§894 Income Affected by Treaty

Summary

Apply the tax rules in a way that respects any U.S. tax treaty that affects a taxpayer. If a treaty gives a lower tax or an exemption for income not tied to doing business in the United States, a nonresident individual or foreign company is treated as not having a permanent establishment in the U.S. at any time during the tax year for that purpose. That rule does not apply to the tax calculated under section 877(b). A foreign person cannot use a treaty to get a lower withholding rate on income that comes through a partnership or other pass‑through entity if three things are true: their home country does not treat that income as theirs, the treaty says nothing about partnership income, and their home country does not tax distributions from the entity. The Treasury must make rules to decide how treaty benefits apply when an entity is treated as a partnership for U.S. tax but as a separate, taxable entity in the taxpayer’s home country (for example, common investment trusts, grantor trusts, or disregarded entities).