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Tax Treaty Benefits for Research
by Paula N. Singer, Esq.
Replacement treaties that became effective in the 1990s (except for the new treaties with Russia, Kazakhstan, and Ukraine) removed benefits for compensation for research services (and teaching). Consistent with the 2006 U.S. Model Treaty, benefits for scholarship and fellowship grants have generally not been included in new treaties or amendments to existing treaties (called “protocols”). However, the majority of U.S. tax treaties in effect currently provide some benefit for engaging in research.
As a result of these treaty updates, the treaty benefits for those engaged in research are not consistent from one treaty to another. Some treaties provide benefits for compensation for research services (as well as benefits for teaching) under the Teacher/Researcher Article. Some treaties provide benefits for noncompensatory research grants (as well as scholarship and fellowship grants) under the Student/Trainee Article. Some of these articles also provide a small compensation benefit for such grant recipients.
Therefore, it is possible for a researcher from one treaty country to have a benefit for compensation for research services or a treaty-exempt noncompensatory research grant while a researcher from another treaty country receives no benefit at all or only a benefit for the research grant but none for compensation for research services or vice versa. In addition, there are many limitations that apply to treaty benefits for research.
Teacher/Researcher Article Benefits
Of the treaties with Teacher/Researcher Articles, all but two – the
treaties with Greece and Pakistan – provide benefits for both teaching
and research at a university or other educational institution. The Teacher/Researcher
Article benefits are typically for two years from date of arrival. Article
limitations – retroactive loss, prospective loss, one-time use,
back-to-back rule, combined-benefit rule – apply to research in
the same manner as for teaching (described in “Tax Treaty Benefits
for Professors and Teachers” in the last edition of Crow's
Nest, Volume 5, Number 3, May/June 2008).
The Teacher/Researcher Article of many treaties now also includes research institutes (Belgium, Czech Republic, France, Slovakia, Slovenia, and Venezuela), scientific research institutes (China, the Former USSR/NIS treaty, and Portugal), medical facilities primarily funded from government resources (Italy), government agencies (the Former USSR/NIS treaty), and public research institutions or other institutions engaged in research for the public benefit (Germany). These benefits can vary depending on where the research takes place, the type of organization sponsoring the researcher, and/or the relationship between the research facility and an educational institution and its personnel.
Teacher/Researcher Articles generally require that the research “be undertaken for the public interest and not for the private benefit of a specific person or persons.” The Treasury explanation of the treaty with the Philippines (as well as many other treaties) provides the following description of public benefit:
For example, the exemption would not apply to a grant from a tax-exempt research organization to search for a cure to a disease if the results of the research become the property of a for-profit company. The exemption would not be denied, however, if the tax-exempt organization licensed the results of the research to a for-profit enterprise in consideration of an arm’s length royalty consistent with its tax-exempt status.
The Treasury explanation of Article 21 of the treaty with Venezuela states further, “personal service income arising from research at a corporate research facility would, in general, not qualify as exempt income.”
Student/Trainee Article Benefits
Most tax treaties include a Student/Trainee Article that provides a treaty
benefit for individuals in the United States for their full-time education
or training and only for payments received for the purpose of their
maintenance, education, and training that arise from outside
the United States. Under these treaties, even research grants made
by foreign payers are not covered by the treaty. Such foreign-source
grants are not taxable while the recipient is a nonresident alien but
will become taxable when the researcher becomes a resident alien.
Most Student/Trainee Articles that provide treaty benefits for U.S.-source scholarships and fellowships include benefits for research grants as well. Article 21 of the treaty with South Korea is typical. It provides benefits for an individual from the treaty country who is temporarily present for the primary purpose of 1) studying at a university or other recognized educational institution, 2) securing training required to qualify for a profession or professional specialty, or 3) studying or doing research as the recipient of a “grant, allowance, or award.” (IRS interprets “grant, allowance, or award” to mean a scholarship or fellowship grant which can be either U.S.- or foreign-source). The Student/Trainee Article of the treaty with China, although similar, does not mention researchers. However, IRS issued ILM200515018 stating that NIH Visiting Fellows from China may be considered trainees for purposes of that treaty article.
Most of these treaties provide a compensation benefit for research grant recipients as well as for students and trainees. The benefit amount varies by treaty from $2,000 to $9,000 per year and is typically limited to five tax years beginning with the date of arrival. A few treaties limit the benefit to five (elapsed) years from date of arrival while some treaties provide a shorter benefit.
Paula Singer, Esq., Co-founder and Chairman of Windstar Technologies, Inc. and partner in the tax law firm, Vacovec, Mayotte & Singer LLP, Newton, MA, has over 25 years of experience providing advice and compliance services to individuals and their employers, and payers on cross-border matters.
Watch for Volume 5, Number 5, on "Stipends."
