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 – IRS Commentary – July 3, 2018
Part F – What are the implications for Green Card Holders who are tax residents of the UK?