What Is a Tax Treaty?

A tax treaty is a bilateral agreement between countries to cooperate on tax rules, which often helps workers avoid having to pay taxes on the same income to two separate countries.

Key Takeaways

• A tax treaty is an agreement between two countries that can help residents of one country avoid being taxed twice when they earn income in a foreign country.
• A tax treaty can also outline agreements about information sharing between two countries to help with tax compliance.
• The U.S. has tax treaties with dozens of countries, and the rules and benefits for taxpayers can vary significantly among these different agreements.

How a Tax Treaty Works

A tax treaty is a bilateral agreement between countries to cooperate on tax rules, which often helps workers avoid having to pay taxes on the same income to two separate countries. These rules can apply to both individuals paying personal income taxes and organizations paying business taxes.

With a relevant tax treaty in place, someone who is a resident of a country other than the United States may be able to reduce or exempt some of their income earned in the U.S. from U.S. income taxes, but they would still pay taxes to their home country. Conversely, a U.S. resident who earns income in another country may be eligible to avoid paying some taxes to that country if it has a tax treaty with the U.S.

Note

The U.S. has tax treaties with many countries, including Australia, India, Spain, and Thailand.

Tax treaties can also involve information sharing between two countries to help tax authorities in those nations carry out tax compliance.

However, the specifics of the tax treaties can vary significantly depending on which countries are involved. Some treaties might exempt capital gains income from sales of real property from double taxation, whereas other treaties might exempt international students from paying U.S. income tax on the value of a scholarship.

Tax treaties can also differ in terms of how they provide benefits, which may include:

• Tax credits
• Tax exemptions
• Reduced tax rates
• Other types of benefits

Note

Tax treaties generally apply at a federal level, although some states may follow national treaties when it comes to assessing state taxes.

Example of a Tax Treaty

Say a college professor is a resident of another country and temporarily comes to the U.S. to teach at a university. Many tax treaties include provisions that would exempt this professor from having to pay U.S. income tax on their teaching income. That way, they won’t be double taxed on that income by the U.S. and their home country.

What Tax Treaties Mean for Individuals

Given that many different treaties exist and the rules can vary significantly, it’s important to look at the specific agreements in place between the relevant countries that apply to your situation.

Also keep in mind that the definition of a “resident” may depend on the specific tax treaty, rather than applying across the board. In some cases, you might be a dual resident of two countries but still be able to claim some tax treaty benefits—so it’s important to check the rules of any tax treaties between countries where you live or earn income.

Claiming tax treaty benefits can also involve filling out additional tax forms. For example, a non-resident of the U.S. may have to fill out Form 8233 to claim an exemption for certain types of compensation.

Again, the exact forms required depend on your situation, so you may want to consult with a relevant professional to guide you through how tax treaties affect your tax filings and overall tax management. Another option is to use tax software designed for expatriates, which is more specialized than typical tax tools.

Frequently Asked Questions (FAQs)

What is the purpose of a tax treaty?

The purpose of tax treaties is to reduce the rate of taxes and, in some cases, provide exemptions for income earned in another country.

Who is eligible for a tax treaty?

In most cases, residents of a country with tax treaties are eligible to take advantage of the treaties, provided they meet the requirements of the specific country's treaty with their home country. Tax treaties tend to differ depending on the country involved.

Can you pay taxes in two countries?

Yes, it's possible that a U.S. citizen could pay taxes in two countries for the same income. Generally speaking, tax treaties can help you avoid this. Also, the foreign earned income exclusion and foreign tax credits can help offset taxes owed on income you earn in a different country, although you can only use one of them in a single tax year.

The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

1. IRS. “Tax Treaties.”
2. IRS. “United States Income Tax Treaties—A to Z.”
3. IRS. "U.S. Tax Guide for Aliens," Page 47.
4. IRS. “About Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual.”
5. Greenback Expat Tax Services. "What Is US Double Taxation—and How Can Expats Avoid It?"
6. IRS. "Choosing the Foreign Earned Income Exclusion."

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