United States

Individual - Foreign tax relief and tax treaties

Last reviewed - 01 August 2022

Foreign tax relief

Taxpayers (generally US persons and foreign persons with effectively connected US trade or business income) may claim a credit against US federal income tax liability for certain taxes paid to foreign countries and US possessions. Foreign income, war profits, and excess profits taxes are the only taxes that are eligible for the credit. Taxpayers may choose to deduct these taxes with no limitation or, alternatively, claim a credit subject to limitations.

Tax treaties

The United States has tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from US taxes, on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income. Under these same treaties, residents or citizens of the United States are taxed at a reduced rate, or are exempt from foreign taxes, on certain items of income they receive from sources within foreign countries. Most income tax treaties contain what is known as a 'saving clause', which prevents a citizen or resident of the United States from using the provisions of a tax treaty in order to avoid taxation of US-source income.

The US has tax treaties with the following countries:

Armenia Iceland Philippines
Australia India Poland
Austria Indonesia Portugal
Azerbaijan Ireland Romania
Bangladesh Israel Russia
Barbados Italy Slovak Republic
Belarus Jamaica Slovenia
Belgium Japan South Africa
Bulgaria Kazakhstan Spain
Canada Korea Sri Lanka
China Kyrgyzstan Sweden
Cyprus Latvia Switzerland
Czech Republic Lithuania Tajikistan
Denmark Luxembourg Thailand
Egypt Malta Trinidad
Estonia Mexico Tunisia
Finland Moldova Turkey
France Morocco Turkmenistan
Georgia Netherlands Ukraine
Germany New Zealand United Kingdom
Greece Norway Uzbekistan
Hungary Pakistan Venezuela

The United States has entered into Totalisation Agreements (see Social security contributions in the Other taxes section) with the following nations:

Australia Germany Poland
Austria Greece Portugal
Belgium Hungary Slovak Republic
Brazil Iceland Slovenia
Canada Ireland South Korea
Chile Italy Spain
Czech Republic Japan Sweden
Denmark Luxembourg Switzerland
Finland Netherlands United Kingdom
France Norway Uruguay

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Proposed PFIC regulations

At the end of January 2022 the IRS issued proposed regulations (the 2022 proposed regulations) regarding the treatment of domestic partnerships and S corporations which own stock in passive foreign investment companies (PFICs) and their domestic partners and shareholders. The proposed regulations would be exceedingly burdensome for partners of domestic partnerships and shareholders of S corporations and Treasury and the IRS are seeking comments from practitioners.

The current PFIC regulations adopt an entity approach whereby domestic partnerships and S corporations holding PFICs are generally responsible for making elections (e.g.. qualifying electing fund and mark-to-market), calculating inclusion amounts, and reporting (e.g. filing Forms 8621). 

The proposed PFIC regulations adopt an aggregate approach whereby the responsibility for making elections, calculating inclusion amounts, and reporting is pushed down to the partner and S corporation shareholder level. Furthermore, partners and S corporation shareholders would have to inform the partnership or S corporation through which they are indirect owners of PFICs of any elections made so that the partnerships and S corporations could track relevant attributes impacted by these elections.