IRS provides tax relief to foreign persons due to COVID-19
The IRS has released guidance for non-resident aliens and foreign businesses impacted by COVID-19 travel disruptions. The guidance relaxes the rules tied to the US taxation of foreign persons in situations where their physical presence or business activities in the US have been extended due to the COVID-19 crisis.
Taxation of foreign businesses
Under section 864(b) of the Internal Revenue Code, a non-resident alien or foreign corporation that is engaged in a US trade or business is taxed on the income effectively connected to their US operations. However, if the foreign person is a resident of a country that has an income tax treaty with the United States, the non-resident alien or foreign corporation is not taxed on the income from its US operations, unless such activities meet the threshold of a permanent establishment, as defined by the treaty. A permanent establishment (PE) can be an office, fixed place of business, or a dependent agent.
Changes Due to COVID-19
- A non-resident alien or foreign corporation not engaged in a US trade or business that has one or more individuals temporarily present in the US due to COVID-19 emergency travel disruptions conducting activities in the United States that would normally occur outside US borders will not trigger taxation as a U.S. trade or business.
A foreign person may choose an uninterrupted period of up to 60 calendar days, beginning on or after February 1, 2020, and on or before April 1, 2020 (the COVID-19 emergency period), during which services or other activities conducted in the US will not be taken into account in determining whether the foreign person is engaged in a US trade or business, provided such activities were performed by one or more individuals temporarily present in the US and would not have been performed in the US but for COVID-19 emergency travel disruptions.
- A non-resident alien or foreign corporation not engaged in a PE that has one or more individuals temporarily present in the United States due to COVID-19 emergency travel disruptions conducting activities in the United States that would normally occur outside US borders will not trigger taxation as a U.S. permanent establishment.
- Taxation of foreign individuals (Revenue Procedure 2020-20)
Under section 7701(b) of the Internal Revenue Code, a non-resident alien is taxed as a US resident if they are “substantially present” in the US for the taxable year.
A non-resident alien will be considered a US resident under the substantial presence test if they meet the following criteria:
- The individual is present in the US on at least 31 days during the tested calendar year; and
- The sum of
- The number of days of presence in the tested calendar year;
- One-third of the number of days of presence in the preceding calendar year; and
- One-sixth of the number of days of presence in the second preceding calendar year totals 183 or more.
When applying the substantial presence test, a non-resident alien may exclude certain days of physical presence in the US, including if the individual qualifies for the medical condition exception (MCE). The MCE provides that an alien individual is not treated as present in the US on days when the individual is unable to leave the US because of a medical condition that arose while the individual was present in the US.
Consistent with the MCE, under US income tax treaties, days spent in the US due to an illness that prevents an individual from timely leaving the country are not taken into account in determining the availability of treaty benefits with respect to income from dependent personal services performed in the United States.
Changes due to COVID-19
Non-resident aliens who would not have been in the US long enough to be considered resident aliens under the substantial presence test or to be ineligible for treaty benefits on services income but for the COVID-19 emergency travel disruptions, are eligible for a medical condition travel exception under Revenue Procedure 2020-20.
An eligible individual is any individual who meets the following criteria:
- Was not a US resident at the close of the 2019 tax year;
- Is not a lawful permanent resident at any point in 2020;
- Is present in the US on each of the days of the individual’s COVID-19 emergency period, and
- Does not become a US resident in 2020 due to days of presence in the US outside of the individual’s COVID-19 emergency period.
An individual’s COVID-19 emergency period is a single period of up to 60 consecutive calendar days selected by the individual starting on or after February 1, 2020 and on or before April 1, 2020 during which the individual was physically present in the US on each day.
Thus, an eligible individual, who intended to leave the US during the individual’s COVID-19 emergency period but was unable to do so due to COVID-19 emergency travel disruptions, may exclude the individual’s COVID-19 emergency period for purposes of applying the substantial presence test.
For purposes of determining an individual’s eligibility for treaty benefits for income from employment or the performance of other dependent personal services within the United States, any days of presence during the individual’s COVID-19 emergency period on which the individual was unable to leave the U.S. due to COVID-19 emergency travel disruptions will not be counted.
The content contained in this article is for information purposes only and not tax advice. You should consult a tax advisor for advice applicable to your situation.
Tara Fisher has been practicing international tax for 20 years. Her professional background includes working for the US Congress Joint Committee on Taxation, and the national tax practice of PWC, the University of Pittsburgh, and American University in Washington, DC. She is a licensed CPA and holds both an undergraduate and graduate degree in accounting from the University of Virginia.