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All income tax treaties provide benefits for individuals engaged in dependent personal services (i.e., employment) and independent personal services (i.e., self-employment). Most treaties require employment be paid by a foreign employer to be eligible for employment benefits, unless the treaty allows benefits for certain U.S. employment income of individuals who entered the United States for a specific purpose such as study, training, teaching or engaging in research. Individuals engaged in self-employment activities may be eligible for treaty benefits for pay from U.S. payers if they meet the conditions of the applicable treaty.

For treaty purposes, whether income is from employment or self-employment services is determined under the tax laws. The tax concept of self-employment depends upon whether an employer-employee relationship exists between the service provider and the payer as established by 20 factors defining employment under the common law. "Employment" and "self-employment" are defined differently for immigration purposes. Under the immigration laws, the concept of "employment" centers around the idea of personal services performed only for the organization(s) that sponsored the service provider's entry and/or stay in the United States.

There are services that the immigration service considers to be legal "employment" but that the IRS considers to be "self-employment." For example, usual academic services provided to a college or university by a B visitor who qualifies under the 9/5/6 B Honorarium Rule, are considered legal "employment" for immigration purposes but "self-employment" for tax purposes.

Most tax treaties include an Independent Personal Services Article, referred to in some treaties as "Income from Self-Employment." Older treaties such as the treaties with Greece and the Former USSR (which covers the nine Newly Independent States that have yet to negotiate separate treaties with the United States) combine income from employment and self-employment in the same article.

Individuals who are tax resident in a treaty country and who derive income from the performance of services in an independent capacity in the United States are exempt from federal income tax unless they meet certain conditions. Conditions vary by treaty and may include any combination of the following:

Entertainers and athletes who qualify for treaty benefits under the Income from Self-Employment Article, but whose gross receipts exceed the maximum amount specified in the Artists and Athletes Article of the applicable treaty are ineligible for treaty benefits. Also, directors receiving directors' fees (considered by IRS Rev. Rul. 74-163 to be self-employment income) are typically denied treaty benefits by the Directors' Fees Article of the applicable treaty.

Business Profits Article

Newer treaties, such as the replacement treaties with the United Kingdom and Japan (and the signed but not yet ratified treaty with Belgium) do not have a separate treaty article for Income from Self-Employment. The General Definitions Article of these treaties provides that the term "business" under the Business Profits Article of the treaty includes the performance of professional services and of other activities of an independent character.

Under the Business Profits Article, the profits of an enterprise that is resident in the treaty country are not subject to federal income tax unless the business is carried on though a permanent establishment that the enterprise has in the United States and the income is attributable to that permanent establishment. A "permanent establishment" is defined by the Permanent Establishment Article of the treaties to include a fixed base through which the business of the enterprise is wholly or partly carried on. Individuals from these treaty countries may conclude incorrectly that these treaties provide no self-employment benefit because of the complicated treaty analysis required to identify how income from self-employment is covered by the treaty.

Exemption from Withholding

Income from self-employment paid to nonresident alien recipients is subject to 30 percent withholding and reporting on a Form 1042-S information return (Income Code 16) and on a Form 1042 tax return unless an exception applies.

In order to claim an exemption from withholding, recipients of services income must present to the payer prior to payment a completed and signed Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual (these treaty benefits do not apply to individuals who are resident aliens for U.S. tax purposes). To be valid, Form 8233 must include a U.S. taxpayer identification number (TIN) and must be sent to the IRS by the payer following the form's instructions. Individuals lacking a Social Security number (SSN) or individual taxpayer identification number (ITIN) may submit Form 8233 to the ITIN Unit with a Form W-7, Application for IRS Individual Taxpayer Identification Number in accordance with the form's instructions for pre-tax return applications. Payers who allow such an exemption from withholding, and who fail to receive the ITIN by the due date of their Form 1042 tax return, will be obligated for the underwithheld taxes.

Recipients of self-employment income not exempt from withholding may claim the treaty benefit on their Form 1040NR tax return. To do so, they must include the information requested by Form 8233 with their Form 1040NR.

Paula Singer, Esq., Co-founder and Chairman of Windstar Technologies, Inc. and partner in the tax law firm, Vacovec, Mayotte & Singer LLP, Newton, MA, has over 25 years of experience providing advice and compliance services to individuals and their employers, and payers on cross-border matters.

Watch for Volume 4, Number 2 for a discussion on Individual Taxpayer Identification Numbers.

