The Internal Revenue Service (IRS) and the US Department of the Treasury released two Revenue Procedures and a new FAQ on April 21 to provide relief to US residents and alien individuals affected by travel disruptions due to the coronavirus (COVID-19) emergency.
Rev. Proc. 2020-20 expands the existing Medical Condition Exception under the Substantial Presence Test (US tax residency) to cover up to 60 days spent in the United States due to COVID-19 Emergency Travel Disruptions, provided certain conditions are met.
By way of background, an alien individual can be taxed as a US resident if, during the taxable year, the person is present (or considered to be present) in the United States for 183 days or more under a statutorily-prescribed formula (the Substantial Presence Test). In applying this test, an individual may exclude days on which the person intended to leave the United States but was unable to do so due to a medical condition that arose after the person arrived in the United States (or existed prior to arrival but the person only became unware of the condition after) (the Medical Condition Exception).
Mobile employees and frequent business travelers closely monitor their days of physical presence in the United States to avoid triggering the Substantial Presence Test; often, they do so only by a few days. As a result, unplanned and unexpected travel disruptions, like those arising from the current COVID-19 emergency, can cause an alien individual who otherwise would not have triggered the Substantial Presence Test to cross the 183-day statutory threshold and be treated as a US resident under the test.
To provide relief to alien individuals affected by the COVID-19 pandemic, the Revenue Procedure treats a COVID-19 Emergency Travel Disruption as a medical condition (non-pre-existing) that has prevented an affected Eligible Individual from leaving the United States on each day during the person’s COVID-19 Emergency Period. Under the Medical Condition Exception, each such day is not taken into account for purposes of applying the Substantial Presence Test. The same treatment applies for purposes of determining whether an alien individual qualifies for benefits under a US tax treaty that requires the person be in the United States for 183 days or less.
The term “COVID-19 Emergency Travel Disruption” is defined broadly to include disruptions resulting from (i) infection from the COVID-19 virus, (ii) governmental travel restrictions, shelter-in-place orders, quarantines, and/or border closures, (iii) canceled flights and other transportation disruptions, and even (iv) feeling unsafe traveling or a desire to adhere to social distancing recommendations. Importantly, there is no requirement that an individual actually contract the COVID-19 virus or that the person exhaust all potentially available options for leaving the United States.
The days excluded from the Substantial Presence Test are days during an individual’s “COVID-19 Emergency Period” – a single period of up to 60 consecutive days starting on or after February 1, 2020, and on or before April 1, 2020, in which the individual was physically present in the United States.
The relief granted under the Revenue Procedure is limited to Eligible Individuals – namely, any person who (i) was not a US resident at the close of the 2019 tax year, (ii) is not a lawful permanent resident at any point in 2020, (iii) is physically present in the United States on each day during the COVID-19 Emergency Period, and (iv) does not become a US resident in 2020 due to days present in the United States outside of the COVID-19 Emergency Period.
To claim relief, Eligible Individuals that file a US tax return on Form 1040-NR must attach a completed Form 8843 to their returns for the 2020 taxable. See Revenue Procedure 2020-20, § 5 for specific instructions on claiming the exemption Eligible Individuals who do not file Form 1040-NR are not required to separately file Form 8843 (or file a Form 1040-NR for the sole purpose of filing Form 8843; instead, they must simply preserve the information and records that would be required to complete Form 8843 in the event the IRS subsequently requests such information.
Rev. Proc. 2020-27 relaxes the requirements for a US citizen or resident to be considered a qualified individual under § 911 for certain specified periods during 2019 and 2020.
By way of background, US citizens and residents are generally taxable on their worldwide income. However, § 911 allows a qualified individual to exclude foreign earned income and an allowance for housing costs from the computation of gross income. A “qualified individual” is any person whose tax home is in a foreign country and who is (i) a US citizen who establishes that he or she has been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire taxable year, or (ii) a US citizen or resident who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days. A qualified individual will not lose his or her status as such if the person has left the foreign country with respect to which he or she is a resident due to war, civil unrest, or “similar adverse conditions” that preclude the normal course of business.
