Substantial Presence Test or Double taxation treaty?

[Michael2017 368]

Hi,

 

I have a question in regards to taxation in the USA. Let`s assume following situation:

 

 

a) A German National can visit the USA on ESTA for extended periods during the Visa process. In fact, 5-6 months is not a problem per year with enough breaks inbetween.

b) On the 3. year, before receiving the green card, the German national passes the substantial presence test, as outlined by IRS:

https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test

c) However, the person has never worked in the USA, or received payment from US sources. All income is generated during the time outside the USA back home in Germany.

d) While passing the substantial presence test, the person has never spend more than 6 months in a year in the USA. Therefore, based on the double taxation treaty of the 

two countries, the person would NOT be a tax resident in USA and would not own taxes on non-us source income.

 

You can not claim under US law a close connection to a foreign country during a green card process:

https://www.irs.gov/individuals/international-taxpayers/conditions-for-a-closer-connection-to-a-foreign-country

 

When You Cannot Claim Closer Connection to a Foreign Country

You cannot claim you have a closer connection to a foreign country if either of the following applies:

• You personally applied, or took other steps during the year, to change your status to that of a Lawful Permanent Resident, or
• You had an application pending for adjustment of status to Lawful Permanent Resident during the current year.

 

 

What prevails? The substantial presence test of the IRS or the double taxation treaty?

 

In my opinion, the Non Resident Alian will be required to submit a tax return in the USA once he passes the substantial presence test, but would not be subject to taxation

based on the double tax treaty. Please confirm / disconfirm.

 

 

Edited June 18, 2018 by Michael2017

[Boiler 45,486]

Spending 5-6 months in the US on the VWP could well be a problem, well eventually it is likely to become a problem, for some people sooner, others later. A few people seemingly not at all.

 

 

[Teemo 252]

16 hours ago, Michael2017 said:

Hi,

 

I have a question in regards to taxation in the USA. Let`s assume following situation:

 

 

a) A German National can visit the USA on ESTA for extended periods during the Visa process. In fact, 5-6 months is not a problem per year with enough breaks inbetween.

b) On the 3. year, before receiving the green card, the German national passes the substantial presence test, as outlined by IRS:

https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test

c) However, the person has never worked in the USA, or received payment from US sources. All income is generated during the time outside the USA back home in Germany.

d) While passing the substantial presence test, the person has never spend more than 6 months in a year in the USA. Therefore, based on the double taxation treaty of the 

two countries, the person would NOT be a tax resident in USA and would not own taxes on non-us source income.

 

You can not claim under US law a close connection to a foreign country during a green card process:

https://www.irs.gov/individuals/international-taxpayers/conditions-for-a-closer-connection-to-a-foreign-country

 

When You Cannot Claim Closer Connection to a Foreign Country

You cannot claim you have a closer connection to a foreign country if either of the following applies:

• You personally applied, or took other steps during the year, to change your status to that of a Lawful Permanent Resident, or
• You had an application pending for adjustment of status to Lawful Permanent Resident during the current year.

 

 

What prevails? The substantial presence test of the IRS or the double taxation treaty?

 

In my opinion, the Non Resident Alian will be required to submit a tax return in the USA once he passes the substantial presence test, but would not be subject to taxation

based on the double tax treaty. Please confirm / disconfirm.

 

 

This appears to be a tax question, not an immigration question. @Boilerhe is not asking about immigration consequences but tax ones. 

 

Generally speaking, if you don't do any work in the US and are not a US citizen you would not be paying any US taxes. 

 

OP - I'm assuming you have filed I-130 but not I-485, correct? In that case my guess is this does not count as "taking steps to change status to LPR." That would be reserved for the I-485. I-130 by itself just establishes the familial relationship between a US Citizen/LPR and an alien. If filed alone, it is not considered a step of the process to adjust status even though of course it is EVENTUALLY needed as part of the process to adjust status. For example, many people who entered the US illegally have approved I-130s but cannot begin any process to adjust status since they are not permitted to file the I-485. 

 

If you have filed I-485 then yes you would be in the unusual case of not having earned income in the US but needing to pay US taxes. But then you would not be entering on VWP for so long. 

 

Might be worth getting a tax lawyer on this one if I haven't got your specifics right. 

Edited June 19, 2018 by Teemo

[Boiler 45,486]

He made various statements.

 

As an aside the US taxes residents on their worldwide income.

[Teemo 252]

Just now, Boiler said:

He made various statements.

 

As an aside the US taxes residents on their worldwide income.

All to determine his tax obligations.

 

He is not a US resident. Not in immigration terms anyway. 

[Boiler 45,486]

Tax and Immigration are different issues.

[Teemo 252]

1 minute ago, Boiler said:

Tax and Immigration are different issues.

Exactly my point. He's asking about tax issues. Different than immigration issues. 

[Michael2017 368]

The question is purely in regards to tax implication not immigration implications.

 

Some answers:

 

1. Person has filed DS-260 as he applies from abroad and does not adjust status. Visits on VWP. I would assume DS-260 is application for permanent residence as per above IRS rule.

2. The essence of the question is that, you can be considered a tax resident under IRS rules if visiting 5 months per year for 3 years under VWP,

as you would pass the substantial presence test: https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test 

However, he would be a non resident alian for tax purposes under the double taxation treaty of the countries, which specifies 6months + 1 day as duration in the country to establish tax residency.  Now, the question is, what prevails? The IRS rule with the substantial presence test which would be positive, or the double taxation treaty? 

 

There is an area in US tax system, in which internal rules would make you a Tax resident, while treaty rules do no.

 

My opinion so far is, that if you pass the substantial presence test, you need to file your taxes in the USA, but you would not pay any taxes due to double taxation treaties. 

[Michael2017 368]

Ok I paid a CPA to answer the question. I publish it below so that others in the same situation will find the answer:

 

While you may meet the IRS Substantial Presence test (100% of this year's days, plus 1/3 of last year's days, plus 1/6 of the prior year's days is more than 183) you can still be considered a nonresident. It is not a matter of the treaty overriding the tax law. The treaty always takes priority. But you have to let the IRS know that you are taking the treaty. You won't have to pay any tax in the US, but it will require you to file a tax return with the IRS. In this return, you will claim that you have a "closer connection" with Germany than you have with the US. I just did one of these a couple of months ago.

 

You will file a Form 1040NR (or more likely, a Form 1040NR-EZ), showing no US effectively connected income, and you will attach a Form 8840, Closer Connection Exception Statement for Aliens, to the Form 1040NR or 1040NR-EZ. This Form goes through a series of questions that you will answer. These questions demonstrate that you have a closer connection to the foreign country than you have to the US. For example, the questions include where is your permanent home, where is your family (wife here, others ??), where are your cars located, where are they registered, where are your personal belongings, furniture, et., where are your bank accounts, where is your work, where do you vote, etc. All these facts help determine which country you have a closer tie to. In your case, it would be Germany. So you would still end up paying tax only in Germany. But you would have a US filing requirement.

 

I hope this answers your question. If you have any more, please feel free to ask and I will be happy to answer.

 

Thanks! Have a great week!

 

Roger