Tax Indemnity Agreements

• Author: Lionel S. Sobel
• Pages: 373-375

373

CHAPTER 14

Tax Indemnity Agreements

Because tax treaties usually contain “Artistes and Athletes” provi-

sions that allow countries to tax income earned locally even by non-

resident alien entertainers, double taxation remains possible, despite

the deductions, exclusions, and credits that are made available by the

Internal Revenue Code.

Consider this example.

• A famous American actress is employed by a British producer

of stage plays to appear in a play in London.

• The actress will have to pay income tax in the United King-

dom on her earnings from the play.

• The actress will not be able to exclude all of her London earn-

ings from the income on which she will have to pay taxes in

the United States, because she won’t be “living abroad” when

she earns it, and thus she won’t be able to satisfy the require-

ments of Internal Revenue Code §911.

• The actress will not be able to take a credit against her taxes

in the United States (under Internal Revenue Code §904) that

fully offsets the taxes she had to pay in the United Kingdom.

• This means that the actress will pay more in taxes (in the

United States and the United Kingdom combined) than she

would have had to pay if she had earned all of her income in

the United States.

If the actress has enough bargaining power, she can protect her-

self against this “loss” of after-tax income by demanding that the Brit-

ish producer compensate her for the extra taxes she will have to pay

as a result of appearing in the producer’s play in London. She has to

do this before she agrees to appear in the play, of course. But if the

producer agrees, that agreement is documented in a “tax indemnity”

clause in the actress’s employment contract.

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