Q: We are a research foundation engaged in public-benefit research. We are hosting a J-1 researcher who is a tax resident of Spain while he conducts research on a non-compensatory grant from the U. S. government. His J-1 sponsor has authorized him to teach a night course in the same field of specialization at a local community college and to receive compensation for that work. There is no Teacher/Researcher Article in the Spanish treaty. Does he have to pay tax on all this income?
A: Article 22, Paragraph 1 of the Spanish treaty (Students, Trainees and Researchers) provides treaty benefits to a qualifying individual studying or doing research as the recipient of a grant from certain grantors (including government grantors). In addition to exempting the grant from tax, the treaty provides an exemption from tax on up to $5,000 U.S. dollars in compensation per year, as long as the research is for the public interest. Unfortunately, the treaty requires the reduction of this amount by the personal exemption amount ($3,500 for 2008). The benefits are available for five years from the date of arrival.
Learn About Tax Navigator During a Free On-Demand Web Demonstration
Learn how International Tax Navigator® can help improve your nonresident alien tax processing by viewing a free on-demand demonstration. The forty-five minute demonstration will educate you on the ease of use of Tax Navigator, the benefits of using this powerful software tool, and give you an overview on how to enter data into the system.
Register Today for Fall Nonresident Alien Payment Seminars Presented by Windstar and COKALA
Registration is now available for fall Nonresident Alien Payment seminars presented by Windstar Technologies and COKALA Tax Advisory Services. The two-day seminars will feature separate tracks geared specifically for educational organizations and corporations. The tracks will educate attendees on tax regulations governing payments to non-U.S. companies and individuals, and the immigration laws that may prohibit payments to those foreign visitors or vendors.
The seminars will be held in Cambridge, MA September 16th – 17th and Fountain Valley, CA October 7th – 8th.
For complete information, including registration and hotel pricing, visit www.cokala.com.Save the Date: Windstar’s Year-end Nonresident Alien Tax Training Workshop December 9th – 12th
Windstar’s next comprehensive Nonresident Alien Tax Training will occur December 10th – 12th at the Hilton Boston/Dedham in Dedham, Massachusetts. A half-day pre-conference will occur on December 9th for new users to Tax Navigator or those new to immigration and nonresident alien taxation.
The three-day seminar will prepare attendees to tackle year-end processing with confidence. In addition to sessions focused on year-end processing, the seminar will also feature in-depth instruction on nonresident alien tax and compliance issues along with hands-on training on the International Tax Navigator®.
The registration cost is $1,350 for the first attendee from an organization and $1,200 for each additional attendee if registered by October 27th. After October 27th the registration cost is $1,450 for the first attendee from an organization and $1,300 for each additional attendee. There is also an additional $350 fee to attend the "Introduction to Tax Navigator" half-day pre-conference on December 9th.
A discounted hotel rate of $119 per night for a single or double room is available at the Hilton Boston/Dedham for seminar attendees.
To receive a complete agenda when it is available in early September, e-mail paul.carpinella@windstar.com.
Recently Published Articles By Paula N. Singer, Esq.
Paula N. Singer, Esq. had the following tax article and law review article published:
- “Tax Treaty Benefits for Workers, Trainees, Teachers, and Researchers,” Corporate Business Taxation Monthly, CCH, August, 2008
- “A Coherent Policy Proposal for U.S. Residence-Based Taxation of Individuals,” co-authored with Prof. Cynthia Blum, Rutgers Law School, Vanderbilt Journal of Transnational Law, May 2008
Windstar Will Dock at These Upcoming Trade Shows
Association of Independent Research Institutes (AIRI) 47th Annual Meeting
Fairmont Hotel
Washington, DC
September 7 – 10, 2008
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National
Association of Tax Reporting and Payroll Management (NATRPM) Annual
Conference
Snowbird Ski and Summer Resort
Salt Lake City, UT
September 7 – 10, 2008
*
* * * * * * * * * * * *
COKALA Nonresident Alien Payment Training
Courtyard by Marriott Cambridge
Cambridge, MA
September 16 – 17, 2008
*
* * * * * * * * * * * *
COKALA Nonresident Alien Payment Training
Courtyard by Marriott Hunting Beach/Fountain Valley
Fountain Valley, CA
October 7- 8, 2008
* * * * * * * * * * * * *
Check back in future
issues of Crow’s Nest or visit http://www.windstar.com/public/events.html for the latest in trade show information.
©Copyright 2008 by Windstar Technologies, Inc. Windstar reserves all rights to this electronic material. Information contained in this publication is based on the best information available at the time of publication. While believing the information in this publication to be accurate, Windstar accepts no legal responsibility for its accuracy.
Since 1995 educational
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U.S. tax residency rules, tax rates, and special tax exemption
rules under the law and U.S. treaties. When government
agencies require information about foreign nationals in the workplace,
Windstar provides straightforward analysis and reporting. Comprehensive
software for analysis and reporting, expert knowledge, and unparalleled
customer service combine to make Windstar the first choice for
nonresident alien tax compliance.