Q: If my honorarium payment was subject to 30 percent withholding and I am not a tax resident in a treaty country, do I have to file a tax return?

A: Under IRS rules, a Form 1040NR tax return is required for all nonresident aliens with income from self-employment services. A Form 1040NR is required even if the self-employment income was exempt from withholding under an applicable tax treaty.

Personal services income is considered income effectively connected with a U.S. trade or business (called "ECI"). ECI is taxed, after allowable deductions, at single or married-filing-separately rates. The IRS does not attempt to collect a tax return from individuals whose withheld taxes exceed the tax computed at graduated rates. However, some individuals, such as dignitaries in A or G status receiving multiple honorarium payments and highly-paid entertainers and athletes, may have taxes withheld that are less than their tax obligation. If that is the case, they should submit estimated payments or they will owe the tax (plus underpayment penalties) with their tax return.

Windstar Technologies, Inc. will hold its next Nonresident Alien (NRA) Training workshop Tuesday, April 24^th through Friday, April 27^th at the Boston Marriott Quincy in Quincy, Massachusetts. Windstar's experts will provide substantive training on immigration rules related to paying foreign nationals, determining tax residency, the special withholding and reporting rules for wages, scholarship and fellowship grants that apply to nonresidents, and exemptions from tax under the law and treaties. Included will be an update on the latest ITIN application rules. All workshop participants will be provided hands-on training on the International Tax Navigator^® and its web-based data collection and forms delivery module, FNIS™.

The registration cost is $1,350 for the first attendee from an institution and $1,200 for each additional attendee. There is also an additional $300 fee to attend the Introduction to Tax Navigator session from 12:30 p.m. - 5:30 p.m. on Tuesday, April 24^th. A discounted hotel rate of $169 per night for single or double bedrooms is available by calling (617)472-1000 before April 9^th.

Paula N. Singer, Esq. will present a number of tax seminars to students and scholars at major Boston area hospitals and colleges. The seminars, beginning in February, will educate attendees on the federal and Massachusetts tax return rules including: how to determine their tax residency status - resident, nonresident, or dual status - what tax returns and disclosure forms are required, who can submit residency and nonresidency elections, who can claim tax treaty exemptions, and what exemptions, deductions, and credits may be available.

International Aspects of Individual U.S. Tax Returns
This guide is a 200-page tax guidebook for tax professionals whose clients include U.S. citizens with assets and income from abroad, U.S. citizens and residents living and working abroad, foreign nationals with U.S.-source income, foreign nationals living and working or studying in the U.S., and individuals relocating to and from U.S. possessions.

U.S. Taxation of Foreign Students
This guide, introduced in December 2006, explains the work-authorized activities of foreign students in F, J, and M nonimmigrant status including documentation required for Social Security number and individual taxpayer identification number applications. The guide discusses the special rules determining U.S. tax status (resident or nonresident) that apply to foreign students, the withholding and reporting rules that apply to scholarship/fellowship grants and wages, and special FICA exemptions. Also included is extensive information about tax treaty benefits that apply to foreign students and their tax return filing obligations.

A Guide for Filing IRS Forms 1042 and 1042-S
This guide has been revised for process changes for tax year 2006 submissions in 2007. The guide explains the procedures that payers must follow to deposit withheld taxes, report the income and withheld taxes, and report treaty exempt U.S. source income made to nonresident aliens and foreign corporations, partnerships, trusts, estates, and other foreign entities (collectively "foreign persons").

Included in the guide are all relevant IRS forms and instructions and IRS Publication 3609 "Filing Information Returns Electronically." No other reference provides this information all in one place.

HEUG/Alliance07 Conference
Disney's Coronado Springs Resort and Disney's Yacht & Beach Club Resorts
March 11 - 14, 2007

Windstar Technologies, Inc.’s vice president of sales, Richard Adams, will speak on IRS Compliance Risks in Payments to Foreign Nationals: the Path through the Regulatory Maze at 2:00 p.m. on March 13^th in Salon B.

Windstar Technologies, Inc.'s vice president of sales, Richard Adams, will speak on An Introduction to U.S. Nonresident Alien Tax Withholding at 1:30 p.m. on March 29^th during session 3B.

©Copyright 2007 by Windstar Technologies, Inc. Windstar reserves all rights to this electronic material. Information contained in this publication is based on the best information available at the time of publication. While believing the information in this publication to be accurate, Windstar accepts no legal responsibility for its accuracy.