How estate tax treaties and foreign tax credits work

The examples below explain specific treaty provisions, permitted credit alternatives, payment evidence and return attachments. Start with the provision that supports the proposed treatment, then check its conditions and limits.

Research notice: Use the treaty text, IRS instructions and regulations linked below when reviewing a proposed claim. An estate attorney or CPA can help assess the proposed treatment against those authorities.

Start with the applicable treaty provision

The United Kingdom domicile example below addresses only one part of Article 4. For citizenship, domestic domicile and moves, see the citizenship and domicile guide.

A limited United Kingdom domicile example

Article 4(2) of the United States and United Kingdom estate treaty addresses an individual whom Article 4(1) first treats as domiciled in both countries. The individual must be a United Kingdom national and must not be a United States national. The individual must also not have been a United States income tax resident in seven or more of the ten taxable years ending with the relevant year. When all those conditions are met, the individual is deemed domiciled in the United Kingdom at that time.

Article 4(2) supplies this specific rule, rather than the complete treaty domicile test.

Compare the permitted credit alternatives

When a treaty authorizes a foreign death tax credit, the Form 706 instructions allow the most beneficial permitted credit alternative. Compare these alternatives:

• The credit figured under the treaty.
• The credit figured under the statute.
• The treaty credit plus a statutory credit for qualifying death taxes paid to a political subdivision or possession of the treaty country that are neither directly nor indirectly creditable under the treaty.

Whether local taxes qualify for a treaty credit depends on the particular treaty. Confirm statutory eligibility and limits before comparing the alternatives.

The credit limit follows the federal tax on the property

When credits for more than one foreign country are allowable, compute each country's credit separately. Attach a separate Schedule P for each foreign country. Convert each foreign tax payment into United States dollars using the exchange rate in effect when that payment was made. Even when several countries tax the same property, its total credit cannot exceed the federal estate tax attributable to that property.

Payment evidence and certification

For a credit claimed on Form 706, complete Schedule P and file it with the return. Attach supporting Form 706 CE, reporting foreign death tax without interest or penalties. If the foreign government refuses certification, file Form 706 CE directly with the IRS as its instructions require. An anticipated credit may be reported on the return, but final allowance requires payment of the foreign tax and filing Form 706 CE evidencing that payment.

If the foreign tax is refunded

A recipient of refunded foreign death tax claimed as a statutory foreign death tax credit must notify the IRS within 30 days after receipt. The notice must identify the decedent, death date, affected property, refund amount excluding interest, refund date, and recipient's name and address. It must also state the interest paid by the foreign country on the refund and supply any additional information requested. The recipient must pay resulting federal estate tax upon notice and demand, even after the ordinary assessment period. For periods before receipt of the refund, that federal tax bears interest only to the extent the foreign country paid interest on the refund.

Treaties can affect credits and specific property rules

Use the IRS treaty directory to locate an agreement and identify the particular provision supporting the proposed treatment.

A limited United Kingdom real property example

Under Article 6 of the United States and United Kingdom estate treaty, immovable property may be taxed in the country where it is situated. Permission to tax does not establish exclusive taxing rights. That country's law defines immovable property, subject to the treaty's express inclusions and exclusions. Included property encompasses accessories, agricultural and forestry livestock and equipment, rights governed by general law respecting landed property, usufructs, and rights to fixed or variable payments for working, or the right to work, mineral deposits, sources and other natural resources. Debts secured by mortgage or otherwise, ships, boats and aircraft are excluded. The same provisions apply to an enterprise's immovable property and immovable property used for independent personal services.

For ownership and partnership situs topics, see the nonresident owner guide.

Treaty credits require a country specific review

Canada prorates the credit

Article XXIX B(2) applies to the estate of a person who was a Canadian resident at death and was not a United States citizen. It allows a unified credit equal to the greater of two amounts: the United States citizen estate credit multiplied by the United States situated gross estate divided by the worldwide gross estate, or the domestic nonresident noncitizen unified credit. Reduce the otherwise allowable credit by any credit previously allowed for the individual's gifts. The proportionate credit is available only if all information necessary for its verification and computation is provided.

The provision prorates the unified credit, rather than the exclusion amount.

Italy and the instructions' treaty list

The Form 706 NA instructions identify Italy among treaties containing provisions to which section 2102(b)(3)(A), which applies where a treaty affects the unified credit, applies as of the instructions' printing. That listing establishes neither universal eligibility for Italian residents nor a full exclusion.

Canadian income taxes payable because of death

Article XXIX B(7) provides a credit against United States estate tax for Canadian federal and provincial income taxes payable because of death on property outside the United States. It applies to the estate of someone who was a United States resident or citizen at death, or at a surviving spouse's death to a qualified domestic trust created by that individual, the individual's executor or surviving spouse. The Canadian and United States taxpayer identities need not match. United States foreign death tax credit computation rules and limits apply. The credit is available only to the extent the same Canadian tax is not claimed as a credit or deduction against another United States tax, except the specified estate tax on qualified domestic trust property at the surviving spouse's death.

Treaty positions on Form 706 NA returns

When items on Form 706 NA are reported based on a death tax treaty or protocol, attach a statement indicating that the return position is treaty based.

Review the regulation linked in Sources with the preparer before deciding whether Form 8833 is required. Check its return due date condition, reporting triggers and waivers separately from the Form 706 NA statement requirement.

Support a proportionate credit claim

For a Form 706 NA treaty proportionate credit claim, attach a statement identifying the particular treaty, claiming its benefits and showing the proportionate credit computation. Attach a copy of the return filed with the treaty partner. If no estate or inheritance return was filed there, explain why none was due. If there was no foreign return, attach an inventory of assets and their values at death explaining the worldwide estate figure.

Common questions

Resources to check out

• IRS estate and gift tax treaty directory: Start here to locate the applicable agreement.
• Form 706 instructions: Schedule P: Review credit alternatives, separate country computations and payment documentation.
• Form 706 CE: Certificate of Payment of Foreign Death Tax: Consult the certification form and its filing instructions.
• United States and Canada: Treaty and included protocols: Read Article XXIX B for the Canadian provisions discussed above.
• IRS estate tax FAQs: International treaty claims: Review the supporting documents for a treaty proportionate credit claim.