The U.S. income tax and reporting obligations of non-U.S. citizens depend on the tax residency status of the individual.
A non-citizen will be considered a resident alien for U.S. income tax purposes if he or she meets one of two objective tests: (1) the “lawful permanent residence” test or (2) the “substantial presence” test.
Under the lawful permanent residence test, a non-citizen is considered a resident alien from the day he or she is admitted to the United States as a lawful permanent resident (i.e., receives a “green card”) until the day this status ends.
Importantly, under the general rules of the U.S. Internal Revenue Code, green card holders, like U.S. citizens, are considered U.S. tax residents even when they are living outside of the United States. Relief from this broad U.S. tax net may be available for a green card holder who resides in a treaty country.
Tax Treaty’s Tie-Breaker Rules
A U.S. income tax treaty, if applicable, may give a green card holder the option to elect nonresident alien status and thereby be released from U.S.-tax-resident status.
The “tie-breaker rules” of many income tax treaties with the United States provide that if an individual is a “resident,” as that term is defined in the treaty, of both the United States and the treaty partner country, preference is given to the country where the individual has a permanent home available to him, or if one is available in both jurisdictions, then such person is considered to be a resident in the place where his personal and economic relations are closer (“center of vital interests”).
A typical treaty article will have language as follows:
Where by reason of the provisions of paragraph 1, an individual is a resident of both Contracting States, then his status shall be determined at follows:
(a) he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (hereinafter referred to as his center of vital interests);
(b) if the State in which he has his center of vital interests cannot be determined, or if he does not have a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode;
(c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a citizen;
(d) if he is a citizen of both States or of neither of them, the competent authorities of the Contracting States shall endeavor to settle the question by mutual agreement.
Assuming the tests favor residence in the foreign country in a particular year, the green card holder can claim treaty relief and thereby be released from U.S.-tax-resident status for such year. It’s recommended that a careful factual analysis be conducted to back up a treaty non-residence claim.
Other Tax Treaty Tests for Green Card Holders
While the above tie-breaker tests are found in most U.S. income tax treaties, certain treaties may have other provisions that apply specifically to green card holders.
For instance, in the U.S.-U.K. income tax treaty, under Article 4(2), a green card holder will be treated as a resident of the U.S. under the treaty only if the individual has a substantial presence, permanent home or habitual abode in the U.S., and if that individual is not a resident of a State other than the United Kingdom for the purposes of a double taxation convention between that State and the United Kingdom.
Given that each U.S. tax treaty has its own variations and nuances, it’s important to carefully review the provisions of the relevant treaty to understand how they apply specifically to the fact pattern at issue.
Claiming Tax Treaty Relief for Green Card Holders
Treaty relief must be claimed on the IRS Form 8833, Treaty-Based Return Position Disclosure, which is attached to the nonresident alien income tax return (Form 1040-NR).
Failure to disclose a treaty-based return position should not result in the inability to take the treaty position, but may result in a penalty of $1,000 in the case of an individual taxpayer.
International Forms for Green Card Holders Claiming Tax Treaty Relief
While claiming treaty relief means that, substantively, a green card holder is treated as a non-resident for tax purposes (and should file a Form 1040-NR rather than a Form 1040), careful consideration should be given to international forms that may not be affected by the provisions of an income tax treaty.
For instance, treaty relief generally does not affect a person’s requirement to file the FBAR to disclose foreign bank accounts. The controlled foreign corporation regulations also seem to indicate that Form 5471 for CFCs reporting is not affected by treaty relief.
Given the complexities involved in international tax reform reporting, a tax professional should be consulted to see whether certain form requirements remain despite a filer’s ability to claim non-residence under an income tax treaty.
In addition to the income tax and reporting considerations discussed above, thought should be given to other implications of claiming non-residence under the treaty.
For instance, if your treaty position were disclosed to the U.S. immigration authorities, it could affect your ability to keep your green card active while living abroad or could even risk your green card being revoked.
Second, depending on how long you’ve held your green card, a treaty residence claim can be treated as an expatriation event (similar to renunciation by a US citizen), which can have exit tax implications.
For these reasons, if you are a green card holder living abroad, you should consider consulting with an expat tax professional to understand the benefits of a treaty claim as well as the risks from tax and other perspectives.