U.S. Residency Certification: Pitfalls & Considerations

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INTRODUCTION

Income from sources within one country paid to residents of other countries often is subject to withholding tax in the source country at a rate that is set by the source country’s internal law. The withholding tax rate can be reduced or eliminated if (1) an income tax treaty exists between the source country and the residence country and (2) the taxpayer is a resident of that second country for purposes of the treaty. This article explains how a U.S. resident taxpayer demonstrates that residence classification in order to claim benefits under an income tax treaty.

FORM 6166

For U.S. residents with non-U.S. source income, proving residency in order to obtain an income tax treaty is accomplished by obtaining a Residency Certificate from the I.R.S. This document certifies that the taxpayer is a resident of the U.S. for Federal income tax purposes. The certification is provided on Form 6166, which certifies to the withholding agent that for a specific year, the taxpayer was a resident of the U.S. for U.S. tax purposes. In the case of a fiscally transparent entity, Form 6166 will certify that the entity, when required, filed an information return and its partners, members, owners, or beneficiaries filed income tax returns as residents of the U.S. As partnerships (including L.L.C.’s treated as partnerships) and disregarded entities are not considered U.S. residents within the meaning of the residence article of most U.S. income tax treaties. As a result, the Form 6166 that is issued by the I.R.S. to will include a list of U.S. resident partners, members or owners. Each person’s ownership percentage does not accompany the names on the list, as with limited exception, the I.R.S. does not have that information.