Monthly Archives: March 2019

Article 4 paragraph 2 of the U.S. U.K. Tax Treaty: A clause preventing the use of the tax treaty tie breaker for some Green Card holders

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Introduction – In The 21st Century The Most Important Thing About A Person Is His Tax Residency

Green Card holders are deemed to be U.S. tax residents under the Internal Revenue Code. In most circumstances, Green Card Holders are also treated as U.S. tax residents under U.S. tax treaties.

U.S. Green Card holders have traditionally been able to use tax treaties to sever “tax residence” with the United States. This decision carries both burdens and benefits and should never be undertaken without competent professional advice. (For Green Card holders who are “long term residents“, the use of a “tax treaty tie breaker” will result in expatriation. Expatriation may trigger the imposition of the Sec. 877A Expatriation Tax.)

The tax treaty tie breaker is available if and only if the individual is, according to the tax treaty, a tax resident of BOTH the United States and the treaty partner country.

Typically the tax treaty tie breaker is a mechanism where one uses the provisions of the tax treaty to assign tax residency to one and only one country according to the tax treaty.

To repeat: a condition precedent to the use of the tax treaty tie breaker is that the individual be a tax resident of both countries according to the tax treaty.

Most tax treaties provide that if an individual is a tax resident of Country A according to domestic law, then the individual is a resident of Country A under the treaty. In other words, tax residency under the terms of the treaty follows from tax residency under domestic law.

Prior to the U.S. U.K. Tax Treaty of July 24, 2001, tax residency for Green Card holders according to the tax treaty, followed from tax residency under domestic law.

The U.S. U.K. Tax Treaty of July 24, 2001 changed this basic rule. The July 24, 2001 tax treaty contains a provision that provides that tax residency under the U.S. U.K. tax treaty, does not necessarily follow from tax residency under U.S. domestic law. Specifically Article 4 Paragraph 2 states that Green Card holders will NOT be treated as U.S. tax residents under the U.S. U.K. Tax treaty except as follows:

2. An individual who is a United States citizen or an alien admitted to the United States
for permanent residence (a “green card” holder) is a resident of the United States only if the
individual has a substantial presence, permanent home or habitual abode in the United States 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.

Paragraph 2 of Article 4 provides a presumption against U.S. tax residency, under the tax treaty, for Green Card holders. This results in a situation where the Green Card holder is a U.S. tax resident under the U.S. Internal Revenue Code, but NOT a U.S. tax resident under the treaty.

The purpose of this post is to explore the implications of this unusual provision and how it impacts Green Card holders who are tax residents of the U.K. The post will be divided into the following six parts:

Part A – U.S. U.K. Tax Treaty – Prior to July 24, 2001 (1975)

Part B – The U.S. U.K. Tax Treaty – signed July 24, 2001

Part C – The meaning of the two necessary conditions to qualify as a U.S. tax resident under the treaty: Joint Committee of Taxation Comments on Paragraph 2 of Article 4

Part D – The meaning of the two necessary conditions to qualify as a U.S. tax resident under the treaty: U.S. Treasury Technical Interpretation

Part E – The meaning of Article 4(2) – A UK Perspective

Part F – IRS Commentary – July 3, 2018

Part G – What are the implications for Green Card Holders who are tax residents of the UK?

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US Treasury interprets Section 962 Election to mean that individual shareholders are entitled to 50% exclusion of #GILTI income when calculating income attributed

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On March 4, 2019 as described by Helen Burggraf at American Expat Finance:
My comment included:

Also welcoming the news of the changes in the tax treatment of Americans’ overseas small businesses was John Richardson, a Toronto-based lawyer at CtizenshipSolutions.ca, who specializes in assisting Americans abroad with their tax and citizenship issues. The Treasury, Richardson said, should be congratulated for taking a “purposive” approach “when interpreting how Sec. 951A interacts with Sec. 962” of the relevant regulations.
In layman’s terms, Richardson noted, the new regulation means that “American expats may now deduct 50% of the active business income defined as GILTI, thus reducing the amount of GILTI they would be expected to have to pay tax on.”
However, the new regulations don’t affect the so-called Section 965 “transition tax,” he noted.
“It appears that Treasury heard and understood the problems faced by individual shareholders of CFCs [Controlled Foreign Corporations].
“I suspect that organisations representing S Corps [a type of closely-held corporation, as defined by the U.S. Internal Revenue Service] also made submissions to Treasury and had an influence on this decision.
“All Americans abroad should be encouraged by this. Instead of interpreting the law in the most literal and punitive way, it appears that Treasury has recognized the problems that individuals, whether living inside or outside America, faced.
“The bottom line is that small business owners abroad will now, for the most part, be able to defer U.S. taxation on the active business income of their corporations by using the Sec. 962 election, provided that their corporations are paying sufficient local tax. They will of course have to pay U.S. tax when the income is distributed to them.
“But [even here], the distributions will be subject to local tax which can then be used, via the FTC rules, to offset U.S. tax owing – for active business income.
“In other words, this is excellent news for Americans abroad.”

Full discussion here …


An example of the 50% discount and the Section 962 election here …


John Richardson – Follow me on Twitter at @ExpatriationLaw

The United States imposes a separate and more punitive tax system on US dual citizens who live in their country of second citizenship

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Prologue

Do you recognise yourself?

You are unable to properly plan for your retirement. Many of you with retirement assets are having them confiscated (at this very moment) courtesy of the Sec. 965 transition tax. You are subjected to reporting requirements that presume you are a criminal. Yet your only crime was having been born in America (something you didn’t even choose) and attempting to live as a U.S. tax compliant American outside the United States. Your comments to my recent article at Tax Connections reflect and register your conviction that you should not be subjected to the extra-territorial application of the Internal Revenue Code – when you don’t live in the United States.

The Internal Revenue Code: You can’t leave home without it!

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