Can the tax treaty apply to a US permanent resident working in US as a foreign government employee?

In a legal advice, the IRS Office of Chief Counsel has concluded that compensation paid to a U.S. permanent resident employed by a foreign government is not exempt from tax under the Belgium-U.S. income tax treaty.

The facts provide that a taxpayer lives and works in the U.S. as an employee of Belgium. The taxpayer, although not a U.S. citizen, is a lawful permanent resident (i.e. a green card holder).

In general, U.S. income tax treaties contain a “savings clause” that provides that a treaty will not affect the taxation by the U.S. of its residents and citizens (see e.g. Article 1(4) of U.S. Model  Income Tax treaty.) An exception to the savings clause is provided for in almost all income tax treaties, but it is not extended to persons who are permanent residents or citizens of the U.S. (permanent residents are treated as U.S. residents under Code Sec.  7701(b)(1)(A)(i)).

The memo notes that Rev Ruling 75-425 has given rise to some confusion with respect to employees of Belgium as it provided that income under the 1948 Belgium-U.S. income tax treaty exempted from tax  the compensation paid to employees who were citizens of the employing country. Prior to the publication of the ruling, however, the new 1970 income tax treaty between both countries was signed and did  not exempt such income from taxation. Rev Rul 75-425 was not updated, but was subsequently obsoleted by Rev Ruling 2007-60.

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One thought on “Can the tax treaty apply to a US permanent resident working in US as a foreign government employee?

  1. In R.E. Harrison, 138 TC –, No. 17, Dec. 59,042 as reported by CCH today –

    A German citizen, who was employed by a German government office located in the United States, was a permanent resident of the United States and a resident alien for tax purposes. Therefore, in the absence of an exemption under either Code Sec. 893 or the North Atlantic Treaty Regarding the Status of Their Forces (NATO SOFA), her wages were subject to tax.

    Her wages were not exempt under Code Sec. 893 because only two of the three conditions required for exemption under the statute were satisfied. The third condition, which required reciprocal treatment by the German government was not satisfied because Germany did not exempt from German tax wages received by United States employees permanently residing in Germany and working for the United States government.

    Her wages were not exempt under the treaty because the exemption from tax provided by the treaty applied to a civilian component. Since she was a permanent resident of the United States, she was not part of the civilian component for purposes of the treaty. The fact that the IRS had conceded that wages of her co-workers were not taxable was irrelevant in determining whether her wages were exempt from tax. Also, the fact that the IRS had agreed, in prior audits, that her wages were exempt from tax did not bar IRS from changing its position with respect to whether her wages were subject to tax.

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