are taxed. It will state whether the specific income is only taxed in the USA; only taxed in your home country, or taxed in both countries. It may also state what rate of tax is applicable in different cases. The treaty will also contain a definition of residence only for the purposes of the treaty; this is not the same as the definition of tax-residence in tax law. The types of income covered by a treaty may include:

  • property income
  • business profits
  • dividends
  • interest
  • royalties
  • capital gains
  • employment income
  • directors fees
  • income from sports and entertainment
  • state and private pensions, alimony and child support
  • money for the full-time education of students, and
  • income from teaching.

It is important to understand that a tax treaty applies to both money sent from and to the USA.

The withholding tax rate in the USA on dividends sent to an individual in a country without a tax treaty is 30%, if sent to a country with a tax treaty they are generally reduced to 15%.

The withholding tax rate in the USA on interest sent to an individual in a country without a tax treaty is 30%, if sent to a country with a tax treaty they are generally reduced to between 10% and 15%.

The withholding tax rate in the USA on royalties sent to a country without a tax treaty is 30%, if sent to a country with a tax treaty they are generally reduced to between 10% and 15%.

A table showing the effective US tax treaties is available here. For the complete rules and rates it is necessary to read the treaties themselves. These can be found by following a link attached to the country name in the table. The sections on dividends, interest and royalties are generally in the middle of the document.

Prior to arriving in the USA you may be able to arrange your existing investments so that the maximum advantage is gained from the terms of any treaty. This may involve moving investments from one non-US country to another to reduce the tax rate paid.

If your home country has a generally lower rate of tax than the USA, you may be able to use the residency definitions in the treaty to show that you are still a tax-resident in your home country. By doing this you may avoid paying some US tax on overseas income from work outside the USA and non-US dividends, interest, royalties and capital gains.

If your home country has a generally higher rate of tax than the USA, you may benefit by becoming tax-resident in the USA as early as possible. At the end of your stay in the USA you can also rearrange your affairs to ensure that any ongoing income from the USA employment or investments is also taxed at the lowest rate possible in the future.

 

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