Hello,
I'm an Egyptian who work now at USA in UNC Chapel Hill (I started at July 2009). I have a J1 visa for 3 years which is the contract time.
when I asked the payroll to apply the taxes treaty between Egypt and USA they said that their computer system said NO because my contract is for 3 years!!!! I wonder if it is my right to apply the treaty on me for 2 years then take the taxes on the third. is it possible to argue about this, and how?
thank you, doria Elkerdany

MukatA

Form tax treaty:
An individual who is a resident of Egypt on the date of arrival in the United States and who is temporarily in the United States primarily to teach or engage in research, or both, at a university or other recognized educational institution is exempt from U.S. income tax on income from the teaching or research for a maximum of 2 years from the date of arrival in the United States. The individual must have been invited to the United States for a period not expected to be longer than 2 years by the U.S. Government or a state or local government, or by a university or other recognized educational institution in the United States.

This exemption does not apply to income from research carried on mainly for the private benefit of any person rather than in the public interest.

Five Rings

In this case Doria you should have two years exempt income and one year taxable by the US.

The US/Egypt treaty clearly states in the Technical Explanation of Article 22:

Since a temporary visit may be of such a duration that an individual may lose his status as a resident of the Contracting State of which he was a resident at the time he became eligible for the benefits of this Article, the individual need only be a resident of such Contracting State at the beginning of his visit. However, if the individual becomes a citizen of, or acquires immigrant status in, the other Contracting State, that other Contracting State may tax the individual without
regard to this Article. See paragraphs (3) and (4)(b) of Article 6 (General Rules of Taxation).
If the individual's visit exceeds a period of two years from the date of his arrival, the exemption applies only to the income received by the individual before the expiration of such two-year period.

Refer the Payroll Dept to :
http://www.irs.gov/pub/irs-utl/egypttrweb5.pdf

AtlantaTaxExpert

I see the points of view for both MukatA and Five Rings.

MukatA contends that since you know going in that the contract is for three years that the tax exemption does NOT apply. This appears to be the position of UNC Chapel Hill.

Five Rings' contention is that your first twenty-four consecutive months (July 2009 to July 2011) is in fact tax-exempt from income taxes, with the successive twelve months (July 2011 to July 2012) being fully taxable. The tax-exemption also applies for the North Carolina state income tax as well.

I concur with Five Rings in this case, as my research on a similar case for a Egyptian client found the same citations in both the tax treaty and the technical explanation of the treaty.

That said, please note that your 24-month exemption applies ONLY for income taxes. For FICA (Social Security and Medicare) taxes, you are exempt for only two calendar years (in your case, 2009 and 2010). Starting on 1 January 2011, you become fully liable for FICA (Social Security and Medicare) taxes, and these taxes should be withheld from your salary starting on that date.

IntlTax

I agree with UNC. Article 22 of the Treaty provides in part:
Inserting some country names to make the sentence read easier:
The portion of the technical explanation quoted by Five Rings indicates that the individual only needs to be a resident of Egypt at the beginning of the two years in order to be considered an Egyptian resident for purposes of the Treaty. This makes sense because someone living outside Egypt for a period of up to two years may lose his/her Egyptian residency status.

However, this does not in any way remove the requirement that the resident be invited "for a period not expected to exceed 2 years." If the period is expected to exceed to years, Article 22 would not apply.

Five Rings

Sorry Intl Tax, I must disagree with your conclusion that Art. 22 does not apply.

The very wording of the TE specifically anticipates a case where the treaty beneficiary is present past the two year period:
"If the individual's visit exceeds a period of two years from the date of his arrival, the exemption applies only to the income received by the individual before the expiration of such two-year period."
I don't see how it can get any plainer than that.

In any case, the situation can be easily remedied by the mere stroke of a pen changing some aspects of the contract.

IntlTax

I believe the language you are focusing on is saying that if the individual is invited for a period not expected to exceed 2 years and then remains beyond two years, the exemption is not retroactively revoked. This is an entirely different situation than someone initially being invited for more than two years.

Five Rings

A very well taken point IntlTax. A three year contract anticipates more than a two year stay.

Now we must question the nature of the J1 visa whether as just a student or as an advanced student/scholar/researcher/professor/specialist

Art 23(4) states:

(4) The benefits provided under Article 22 (Teachers) and paragraph (1) of this Article shall, when taken together, extend only for such period of time, not to exceed 5 taxable years from the date of arrival of the individual claiming such benefits, as may reasonably or customarily be required to effectuate the purpose of the visit, and for such additional period of time as is necessary to complete, as
a full-time student, educational requirements as a candidate for a postgraduate or professional degree from a recognized educational institution. The benefits provided under Article 22 (Teachers) shall not be
available to an individual if, during the immediately preceding period, such individual enjoyed the benefits of paragraph (1) of this Article.

The TE goes on to explain:
The first sentence of paragraph (4) provides that the benefits provided in paragraph (1)
and the benefits provided under Article 22 (Teachers), when taken together, may extend only for such period of time, not to exceed five taxable years from the date of individual's arrival, as may reasonably or customarily be required to effectuate the purpose of the visit, and for suchadditional period of time as is specified in paragraph (1). The second sentence of paragraph (4) makes it clear that the benefits provided by Article 22 will not be available to an individual if, during the immediately preceding period, the individual enjoyed the benefits provided by paragraph (1).
Thus, an Egyptian individual who originally entered the United States for the purpose of becoming a student and received benefits under paragraph (1) must leave the United
States and, if necessary, reestablish residence in Egypt, and then return at the invitation of the United States, a political subdivision or local authority thereof, or a university or other
recognized educational institution for the primary purpose of becoming a teacher in order to takeadvantage of Article 22.

I guess it all depends on this individual's circumstances.

doriayk

thanks for your answers, I really appreciate you taking the time, though it is very confusing to me as a non-specialist and I don't know what should I do now.

IntlTax

If you were invited for a period expected to exceed 2 years, there is nothing to do.