[Code of Federal Regulations]
[Title 26, Volume 18]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR301.7701(b)-7]

[Page 667-670]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 301_PROCEDURE AND ADMINISTRATION--Table of Contents
 
                               Definitions
 
Sec. 301.7701(b)-7  Coordination with income tax treaties.

    (a) Consistency requirement--(1) Application. The application of 
this section shall be limited to an alien individual who is a dual 
resident taxpayer pursuant to a provision of a treaty that provides for 
resolution of conflicting

[[Page 668]]

claims of residence by the United States and its treaty partner. A 
``dual resident taxpayer'' is an individual who is considered a resident 
of the United States pursuant to the internal laws of the United States 
and also a resident of a treaty country pursuant to the treaty partner's 
internal laws. If the alien individual determines that he or she is a 
resident of the foreign country for treaty purposes, and the alien 
individual claims a treaty benefit (as a nonresident of the United 
States) so as to reduce the individual's United States income tax 
liability with respect to any item of income covered by an applicable 
tax convention during a taxable year in which the individual was 
considered a dual resident taxpayer, then that individual shall be 
treated as a nonresident alien of the United States for purposes of 
computing that individual's United States income tax liability under the 
provisions of the Internal Revenue Code and the regulations thereunder 
(including the withholding provisions of section 1441 and the 
regulations under that section in cases in which the dual resident 
taxpayer is the recipient of income subject to withholding) with respect 
to that portion of the taxable year the individual was considered a dual 
resident taxpayer.
    (2) Computation of tax liability. If an alien individual is a dual 
resident taxpayer, then the rules on residency provided in the 
convention shall apply for purposes of determining the individual's 
residence for all purposes of that treaty.
    (3) Other Code purposes. Generally, for purposes of the Internal 
Revenue Code other than the computation of the individual's United 
States income tax liability, the individual shall be treated as a United 
States resident. Therefore, for example, the individual shall be treated 
as a United States resident for purposes of determining whether a 
foreign corporation is a controlled foreign corporation under section 
957 or whether a foreign corporation is a foreign personal holding 
company under section 552. In addition, the application of paragraph 
(a)(2) of this section does not affect the determination of the 
individual's residency time periods under Sec. 301.7701(b)-4.
    (4) Special rules for S corporations. [Reserved]
    (b) Filing requirements. An alien individual described in paragraph 
(a) of this section who determines his or her U.S. tax liability as if 
he or she were a nonresident alien shall make a return on Form 1040NR on 
or before the date prescribed by law (including extensions) for making 
an income tax return as a nonresident. The individual shall prepare a 
return and compute his or her tax liability as a nonresident alien. The 
individual shall attach a statement (in the form required in paragraph 
(c) of this section) to the Form 1040NR. The Form 1040NR and the 
attached statement, shall be filed with the Internal Revenue Service 
Center, Philadelphia, PA 19255. The filing of a Form 1040NR by an 
individual described in paragraph (a) of this section may affect the 
determination by the Immigration and Naturalization Service as to 
whether the individual qualifies to maintain a residency permit.
    (c) Contents of statement--(1) In general--(i) Returns due after 
December 15, 1997. The statement filed by an individual described in 
paragraph (a)(1) of this section, for a return relating to a taxable 
year for which the due date (without extensions) is after December 15, 
1997, must be in the form of a fully completed Form 8833 (Treaty-Based 
Return Position Disclosure Under Section 6114 or 7701(b)) or appropriate 
successor form. See section 6114 and Sec. 301.6114-1 for rules relating 
to other treaty-based return positions taken by the same taxpayer.
    (ii) Earlier returns. For returns relating to taxable years for 
which the due date for filing returns (without extensions) is on or 
before December 15, 1997, the statement filed by the individual 
described in paragraph (a)(1) of this section must contain the 
information in accordance with paragraph (c)(1) of this section in 
effect prior to December 15, 1997 (see Sec. 301.7701(b)-7(c)(1) as 
contained in 26 CFR part 301, revised April 1, 1997).
    (2) Controlled foreign corporation shareholders. If the taxpayer who 
claims a treaty benefit as a nonresident of the United States is a 
United States shareholder in a controlled foreign corporation (CFC), as

[[Page 669]]

defined in section 957 or section 953(c), and there are no other United 
States shareholders in that CFC, then for purposes of paragraph (c)(1) 
of this section, the approximate amount of subpart F income (as defined 
in section 952) that would have been included in the taxpayer's income 
may be determined based on the audited foreign financial statements of 
the CFC.
    (3) S corporation shareholders. [Reserved]
    (d) Relationship to section 6114(a) treaty-based return positions. 
The statement required by paragraph (b) of this section will be 
considered disclosure for purposes of section 6114 and Sec. 301.6114-
1(a), but only if the statement is in the form required by paragraph (c) 
of this section. If the taxpayer fails to file the statement required by 
paragraph (b) of this section on or before the date prescribed in 
paragraph (b) of this section, the taxpayer will be subject to the 
penalties imposed by section 6712. See section 6712 and Sec. 301.6712-
1.
    (e) Examples. The following examples illustrate the application of 
this section:

