On April 21, 2020, the Internal Revenue Service (the “IRS”) published a helpful revenue procedure (Rev. Proc. 2020-20), (the “Procedure”) that, in general, excludes days present in the US during the COVID-19 pandemic for purposes of determining US residency AND for purposes of subjecting to US tax, income from personal services (i.e., employment and self-employment) of a non-US individual.
The IRS indicated that travel disruptions resulting from the global outbreak of the COVID-19 may cause certain individuals to become U.S. residents for US tax purposes, or become subject to tax in the US although never anticipated meeting the “substantial presence test” and may impact an individual’s qualifications for certain treaty benefits.
According to the Procedure, the COVID-19, may have affected the travel plans of individuals who intended to leave the United States. Accordingly, the IRS has determined that individuals, regardless of whether they were infected with the COVID-19 virus, may have become severely restricted in their movements, including by order of government authorities. The IRS added that individuals who do not have the COVID-19 virus and attempt to leave the United States may also face canceled flights and disruptions in other forms of transportation, shelter-in-place orders, quarantines, and border closures. The IRS provides a relief also to those who can travel but may feel unsafe doing so during this period due to recommendations to implement social distancing and limit exposure to public spaces.
Consequently, the IRS decided to expend the “medical condition exception” under the “substantial presence test” to include any non-U.S. individual located in the United States during the period beginning on or after February 1 until on or before April 1 (the “COVID Period”). The IRS presumes that everyone in the United States were affected, this way or another, by the COVID-19 virus. However, a medical condition will not be considered while the individual is present in the United States if the medical condition existed before the individual’s arrival in the United States and the individual was aware of the medical condition.
Similarly, under U.S. income tax treaties, days spent in the United States 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. In general, personal services (employment) are taxed in the United States if (among other things) the foreign service provider was present in the United States for more than 183 days in a year. For purposes of computing days of presence in the United States under this type of test, days on which an illness prevented the individual from leaving the United States are not counted.
Any non-U.S. individual that was present in the United States each day during the COVID and who intended to leave the United States during the COVID Period, but was unable to do so, may select a single period of up to 60 consecutive calendar days for purposes of the day count under the “substantial presence test” and for purposes of the day count under the treaty. The selection is only available to an individual who (1) was not a U.S. resident at the end of 2019, (2) is not a green card holder at any point in 2020, (3) is present in the United States on each of the days of the COVID Period, and (4) who does not become a U.S. resident in 2020 due to days of presence in the United States.
The IRS, to provide as much clarity as possible, clarified that an individual will be presumed to have intended to leave the United States on any day during the individual’s COVID Period, unless that individual has applied, or otherwise taken steps, to become a lawful permanent resident of the United States.