Further guidance has been issued to grant relief for foreigners stuck in the U.S. because of the COVID-19 outbreak. The relief pertains to U.S. residency determination and treaty benefits.
On April 21, 2020, the Treasury Department and the Internal Revenue Service (IRS) issued additional guidance related to travel disruptions due to COVID-19 with respect to foreign individuals present in the U.S. (Revenue Procedure 2020-20) and U.S. citizens and residents overseas (Revenue Procedure 2020-27). Additionally, a FAQ specifically addressed unintended U.S. trade or business implications.
Revenue Procedure 2020-20 provides relief to foreign individuals present in the U.S. that may be impacted by travel restrictions due to COVID-19. The IRS provides an exception for purposes of determining the U.S. residency status of a foreign individual under the substantial presence test.
Generally, foreign individuals that are not green card holders may become resident aliens if they meet the substantial presence test. To meet this test, an individual must be present in the U.S. more than 183 days over a three-year period by taking into account 100% of the days of presence in the current calendar year, 1/3 of the days of presence in the preceding calendar year, and 1/6 of the days of presence in the second preceding calendar year.
Under the relief procedures, an eligible individual may exclude up to 60 consecutive days of U.S. presence during the period from February 1, 2020 to April 1, 2020 for purposes of applying the substantial presence test. This exception applies regardless of whether the individual was infected with the COVID-19 virus.
An eligible individual is one who:
For purposes of the Revenue Procedure, it will be presumed that the eligible individual intended to and was unable to leave the U.S. The relief will be afforded via an expanded medical condition travel exception. The COVID- 19 emergency will be considered as a medical condition that prevented the eligible individual from leaving the U.S. In addition, will not be treated as a pre-existing medical condition. Form 8843, Statement for Exempt Individuals and Individuals with a Medical Condition, should be completed and attached to the individual’s Form 1040-NR, if otherwise required to file. Form 8843 is to be specifically completed pursuant to the Revenue Procedure instructions and there is no need for a physician’s statement. Eligible individuals otherwise not required to file Form 1040-NR are not required to complete Form 8843, but should retain the relevant records to support reliance on the Revenue Procedure.
It should be noted that an alien individual who still would be considered as a U.S. resident even after excluding the 60 days of presence, may still be considered a nonresident alien if eligible to claim the closer connection exception under Section 7701(b)(2). Further, the medical condition exception could also apply if the specific requirements are otherwise satisfied; as applicable without regard to this Revenue Procedure.
Similar relief apples in determining whether an individual (does not have to be an eligible individual) qualifies for treaty benefits with respect to income from dependent personal services performed in the U.S. To claim the exemption in accordance with the Revenue Procedure, the individual should provide the employer or other withholding agent with a Form 8233, certifying that the income is exempt.
In Revenue Procedure 2020-27, the IRS provides relief to U.S. citizens and residents who reasonably expected to meet the eligibility requirement of Section 911(d)(1) in order to claim the foreign earned income and housing cost exclusion.
U.S. citizens or residents whose tax home is in a foreign country and who are present in a foreign country for a period of at least 330 days during any period of 12 consecutive months are eligible for the foreign earned income and housing cost exclusion. In addition, a qualified individual also includes a U.S. citizen that has been a bona fide resident in a foreign country or countries for an uninterrupted period that includes an entire taxable year.
For 2019 and 2020, the Secretary of the Treasury has determined the COVID-19 emergency to be an adverse condition that precluded the normal conduct of business. Under the relief procedures, treat individuals who reasonably have been expected to meet this requirement but who had to leave a foreign country due to COVID-19 will still as meeting this requirement. This relief applies as of December 1, 2019 for individuals who had to leave China (excluding Hong-Kong and Macau), and for individuals who had to leave any foreign country as of February 1, 2020, until July 15, 2020. However, an individual must have established residency or been physically present in a foreign country before the applicable date for relief. An example is provided as below:
An individual who was present in the UK on 1/1/20-3/31/20, establishes that he or she reasonably expected to work in the UK for the entire calendar year, but departed the UK on 3/2/20, due to the COVID-19 Emergency, and returns to the UK on 8/25/20, for the remainder of the calendar year, would be a qualified individual for 2020, assuming the individual has met the other requirements for qualification under Section 911.
The IRS stated in an FAQ on its website that a nonresident alien, foreign corporation, or a partnership in which either is a partner (affected person) that is not otherwise engaged in a U.S. trade or business (USTB) will be afforded relief. It will not be treated as engaged in a USTB as a result of services or other activities conducted by individuals temporarily present in the U.S. if such services or other activities would not have been conducted in the U.S. but for COVID-19 travel disruptions during a selected uninterrupted period of up to 60 calendar days during the period from February 1, 2020 to April 1, 2020. This exception also applies for purposes of determining whether a nonresident alien or foreign corporation has a permanent establishment in the U.S. under an income tax treaty.
The affected person should retain contemporaneous documentation to the 60-day period chosen and that the relevant business activities conducted would not have been undertaken in the U.S. but for COVID-19 emergency travel disruptions.
Nonresident aliens and foreign corporations may make protective filings of their annual U.S. tax returns, even if they believe they were not required to, in order to avail themselves of benefits and protections (such as preservation of deductions, statutes of limitations, and claiming tax treaty–based relief). The IRS stated in the FAQ that they would continue to monitor the evolving effects of the COVID-19 emergency on nonresident alien individuals and foreign corporations.