Tax Treaty Article 20(c): What Is It & Who Qualifies?

International tax agreements, or tax treaties, exist between the United States and numerous other countries to prevent the double taxation of income. These treaties contain specific articles that offer tax relief to certain classes of individuals, including foreign nationals in the U.S. as students or business trainees. One such provision, often found in a variation of Article 20, allows eligible individuals from a treaty country to exclude specific foreign-source payments from their taxable income in the U.S. This exemption applies to funds intended for education and living expenses.

Eligibility for the Exemption

To qualify for benefits under a student and trainee article, an individual must be a resident of a country that has a tax treaty with the U.S. They must also be present in the U.S. as a student at an accredited educational institution or as a business apprentice or trainee.

The purpose of the individual’s presence is also a factor, as the tax exemption applies only if the person is in the country solely for their education or training. This “sole purpose” test means an individual who entered the U.S. for work and later enrolled in classes part-time would likely not qualify.

For instance, Article 21 of the U.S.-India tax treaty specifies that an individual must have been a resident of India immediately before visiting the U.S. for education or training. This treaty also allows eligible students and business apprentices from India to claim the standard deduction on their U.S. tax returns, a benefit not available to most nonresident aliens. The exemption is available for the time needed to complete the education or training.

Scope of Exempt Income

The tax exemption under a student and trainee article applies only to specific payments from foreign sources, covering remittances received from outside the United States for the individual’s maintenance, education, or training. This includes money sent from family in the home country or a scholarship from a foreign organization to cover tuition and living costs. Some treaties, like the one with the People’s Republic of China, also exempt grants or awards from governmental or tax-exempt organizations.

This exemption does not extend to income earned for services performed within the U.S. Wages, salaries, or other compensation for work in the United States are considered U.S. source income and are subject to U.S. tax laws. While some treaties offer a limited exemption for a small amount of earned income, such as the $5,000 provision in the U.S.-China treaty, this is a separate benefit.

Claiming the Treaty Benefit

An individual who qualifies for a tax treaty exemption must claim it when filing their U.S. tax return. The primary tax return for a nonresident alien is Form 1040-NR, U.S. Nonresident Alien Income Tax Return. On this form, the treaty-exempt income is reported and then excluded from the total taxable income.

The taxpayer must also attach Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b). On this form, the individual must identify the specific treaty and article that provides the basis for the exemption and explain the treaty position. Failure to file this required disclosure form can result in penalties.