Pursuant to the Revenue Procedure, the Secretary of Treasury has determined that, for 2019 and 2020, the current COVID-19 emergency is an adverse condition that precludes the normal conduct of business in (i) the People’s Republic of China (excluding Hong Kong and Macau) during the period between December 1, 2019, and July 15, 2020, (ii) all other countries worldwide during the period between February 1, 2020, and July 15, 2020. As a result, a qualified individual who traveled outside of his or her country of residence during the applicable aforementioned period will not lose qualified status, provided that the person establishes a reasonable expectation that he or she would have been a qualified individual but for COVID-19 emergency (the Revenue Procedure provides little guidance as to what is or might be considered a “reasonable expectation”; we anticipate that the IRS will issue further guidance on this topic).
Example (Residency Test). A qualified individual (with respect to China) who left China between December 1, 2019, and July 15, 2020, will continue to retain qualified status if the person establishes a reasonable expectation that he or she would have been a qualified individual but for the COVID-19 Emergency.
Example (330-Day Test). An individual present in the United Kingdom from January 1, 2020, to March 1, 2020, demonstrates that he or she was expected to work in the United Kingdom for the entirety of the calendar year. The individual left the United Kingdom on March 2, 2020 due to the COVID-19 emergency and returns on August 25, 2020, and stays through the remainder of the calendar year. The individual is considered a qualified individual for 2020 with respect to two periods: January 1 to March 1, 2020, and August 25 to December 31, 2020.
In addition to and consistent with the Revenue Procedures above, the IRS has posted two new FAQs concerning whether foreign corporations employing individuals or agents in the United States and nonresident alien individuals performing services in the United States will be considered to be engaged in a US Trade or Business (USTB) or to maintain a permanent establishment (PE) in the United States as a result of presence or activities performed in the United States due to COVID-19 Emergency Travel Disruptions.
By way of background, a nonresident alien individual who performs services or other activities in the United States and a foreign corporation who employs individuals or engages individuals as agents to perform services or other activities in the United States may be considered engaged in a USTB, and subject to US taxation on that basis. However, if the nonresident alien individual or foreign corporation qualifies for benefits under a US tax treaty, income associated with the USTB generally will not be subject to US taxation unless the individual or corporation is considered to maintain a permanent establishment (PE) in the United States, such as an office, fixed place of business, or a dependent agent.
Nonresident alien individuals and foreign corporations typically limit their contacts with and presence in the United States to avoid creating a USTB. The current COVID-19 emergency, however, may require individuals to be temporarily present or activities to be temporarily performed within the United States (when they would not otherwise be), which could in turn give rise to a USTB or a PE in the United States.
The FAQ allows a nonresident alien, foreign corporation, or partnership to exclude an uninterrupted period of up to 60 calendar days between February 1, 2020, and April 1, 2020, during which services or other activities are conducted in the United States from being taken into account in determining whether the nonresident alien individual or foreign corporation is engaged in a USTB. This relief is only available for activities that are performed by individuals temporarily present in the United States, which would have been performed outside the United States but for the COVID-19 emergency. An individual will be considered temporarily present in the United States if the person: (i) arrived in the United States between February 1, 2020, and April 1, 2020, (ii) is a nonresident alien or a US citizen or lawful permanent resident who had a tax home outside the United States in 2019, and (iii) reasonably expects to have a tax home outside the United States in 2020 (but for the COVID-19 emergency). Similar rules and principles apply for purposes of determining whether a nonresident alien individual or foreign corporation is considered to maintain a PE in the United States.
The FAQ encourages taxpayers to retain contemporaneous documentation to support their positions in line with this FAQ guidance.
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Barton W.S. Bassett
 The Substantial Presence Test provides that an alien individual is a resident if the individual is (1) present in the United States on at least 31 days during the tested calendar year; and (2) the sum of the number of days present, one-third of the number of days present in the preceding calendar year, and one-sixth of the number of days present in the second preceding year totals 183 or more days.