U.S. persons working abroad are subject to U.S. taxes on their worldwide income. If a foreign country taxes the U.S. person on their income earned in that country, relief may be available through foreign tax credits, or the earned income exclusion provisions of Code Section 911.
Most practitioners also know to consult any applicable income tax treaties, to determine if there are any special provisions that limit what types or amounts of income the foreign country can tax. What is less widely known is that there are other types of international agreements that may apply to this issue and that may need to be consulted.
The first of these is a Status of Forces Agreement (SOFA). These agreements generally provide rules regulating the presence of armed forces and civilian supporting personnel of one country in the jurisdiction of another. These agreement can provide for the exclusion of such forces from local income taxes based on residence in the other country. For example, Article X.1. of the NATO Status of Forces Agreement provides:
Therefore, where military personnel, their supporting civilian personnel, or international aid workers are working in a foreign country, such agreements should be reviewed for applicability.
Most practitioners also know to consult any applicable income tax treaties, to determine if there are any special provisions that limit what types or amounts of income the foreign country can tax. What is less widely known is that there are other types of international agreements that may apply to this issue and that may need to be consulted.
The first of these is a Status of Forces Agreement (SOFA). These agreements generally provide rules regulating the presence of armed forces and civilian supporting personnel of one country in the jurisdiction of another. These agreement can provide for the exclusion of such forces from local income taxes based on residence in the other country. For example, Article X.1. of the NATO Status of Forces Agreement provides:
"Where the legal incidence of any form of taxation in the receiving State depends upon residence or domicile, periods during which a member of a force or civilian component is in the territory of that State by reason solely of his being a member of such force or civilian component shall not be considered as periods of residence therein, or as creating a change of residence or domicile, for the purposes of such taxation. Members of a force or civilian component shall be exempt from taxation in the receiving State on the salary and emoluments paid to them as such members by the sending State or on any tangible movable property the presence of which in the receiving State is due solely to their temporary presence there. "Another type of treaty or international that can also provide similar benefits are agreements of the United States Agency for International Development (USAID). These agreements may provide exemptions from local taxation for aid workers present in a foreign country.
Therefore, where military personnel, their supporting civilian personnel, or international aid workers are working in a foreign country, such agreements should be reviewed for applicability.
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