How a Tax Residency Certificate Can Benefit You

A Tax Residency Certificate (TRC) is a document that certifies the residency status of a taxpayer for income tax purposes and can help avoid double taxation and reduce withholding taxes imposed on income generated by a U.S. taxpayer in a foreign country. Without a TRC, the U.S. taxpayer may be subject to higher taxation in the foreign country, resulting in income that may be taxed twice at an additional real cash tax cost to the business’s and individual’s bottom line. Therefore, obtaining a TRC is essential for U.S. taxpayers operating abroad who are looking to mitigate their tax liabilities and maintain compliance with tax laws.

By obtaining Form 6166 Certification of U.S. Tax Residency through the completion of IRS Form 8802, U.S. individuals, partnerships, corporations and other U.S. entities operating overseas can avoid paying excessive foreign taxes imposed on their foreign-sourced income. Note that for pass-through entities like U.S. partnerships and S Corporations, it may be necessary for the partners and shareholders to certify that they are also U.S. tax residents. This will require filing of a tax information authorization form for each owner so that the IRS can verify the certifications made by the individual owners.

While the processing time for these certifications was at a peak during COVID, it now appears that TRCs are being sent to taxpayers within three months of submission. Thus, any taxpayer that would require a TRC to reduce foreign taxes should take into account the lead time necessary to obtain the TRC before payment from the foreign customer is initiated.

Once a TRC is obtained, it can be presented to the tax authorities or foreign bank in the country where the income is earned to claim any tax benefits or exemptions that may be available.

In conclusion, a Tax Residency Certificate may be an essential document for individuals and businesses with income earned in foreign countries. It can help to prevent double taxation and reduce the overall tax burden on the U.S. taxpayer. For more information about the TRC and how it can provide you with significant tax savings, please reach out to Gwayne Lai, Partner, Anchin’s International Tax Group, or your Anchin Relationship Partner.