US Tax Treaties: Which Countries Offer Expats the Best Deal?

The US has tax treaties with dozens of different countries. If you live in one of those countries, it may be worth claiming the tax treaty’s benefits. Keep in mind, though, that each tax treaty is slightly different. As you can imagine, some US tax treaties are more advantageous than others.

Below, we’ll give a high-level overview of what tax treaties are, how they work, and which ones benefit expats the most.

Why are US tax treaties necessary?

When a national of one country lives in another, taxes can get confusing. It may be unclear whether they need to pay taxes to their home country, their country of residence, or both — a phenomenon called double taxation.

In these situations, tax treaties help by: 

• Defining who meets a country’s definition of tax residence
• Establishing tie-breaker rules that determine which country has the first right to tax a taxpayer
• Listing which specific items of income are subject to taxation in each country
• Offering tax benefits (e.g. credits, deductions, exclusions, reduced rates, and exemptions) that help reduce the burden of double taxation

Americans are especially prone to double taxation since the US employs citizenship-based taxation. Under this system, all American citizens and permanent residents must file an income tax return. They are also subject to federal income taxes in the US, even if they live abroad.

That means if a US expat meets another country’s tax residency definition, they’re potentially on the hook for tax bills in two different countries.

While tax treaties eliminate double taxation in theory, Americans abroad can’t always claim their benefits.

Limitations to US tax treaties

Virtually all US tax treaties contain a saving clause. While it may sound beneficial, saving clauses don’t help you save at all. In fact, it’s quite the opposite. 

Saving clauses reserve — or “save” — the US government’s right to tax its residents as if the treaty didn’t exist. As a result, saving clauses render most of a tax treaty’s benefits useless. That said, treaties with saving clauses also typically specify exceptions to the saving clause. Specific saving clause exemptions vary among countries, however.

Countries with the most favorable US tax treaties

So, which countries have the most beneficial tax treaties for US expats? We’ve highlighted a few of the most useful treaties below.

Canada

Perhaps it’s no surprise that one of the most advantageous US tax treaties is with our friendly neighbor to the north. The US/Canada tax treaty carves out a number of exceptions to the saving clause, especially for retirees.

• Reciprocal tax exemptions: Americans receiving Canadian pensions or annuities can apply tax-exempt treatment under Canadian law to their US tax return. As a result, those portions would be exempt from US taxes as well
  • Example: Let’s say that Julia, a US citizen living in Canada, receives a Canadian pension worth $20,000 CAD per year, of which $2,000 CAD is exempt from Canadian taxation. As a result, that $2,000 CAD is also exempt from US taxation 
• Social Security payment taxation: Any Canadian social security benefits an American living in Canada receives — such as Canada Pension Plan (CPP) payments or Old Age Security (OAS) benefits — are taxable only by Canada. Furthermore, only 85% of any US Social Security payments American citizens residing in Canada receive are subject to Canadian taxes
• Child support & alimony taxation: Child support payments received by an American living in Canada are not taxable in either country. Alimony payments are taxable in the US, but any amount that would be tax-exempt in Canada is also exempt from US taxation
• Deferring taxes on retirement distributions: Americans can defer US taxes on accrued but undistributed income from qualified Canadian retirement plans like Canadian Registered Retirement Savings Plans (RRSPs) until distribution. To do so, they must file an election under the tax treaty
• Qualified retirement plan deductions: Americans living in Canada who participate in a qualified Canadian retirement plan may deduct or exclude contributions to that plan from their US taxable income, provided that they meet certain conditions
• Withholding tax rates: The US/Canada tax treaty caps withholding rates at:
  • 0% for most interest income
  • 5% to 15% for dividends
  • 15% for pensions & annuities

The UK

Americans who have moved across the pond to the UK have access to several tax treaty benefits. As with Canada, many of the surviving US/UK tax treaty benefits are advantageous for retirees in particular.

• Tax-free lump sum withdrawal: Americans living in the UK can make a tax-free lump-sum withdrawal of their UK pensions of up to 25% on pensions up to £1,073,100 (~$1,390,791)
• Social Security payment taxation: Any UK social security benefits an American living in the UK receives are taxable only by the UK
• Child support & alimony taxation: Child support and alimony payments that an American living in the UK receives are subject to taxation only in the UK. Furthermore, any amount that would be tax-exempt in the UK for a UK national are exempt from US taxation for an American national
• Deferring taxes on retirement distributions: Americans living in the UK can defer US taxes on accrued but undistributed income from qualified UK retirement plans until distribution
• Qualified retirement plan deductions: Americans living in the UK who participate in a qualified retirement plan (e.g. personal pensions, workplace pensions) may deduct or exclude contributions to that plan from their US taxable income, provided that they meet certain conditions
• Withholding tax rates: The US/UK tax treaty caps withholding rates at:
  • 0% for most interest income
  • 5% for qualified dividends
  • 0% for pensions & annuities

