The United States has entered into income tax treaties with a number of foreign countries. Under these treaties, residents of foreign countries are taxed at a reduced rate or are exempt from U.S. income taxes on certain types of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific types of income. If a treaty exemption applies to a particular person, and the proper documents are presented, the person will be exempted from the IRS nonresident alien withholding requirement.
The benefit always results in a reduction of the income tax to be withheld, but the granting of the tax treaty benefit is not automatic. In order to be granted a tax treaty, an individual must have a SSN (social security number) or an ITIN (individual taxpayer identification number).
Depending on the type of income, there are different forms that are required to be completed before applying for a tax treaty benefit:
Form 8233, Exemption from Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a nonresident alien individual, is used for dependent (employee) and independent (non-employee) compensation. Must be renewed annually if tax exemption is to continue.
Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, is used by individuals to document their non-U.S. status, and to make treaty claims on U.S. source income that is nonservice income (e.g., royalties, scholarship, etc.) This form is valid for three years and must be given to employer.