New regs. on certain filing requirements of foreign individuals.

On Oct. 6, 1997, the Treasury issued final regulations adopting a number of changes that affect the filing of U.S. tax and information returns for foreign individuals.

First, Sec. 6114 requires that, if a treaty provision reduces a person's tax liability otherwise imposed under the Code, the person must report that position on a tax return. The existing regulations do not require a foreign individual who otherwise qualifies as a U.S. resident under the Code to report a treaty-based return position, if he elects to be a nonresident under the treaty. However, new Regs. Sec. 1.6114-1(c) requires that this individual file a treaty-based return position if a treaty election to be a nonresident is made and either (1) a treaty reduces U.S. tax on more than $10,000 of the individual's U.S.-source income or income effectively connected with a U.S. business or (2) a treaty reduces U.S. tax on more than $100,000 of that individual's other worldwide income (such as foreign source or subpart F income). Second, when any treaty-based disclosure is necessary under either Sec. 6114 or 7701(b) (relating to residency under the Code) the foreign individual must now file Form 8833, Treaty-Based Position Disclosure Under Section 6114 or 7701 (b), with his tax return instead of providing the information statement previously required; see old Regs. Secs. 301.7701(b)-7(c) and 301.6114-1 (d). Third, individuals claiming that they are nonresidents under the Code definition of residency, due to a closer connection to a foreign country than to the U.S., must now report this claim by filing Form 8840, Closer Connection Exception Statement for Aliens; see Regs. Sec. 301.7701 (b)-8.

Fourth, foreign individuals who would be treated as U.S. residents due to the length of their physical presence in the U.S. for medical reasons must now file a Form 8443, Statement for Exempt Individuals and Individuals With a Medical Condition, to avoid residency status.

Fifth, a foreign individual who is a U.S. resident under the Code, who is a U.S. shareholder of a controlled foreign corporation (CFC), or who is subject to the information reporting requirements of Secs. 6038 and 6046 (subject to Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations), but who otherwise claims treaty benefits as a U.S. nonresident, may satisfy the information reporting requirements on the Form 5471 (i.e., required by Regs. Secs. 1.6038-2(f)(10)(i) and (ii), (g) and (h) and 1.6046-1(b) (10), (11), (12), (c)(3)(ii)(d) and (g)), by filing the CFC's audited foreign financial statements. Further, this individual may determine his subpart F income from these financial statements for purposes of filing a Form 8833, indicating that the treaty bars taxing this Subpart F income. This simplified reporting is only available if there are no other U.S. shareholders of the CFC. If there are other U.S. CFC shareholders, the foreign individual is subject to the otherwise applicable reporting requirements of Secs. 6038 and 6046.

The final regulations also add conforming adjustments to Regs. Sec. 301.7701(b)-3(b)(3) to reflect revision to the definitions of teacher, trainee and student previously codified in Sec. 7701(b)(5). The final regulations were also updated to reflect changes promulgated by Section 320 of the Social Security Independence and Programs Improvements Act of 1994 (P.L. 103-296), which extends exemption from FICA, FUTA and Railroad Retirement Act taxes to class "Q" visa holders (i.e., participants in international cultural exchange programs, such as foreign persons working at Disney's Epcot Center).

These regulations are effective for all returns due (without extensions) on or after Dec. 15, 1997.