France

The last country whose US tax treaty we’ll explore in depth is France. Some benefits of the US/France tax treaty include:

• Double taxation on businesses: Americans who are tax residents of France and have already paid French taxes can generally claim foreign tax credits on their US tax returns to offset the US tax on the same income, and vice versa.
• Social Security payment taxation: Any French social security benefits an American living in France receives are taxable only by France. Similarly, US Social Security benefits paid to an American resident in France are taxable only by the US.
• Withholding tax rates: The US/France tax treaty caps withholding rates at:
  • 0% for most interest income
  • 5% for qualified dividends
  • 0% for private pensions & annuities

Other beneficial tax treaties

Several other countries whose tax treaties carve out generous exceptions to the saving clause include:

• Brazil
• Germany
• The Netherlands
• Poland
• South Africa
• Sweden
• Switzerland

Tips for claiming US tax treaty benefits

Planning on claiming the benefits of a tax treaty? Keep the following in mind:

• Tax treaty benefits do not apply automatically. To claim them, you must first file Form 8833
• When reporting foreign-source income, you must always convert it from its original currency to US dollars using a reliable converter (Wise has a good currency conversion tool on their website)
• Foreign retirement accounts that surpass a certain threshold can trigger additional reporting requirements, such as the:
  • Foreign Bank Account Report (FBAR): Mandatory for US expats with more than $10,000 across all of their foreign financial accounts
  • Statement of Specified Assets (Form 8938): Mandatory for US expats with more than $200,000 in foreign assets on the last day of — or more than $300,000 at any time during — the tax year
• Pooled funds in foreign retirement accounts may classify as Passive Foreign Investment Companies (PFICs). If you hold them, you may be required to file Form 8621 and could face harsh tax treatment
• Always confirm your strategy with a tax professional to make sure that you understand the implications and verify that you’re making the right move

Alternatives to US tax treaties

Whether the country you live in doesn’t have a US tax treaty, or you want to reduce your US tax liability beyond what a US tax treaty offers, there are other ways to reduce your tax bill. This includes the:

Foreign Tax Credit (FTC)

The FTC gives expats dollar-for-dollar US tax credits on any foreign income tax paid, including lottery winnings. For expats living in countries with a higher tax rate than the US, this can often not only completely eliminate their US tax liability, but also provide them with surplus credits. You can then use these surplus credits on future tax returns, up to ten years.

To qualify for the FTC, taxes must be legal, based on income, paid or accrued, and charged to you specifically. You can claim the Foreign Tax Credit by filing Form 1116.

Foreign Earned Income Exchange (FEIE)

The FEIE allows US expats to exclude a certain portion of their foreign-earned income from taxation. For tax year 2023, US expats can exclude up to $120,000 from taxation. For tax year 2024, that number increases to $126,500 due to inflation.

Keep in mind that you can’t apply the FEIE to all types of income. You can only exclude actively-earned income — like wages, salary, commission, and bonuses — under the FEIE. Passive income (e.g. interest, dividends, royalties, rental income) is not eligible. 

To qualify for the FEIE, you must meet one of two tests:

• The Physical Presence Test: Spend at least 330 out of any 365-day period overlapping the tax year outside of the US
• The Bona Fide Residence Test: Have lived outside of the US for at least one continuous calendar year, and be able to prove it through official documentation (e.g. residence card, rental contract, utility bills)

You can claim the FEIE by filing Form 2555.

Foreign Housing Exclusion (FHE)

The FHE helps expats offset some of the cost of qualified housing expenses (e.g. rent, utilities, occupancy taxes). Anyone who meets either the Physical Presence Test or Bona Fide Residence Test is eligible for the FHE. 

You can claim the FHE using the same form that you use for the FEIE: Form 2555.

Totalization agreements

Totalization agreements prevent nationals of one country living in another from having to pay social security taxes in both. The US has totalization agreements with about 30 different countries, including the UK, Canada, Australia, South Korea, and most of the EU.

Generally, which country you pay social security taxes to depends on how long you plan to reside and work there:

• Up to 5 years: Pay social security taxes in your home country
• Over 5 years: Pay social security taxes in your country of residence

In some situations, however, expats may want to pay social security taxes in their country of residence regardless — like if they want to access that country’s public healthcare system.

Resources:

1. Tax treaty benefits for U.S. citizens and residents
2. US tax treaty tables
3. U.S.-U.K. income tax treaty
4. US-France income tax treaty

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