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Claiming a Tax Treaty Benefit in a Foreign Country or Want to avoid Paying VAT? Make Sure You Obtain a Form 6166

Claiming a Tax Treaty Benefit in a Foreign Country or Want to avoid Paying VAT? Make Sure You Obtain a Form 6166

By Anthony Diosdi

The United States has income tax treaties with approximately 58 countries. These treaties allow for various forms of tax relief. In order for a U.S. corporation or U.S. individual to obtain a tax treaty benefit in a foreign country that has a tax treaty with the United States, many U.S. treaty partners require that the Internal Revenue Service (“IRS”) certify that the entity or individual claiming treaty benefits is a resident of the United States for federal tax purposes. The IRS provides this residency certification on Form 6166, a Letter of U.S. Residency Certification. A Form 6166 may also be used as a proof of U.S. residency for purposes of obtaining an exemption from a value added tax (“VAT”) imposed by a foreign country.

Below, please find two examples how a Form 6166 works:

For example, suppose that Bling Gold is a U.S. corporation that manufacturers jewelry. Assume that Bling Gold operates businesses throughout the world. Bling Gold conducts business in Indonesia, a country that imposes a VAT. If Bling Gold wishes to obtain an exemption from the Indonesia VAT, it must obtain a Form 6166. Bling Gold must present the Form 6166 to local withholding agents.

Now let’s assume that Tom is a U.S. citizen who works as a consultant abroad in Hungary. Tom receives income from a business in Hungary for the consulting work that he performs. Hungary has an income tax treaty with the United States. Since Hungary has an income tax treaty with the United States, Tom can avoid double taxation on his consulting income under the treaty. In order to avoid double taxation, Tom will need to provide proof of U.S. residence to the Hungarian business. By providing proof of residency to the Hungarian business, Tom may avoid Hungarian withholding taxes on his foreign income. Tom will need to provide a Form 6166 to the Hungarian business.

The IRS procedure for requesting a certification of residency requires the submission of Form 8802, Application for United States Residency Certification. The IRS also requires a user fee for processing residency certifications made on Form 8802 in the amount of $85 for individuals and $185 for non-individual taxpayers. A Form 6166 should be obtained annually.

Diosdi Ching & Liu, LLP assists individuals and businesses with tax treaty planning. 

Anthony Diosdi is one of several international tax attorneys at Diosdi Ching & Liu, LLP. As an international tax attorney, Anthony Diosdi provides international tax advice to individual, closely held entities and publicly traded corporations. Diosdi Ching & Liu, LLP has offices in Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi advises clients in international tax matters throughout the United States. Anthony Diosdi may be reached at (415) 318-3990 or by email: adiosdi@sftaxcounsel.com

This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.