The IRS recently issued a statement amplifying previously-published guidance on relief measures for individuals affected by the COVID-19 pandemic. Over the last week, the IRS has responded to inquiries from practitioners as airports remained closed in some jurisdictions and individuals continued to avoid travel due to unsafe conditions. The new IRS FAQ provides clarity that the United States will not be extending the COVID-19 Residency or Permanent Establishment Relief. Perhaps as a sign of good things to come, the IRS announced that it will not be extending this relief as travel disruptions “are beginning to get better,” though it will still be monitoring the situation closely.
In a previous blog we reviewed the original relief from tax residency rules for snowbirds and other visitors to the United States that the IRS offered in response to COVID-19 travel disruptions. As discussed in that blog, this published guidance provided a 60-day grace period to “Eligible Individuals” whose U.S. stays were involuntarily extended due to the pandemic. Specifically, these individuals could potentially exclude up to 60 days of physical presence in the United States under the “Substantial Presence Test” for 2020. While the relief applies to the substantial presence test, it is also meant to apply to the “Closer Connection Test” and the determination of a Permanent Establishment (“PE”) in the US.
- U.S. Earned Income
If individuals perform services in the United States, they may be considered to be engaging in a U.S. “trade or business” (“USTB”). Generally, a non-U.S. individual or corporation that is engaged in a USTB is taxable on its income that is “effectively connected” to that USTB. If such an individual was performing services in the United States for his or her non-U.S. business but could not leave due to COVID-19 travel disruptions, such activity could cause the nonresident alien or foreign corporation to become engaged in a USTB. This is similar to the situation faced by many U.S. residents who may be working remotely during the pandemic from states where they normally would not work, potentially exposing them to different tax regimes than normal. While outside the scope of this blog, it is worth noting that the IRS guidance for non-U.S. persons applies only to federal tax, not U.S. state and local tax.
- IRS Relief
The new IRS guidance provides that, during the same 60-day grace period as provided in the original notice (February 1 to April 1), non-U.S. individuals and corporations may exclude up to 60 days during which services or other activities conducted in the United States will not be taken into account in determining whether the taxpayer is engaged in a USTB, provided that such activities were performed by one or more individuals temporarily present in the United States and would not have been performed in the United States but for COVID-19 travel disruptions. During this same time period, these services performed by one or more individuals temporarily present in the United States will not be taken into account to determine whether the nonresident or foreign corporation has a PE, provided that the services or other activities of these individuals would not have occurred in the United States but for COVID-19 travel disruptions.
A non-U.S. individual or corporation earning income during the grace period will also not be subject to the 30% gross basis tax imposed under I.R.C. §§ 871(a) or 881(a) solely because he, she, or it is not treated as having a USTB or PE under this guidance. The non-U.S. individual or corporation should be sure to retain documentation of relevant business activity conducted in the United States in anticipation of an IRS request. Making protective filings on a 2020 U.S. tax return, even if there is not otherwise a requirement to file, would be prudent to ensure the application of these benefits.