IRS Form 6166 Explained
IRS Form 6166 Explained
Taxation laws are different in international companies when compared to the United States, often enforcing higher income tax rates and value added tax (VAT) that the U.S. does not. Therefore, U.S.-residing individuals or companies that conduct business in a foreign country often receive much higher tax bills.
To combat this circumstance, the United States has entered into tax treaties with numerous countries throughout the world, allowing taxpayers who reside in the U.S. to tax the profits earned in a foreign country at the regular IRS rate instead of the foreign country’s rate.
American residents and companies conducting business overseas can receive substantial tax benefits, such as reduced tax rates, exemption from double taxation, and other favorable provisions that can apply to various types of international income, such as employment wages, interest, and retirement income. However, to qualify for these tax breaks, individuals or companies must first establish their U.S. residency with the foreign government that provided their income.
TABLE OF CONTENTS
What Is IRS Form 6166?
What Are Value Added Taxes?
Information Listed On Tax Form 6166
Eligibility Requirements For Tax Form 6166
Reasons You May Not Qualify For Tax Form 6166
Types of Entities That Can File Tax Form 6166
Benefits of Filing Tax Form 6166
How To Get IRS Form 6166
When To File Form 8802
Where To Send Form 6166
Key Takeaways:
- IRS Form 6166, or Certification of U.S. Tax Residency, is a tax document certifying that an individual or business is a resident of the United States, in regard to income tax laws during the indicated fiscal year. This residency certification documentation allows individuals or businesses to benefit from tax treaties negotiated between the U.S. and the foreign country in which they are doing business, allowing them to be taxed at their home country’s tax rate and avoid Value Added Tax (VAT) charges, if applicable.
- To be eligible for tax form 6166 and benefit from the income tax treaty partners in foreign countries, the individual or entity must be up to date in their federal income tax return filing history and be a resident of the United States.
- The types of entities that may file form 6166 include qualifying corporate subsidiaries, employee benefit plans, estates, LLCs that are treated as a partnership for the purposes of taxes, federal, state, and local government agencies, partnerships, and trusts.
- In order to get IRS form 6166, taxpayers must first file Tax Form 8802, or the Application for United States Residency Certification, with the IRS.
What Is IRS Form 6166?
IRS Form 6166, or Certification of U.S. Tax Residency, is a tax document certifying that an individual or business is a resident of the United States in regard to income tax laws during the indicated fiscal year.
This form must be printed on the official U.S. stationary with the U.S. Department of Treasury seal to verify the validity of the form. Form 6166 enables individuals or businesses to benefit from tax treaties negotiated between the U.S. and the foreign country in which they are doing business, allowing them to be taxed at their home country’s tax rate and avoid Value Added Tax (VAT) charges, if applicable.
What Are Value Added Taxes?
Value Added Tax (VAT) charges are consumption taxes that are typically imposed on the value that is added to a product or service at each stage of its production or distribution. The tax is usually levied on the difference between the cost of producing a product or service and the price at which it is sold to the end consumer. VATs are commonly used in many countries around the world as a way to generate revenue for the government and shift the tax burden from income and property taxes to consumption taxes.
Information Listed On Tax Form 6166
As taxpayers fulfill the requirements for submitting tax form 6166, they will need to provide the following information on their application:
- Full Name
- Employer Identification Number (EIN) or Social Security Number (SSN)
- Type of Applicant
- Name of Person Submitting the Payment
- Best Contact Email Address and Telephone Number
- Number of Forms Submitted
- Payment Total
Eligibility Requirements For Tax Form 6166
There are certain requirements that impact whether a taxpayer is eligible for tax form 6166.
Federal Income Tax Return Filing History
The first qualification to be considered eligible for foreign tax exemption is for the individual or company to have filed the appropriate U.S. income tax return based on their filing status for the relevant tax year or for the most recent tax year if form 6166 covers a year for which returns aren’t yet due to be submitted.
U.S. Residency
Individuals or entities must be a resident of the United States who is subject to the U.S. tax due to their citizenship, residence, place of incorporation, or different but similar criteria.
Reasons You May Not Qualify For Tax Form 6166
While there are factors that contribute to your eligibility for tax form 6166, here are some details that could disqualify you from being eligible:
- A required United States federal income tax return was not filed.
- An income tax return was filed as a non-resident.
- As a dual-resident, you decided or plan to later forfeit your residency in the United States.
- You are a fiscally-transparent entity that is organized in the United States without the inclusion of U.S. beneficiaries, partners, or owners.
- The business entity that is requesting residency certification is not based in the U.S. and is an exempt organization.
- The trust, which is part of an employee benefit plan in its first year, is the entity that has requested certification, and it is not being managed by a qualified custodian bank.
Types of Entities That Can File Tax Form 6166
Along with individuals who reside in the U.S., the types of entities that may qualify to file tax form 6166 include:
- Corporate Subsidiaries
- Employee Benefit Plans
- Estates
- LLCs that are treated as a partnership for the purposes of taxes
- Federal, State, and Local Government Agencies
- Partnerships
- Trusts
Benefits of Filing Tax Form 6166
If you or your company conducts business abroad, you may be able to reduce your tax bill by submitting tax form 6166 to receive tax treaty benefits. Some of these benefits include:
- Reduced income tax rates
- Exemption from double taxation
- Other favorable provisions that can apply to international income, such as wages, interest, and retirement income
How To Get IRS Form 6166
In order to get IRS form 6166, taxpayers must first file Tax Form 8802, or the Application for United States Residency Certification, with the IRS. Using form 8802 is a mandatory part of the process to be considered for form 6166. The taxpayer will be required to fill out some more complex information within this tax form, such as their name, most up-to-date address, type of business entity, income tax return filing status, as well as further details. Form 8802 must have a signature and date written by a person who is authorized to sign on behalf of the entity, and if there is any perjury in these signatures, there are penalties.
There is a worksheet within form 8802 that includes a list of all the countries for which applicants can request form 6166. There are more than 50 countries on this list, including but not limited to Belgium, Germany, Italy, and Portugal. An applicant can use one form 8802 to request form 6166 for multiple countries, but they must file again every tax year they wish to request form 6166.
There is also an $85 fee for submitting this documentation that can be paid via direct deposit from your bank account, check, money order, or debit or credit card.
When To File Form 8802
It is important that taxpayers submit their form 8802 applications at least 45 days before they need the certificate of residency. This application should include all relevant forms and full payment of the fee. If there are any issues with your form 8802 submission, the IRS will contact you within 30 days of filing.
Where To Send Form 6166
Once the taxpayer has filed form 8802 and received form 6166 in the mail, they have a few options for how to submit the completed tax form 6166. Before this form is sent forward, however, it must be authenticated (or apostilled) for it to be considered valid in a foreign country.
Authenticating Form 6166
Apostille:
An Apostille is for documents requesting tax form 6166 in countries that were participants in the 1961 Hague Convention Treaty.
Authentication
An authentication certificate is for documents requesting tax form 6166 in countries that were not participants in the 1961 Hague Convention Treaty.
Mailing Form 6166
Once form 6166 has gone through the legalization process and is authenticated, taxpayers can mail the form to the foreign withholding agency or the foreign country’s taxing authority. Upon filing with the foreign country’s financial institution, depending on which country it is, you may be taxed at the country’s tax rate and receive a refund after proving your U.S. residency, or your tax may be withheld at the treaty-reduced rate immediately.
If you have lingering questions about how tax form 6166 works, want help assuring you are fulfilling the requirements to receive foreign tax benefits, or need clarification about the Internal Revenue Code, the tax pros at Ideal Tax are here to help. We also offer a free tax consultation.
