Relief on Substantial Presence and Treaty Day-Count Tests.
On May 30th, the IRS issued Revenue Procedure 2020-20 which provides non-U.S. individuals present in the U.S. some limited relief from the day-count tests for U.S. tax residency and for eligibility for certain treaty benefits. The relief comes in the form of the “COVID-19 Medical Condition Travel Exception”. The name of the exception is a misnomer because individuals need not have had any medical condition (including the COVID-19 virus) to claim its benefits.
Travel disruptions due to COVID-19 related restrictions have meant that some non-resident individuals have been forced to stay in the U.S. longer than anticipated. This longer stay may cause those individuals to be treated as U.S. residents for U.S. federal income tax purposes under the weighted day-count “substantial presence” test for U.S. residency.[1] An individual that meets the substantial presence test will generally be classified as a U.S. tax resident, and as a result, will be subject to federal income tax in the U.S. on his or her worldwide income (rather than just on income earned from activities in the U.S.). The longer stay could also prevent non-resident individuals from claiming certain treaty benefits that would otherwise allow them to escape U.S. taxation on certain income earned in connection with personal services performed in the U.S.
With Revenue Procedure 2020-20, the IRS has expanded the existing medical condition exception, which permits a non-resident individual to omit those days on which a medical condition prevented the person from leaving the United States, to include a COVID-19 related travel exception. This exception is intended to provide relief to individuals who were unable to leave the country for any reason including travel bans, limited availability of flights, shelter-in-place orders, border closures and health and safety concerns with travel. The exception permits individuals to exclude a single period of up to 60 consecutive days starting between February 1, 2020 and April 1, 2020 in which the individual was continuously physically present in the United States (the “COVID-19 Emergency Period”). An individual need not have any actual COVID-19 related medical condition to claim this exception.
To be eligible for the exception, the non-resident individual (i) must not have been a U.S. resident at the close of the 2019 tax year, (ii) may not be a lawful permanent resident (e.g., green card holder) at any time in 2020, and (iii) must not otherwise meet the substantial presence test (without regard to the number of days in the individual’s COVID-19 Emergency Period that the individual would otherwise have been able to exclude had the exception applied). Further, the individual must have intended to leave the U.S. during that individual’s COVID-19 Emergency Period, although the IRS will presume the existence of such an intent unless the individual had applied or taken steps to become a lawful permanent resident.
To claim the benefits of the COVID-19 medical condition travel exception, an individual otherwise required to file a U.S. personal income tax return for the 2020 tax year on IRS Form 1040NR must attach Form 8843 (Statement for Exempt Individuals and Individuals with a Medical Condition) to that IRS Form 1040-NR by that form’s due date. Those individuals who are not otherwise required to file a Form 1040-NR need not file Form 8843 to claim the exception, but the revenue procedure directs those individuals to retain “all relevant records” to support their eligibility for the exception in the event their eligibility is ever challenged by the IRS.
Relief from ‘Engaged in a U.S. Trade or Business’ and Permanent Establishment Tests
The IRS has released information in the form of responses to Frequently Asked Questions that business activities conducted by a non-resident alien or foreign corporation in the U.S. during the 60-day period from February 1, 2020 to April 1, 2020 will not be taken into account in determining whether the non-resident individual or foreign corporation should be considered to have been engaged in the conduct of a U.S. trade or business, or has established a U.S. permanent establishment for purposes of a treaty, if those activities would not have been conducted in the United States but for COVID-19 related travel restrictions.
Relief for U.S. Citizens or Residents Wishing to Claim the Code Section 911 Foreign Earned Income and Housing Costs Exclusion.
Revenue Procedure 2020-27 provides relief to U.S. citizens or residents working abroad that were unable to satisfy the 330 day-count requirements for the foreign-earned income and housing costs exclusion available under Code Section 911. An individual who has established residency in a jurisdiction and reasonably expected to meet the eligibility requirement under Code Section 911 but failed to do so because the individual departed the foreign country on or after February 1, 2020 and before July 15 2020 will be treated as a qualified individual for that period.
* * * *
If you have any questions regarding this information, please contact Judith Fiorini at 212.653.8458, Keith Gercken at 415.774.3207, or Amy Tranckino at 858.720.8960.
This update has been prepared by Sheppard, Mullin, Richter & Hampton LLP for informational purposes only and does not constitute advertising, solicitation, or legal advice, and does not form an attorney-client relationship. Further, this update is not promised or guaranteed to be correct or complete and may or may not reflect the most current legal developments. As you are aware, the COVID-19 crisis situation is dynamic and rapidly evolving, as are the laws, regulations, guidance and interpretations thereof. The information provided herein does not constitute tax advice and may not be relied upon for avoidance of tax penalties or for any other purpose.
FOOTNOTES
[1] Generally, an alien individual is a resident under the substantial presence test in the tested calendar year if: (1) the individual is present in the United States on at least 31 days during the tested calendar year; and (2) the sum of (i) the number of days of presence in the tested calendar year; (ii) one-third of the number of days of presence in the preceding calendar year; and (iii) one-sixth of the number of days of presence in the second preceding calendar year totals 183 days or more.