    Example 1. B, an alien individual, is a resident of foreign country 
X, under X's internal law. Country X is a party to an income tax 
convention with the United States. B is also a resident of the United 
States under the Internal Revenue Code. B is considered to be a resident 
of country X under the convention. The convention does not specifically 
deal with characterization of foreign corporations as controlled foreign 
corporations or the taxability of United States shareholders on 
inclusions of subpart F income, but it provides, in an ``Other Income'' 
article similar to Article 21 of the 1981 draft of the United States 
Model Income Tax Convention (U.S. Model), that items of income of a 
resident of country X that are not specifically dealt with in the 
convention shall be taxable only in country X. B owns 80% of the one 
class of stock of foreign corporation R. The remaining 20% is owned by 
C, a United States citizen who is unrelated to B. In 1985, corporation 
R's only income is interest that is foreign personal holding company 
income under Sec. 1.954A-2 of this chapter. Because the United States-X 
income tax convention does not deal with characterization of foreign 
corporations as controlled foreign corporations, United States internal 
income tax law applies. Therefore, B and C are United States 
shareholders within the meaning of Sec. 1.951-1(g) of this chapter, 
corporation R is a controlled foreign corporation within the meaning of 
Sec. 1.957-1 of this chapter, and corporation R's income is included in 
C's income as subpart F income under Sec. 1.951-1 of this chapter. B 
may avoid current taxation on his share of the subpart F inclusion by 
filing as a nonresident (i.e., by following the procedure in Sec. 
301.7701(b)-7(b)).
    Example 2. The facts are the same as in Example 1, except that B 
also earns United States source dividend income. The United States-X 
income tax convention provides that the rate of United States tax on 
United States source dividends paid to residents of country X shall not 
exceed 15 percent of the gross amount of the dividends. B's United 
States tax liability with respect to the dividends would be smaller if 
he were treated as a resident alien, subject to tax on a net basis 
(i.e., after the allowance of deductions) than if he were treated as a 
nonresident alien. If, however, B chooses to file as a nonresident in 
order to claim treaty benefits with respect to his share of R's subpart 
F income, his overall United States tax liability, including the portion 
attributable to the dividends, must be determined as if he were a 
nonresident alien.
    Example 3. C, a married alien individual with three children, is a 
resident of foreign country Y, under Y's internal law. Country Y is a 
party to an income tax convention with the United States. C is also a 
resident of the United States under the Internal Revenue Code. C is 
considered to be a resident of country Y under the convention. The 
convention specifically covers, among other items of income, personal 
services income, dividends and interest. C is sent by her country Y 
employer to work in the United States from January 1, 1985 until 
December 31, 1985. During 1985, C also earns United States source 
dividends and interest and incurs mortgage interest expenses on her 
personal residence. The United States-Y treaty provides that 
remuneration for personal services performed in the United States by a 
country Y resident is exempt from United States tax if, among other 
things, the individual performing such services is present in the United 
States for a period that is not in excess of 183 days. The treaty 
provides that the rate of United States tax on United States source 
dividends paid to residents of Y shall not exceed 15 percent of the 
gross amount of the dividends and it exempts residents of Y from United 
States tax on United States source interest. In filing her 1985 tax 
return, C may choose to file either as a resident alien without claiming 
any treaty benefits or as a nonresident alien if she desires to claim 
any treaty benefit. C files as a nonresident (i.e. by following the 
procedure described in Sec. 301.7701(b)-7(b)). Because C does not 
satisfy the requirements of the United States-Y treaty with regard to 
exempting personal services income from United States tax, C will be 
taxed on her personal services

[[Page 670]]

income at graduated rates under section 1 of the Code pursuant to 
section 871(b) of the Code. She will not be entitled to deduct her 
mortgage interest expenses or to claim more than one personal exemption 
because she is taxed as a nonresident alien under the Code by virtue of 
her decision to claim treaty benefits, and section 873 of the Code 
denies nonresidents the deduction for personal residence mortgage 
interest expense and generally limits them to only one personal 
exemption. C will be subject to a tax of 15 percent of the gross amount 
of her dividend income under section 871(a) of the Code as modified by 
the treaty, and she will be exempt from tax on her interest income. C is 
not entitled to file a joint return with her spouse even if he is a 
resident alien under the Code for 1985.
    Example 4. The facts are the same as in Example 3, except that C 
does not choose to claim treaty benefits with respect to any items of 
income covered by the treaty (i.e., she files as a resident). Therefore, 
she is taxed as a resident under the Code and pays tax at graduated 
rates on her personal services income, dividends, and interest. In 
addition, she is entitled to deduct her mortgage interest expenses and 
to take personal exemptions for her spouse and three children. C will be 
entitled to file a joint return with her spouse if he is a resident 
alien for 1985 or, if he is a nonresident alien, C and her spouse may 
elect to file a joint return pursuant to section 6013.

[T.D. 8411, 57 FR 15251, Apr. 27, 1992; 57 FR 28612, June 26, 1992, as 
amended by T.D. 8733, 62 FR 53387, Oct. 14, 1997]