Discussion:J1 Visa to E2 Visa - Netherlands Tax Treaty
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Supertaxnerd (talk|edits) said: | 9 November 2009 |
| Hi all,
I have a Dutch client that is single, and was working in the US under a J1 visa, but her visa expired in September 2008. Effective October 2008, she was issued an E2 visa. She was working for a foreign employer, but was working in the US for all of 2008. With the J1 visa she qualified as a nonresident and was not subject to tax on her US source income (US source even though she was paid by a foreign employer because she was working in the U). She filed an 8843 for 2007. But this year, she has dual resident status. I know she can't take the foreign tax credit since her income is US source income, is she allowed any type of reduction or the sort on her income tax return for the taxes she paid in the Netherlands on the portion of her income that was received when she became a resident (after her J1 visa expired)? I tried looking in the tax treaty for the Netherlands but couldn't find anything relating to this. As for social security tax, there is an agreement between the Netherlands and the US and she has a copy of the certificate that was issued by the Netherlands; I know she is only subject to this tax in the Netherlands while she is a nonresident, but because she was a resident in the last quarter of 2008, does this certificate still cover social security tax? Also, she has to submit a statement for the income that was received for the portion of the year that she was a nonresident, it states that the 1040NR can be used for this, but is there another form that can be used for the statement? Can the 8843 be used in lieu of the 1040NR in this case? Thanks in advance for your help. I haven't prepared many returns of this nature, especially when it comes to dual-resident status, and I want to ensure I cover all my basis. | |
| 9 November 2009 | |
| Unless your client makes a first-year alien's election, it would appear that she is a nonresident of the US for the 2008 tax year. | |
Supertaxnerd (talk|edits) said: | 9 November 2009 |
| Thanks for the response, R2. Would she still be a nonresident for the entire year if she would normally be classified as a resident under the substantial presence test if it weren't for the exception for trainees holding a J1 visa with wages paid by a foreign employer?
The reason I'm saying she would be dual-status for 2008 is because she no longer qualified for nonresident status after her J1 visa expired in September 2008; however, please correct me if I'm wrong. Thanks again. | |
| November 9, 2009 | |
| The J visa doesn't automatically make you a nonresident. It either does nothing, or, if you meet the requirements (substantial compliance and the time limits), lets you treat days of presence under the visa as if you weren't present in the U.S. Assuming this taxpayer qualifies, it's as if she came to the U.S. the day her visa status changed, which was in the second half of the year; if there were no non-exempt days in the previous 2 years, that will leave her with less than 183, so she won't be a resident under the substantial presence test. | |
Supertaxnerd (talk|edits) said: | 9 November 2009 |
| That makes perfect sense to me now! Thanks so much LH2004 and R2.
Since she is a nonresident, and worked in the US all year, her income paid by a foreign employer is US source income, is there a way for her to be able to take into account the taxes she paid on this income in the Netherlands so there won't be an issue with double taxation? | |
| 9 November 2009 | |
| Look under the treaty under the section titled "Uitvluchten". | |
Supertaxnerd (talk|edits) said: | 9 November 2009 |
| From what I can tell after reading article 16 of the tax treaty between the US and the Netherlands, the income that was paid by her employer while she was working in the US will not be taxed by the US because
1. She wasn't present in the US for a period not exceeding 183 days 2. Her wages were paid by an employer who is not a resident of the US, and 3. The wages were not borne as a deductible expense by a permanent establishment or fixed base that the employer has in the host state. I'm assuming in this situation all the wages she received after her J1 visa expired would still be exempt from tax. I'm wondering if there is a flaw with my interpretation of the treaty given the circumstances. | |
Supertaxnerd (talk|edits) said: | 9 November 2009 |
| Also, from what I've read in article 24 and 25, as far as double taxation goes, if my client didn't meet the 3 requirements stated above, then she would be subject to US tax, but she should be able to reduce her taxes in the Netherlands by the amount of taxes paid to the US on the same income. Again, I'm just trying to ensure that I'm not interpreting this incorrectly. Any insight or guidance you can provide regarding this issue would be greatly appreciated. | |
| November 9, 2009 | |
| She was in the U.S., the state in which employment was exercised, for periods exceeding 183 days; therefore, art. 16 para. 2 does no apply; therefore, under para. 1, income from employment in the U.S. will be taxable only in the U.S., unless some other exception applies. Unless I'm missing something. | |
Supertaxnerd (talk|edits) said: | 9 November 2009 |
| I must be in serious need of coffee. The whole time I was reading article 16, I kept thinking, "OK, she doesn't meet the 183 day requirement because of the exemption that excluded the days that she held a J-1 visa," but of course that only applies to determining if she was a resident for the tax year (right?). | |
| 11 November 2009 | |
| Excempt days are treated as such for purposes of IRC Sec 7701(b), but not for purposes of the treaty. | |
| 11 November 2009 | |
| Incidentally, your client might be better off making the first-year alien's election. | |
Supertaxnerd (talk|edits) said: | 3 December 2009 |
| I just wanted to login and thank you guys for the help you provided. It helped tremendously!
Crow, all I can do is shake my head. You're a riot! Thanks for the laughs anyway. | |
Supertaxnerd (talk|edits) said: | 22 January 2010 |
| In a situation where the client didn't make the first-year election on the 2008 return, can she amend the 2008 return? In Pub 519, it says that she can file an extension until such time that she actually qualifies, but makes no mention of whether or not she can make the election on an amended return. | |
Supertaxnerd (talk|edits) said: | 22 January 2010 |
| Just in case someone has the same issue later, figured I'd post the answer to my own question.
As it turns out (I must have overlooked it), in Pub. 519 it states: If you do not follow the procedures discussed here for making the first-year choice, you will be treated as a nonresident alien for all of 2008. However, this does not apply if you can show by clear and convincing evidence that you took reasonable actions to become aware of the filing procedures and significant steps to comply with the procedures. | |
| 23 January 2010 | |
| See Regulation ยง 1.7701(b)-4. The election must be made on a return, not necessarily the original return or a timely return. | |
