The US Treasury Department and the Internal Revenue Service on April 21 announced that the US tax residency rules for individuals and businesses have been eased, in response to the COVID-19 pandemic.
The main rules regarding individual tax residency in the US provide that a non-resident individual may become a resident by passing one of two tests: the Green Card Test or the Substantial Presence Test.
Under the Green Card Test, an individual becomes tax resident in the US if they are a lawful permanent resident of the US under the immigration laws of the US, and if they spend at least one day in the US.
Alternatively, the Substantial Presence Test features both a 31-day test and a 183-day test. In order to become tax resident in the US, taxpayers must have been present in the US for 31 days in the current year, and also have accumulated 183 days under the following calculations:
- Current-year days in the US;
- First preceding year days in the US divided by 3; and
- Second preceding year days in the US divided by 6.
If the total of these three sums equals or exceeds 183 days the taxpayer is resident in the US for tax purposes.
There are, however, a number of exceptions to these rules.
Revenue Procedure 2020-20
New Revenue Procedure 2020-20 provides for concessionary rules for persons stranded in the US as a result of COVID-19. It provides that, under certain circumstances, up to 60 consecutive calendar days of US presence that are presumed to arise from travel disruptions caused by the COVID-19 emergency will not be counted for purposes of determining US tax residency, or when determining whether an individual qualifies for tax treaty benefits for income from personal services performed in the US.
Revenue Procedure 2020-27
The US Treasury and IRS have also released Revenue Procedure 2020-27, which provides that qualification for gross income exclusions under Section 911 of the Internal Revenue Code will not be impacted as a result of days spent away from a foreign country due to the COVID-19 emergency. Section 911 deals with foreign earned income.
Under US tax rules for US citizens who typically live and work in a foreign country, taxpayers meeting certain requirements may qualify for the "foreign earned income exclusion", which reduces their exposure to US taxation.
To claim the benefits, a taxpayer must have foreign earned income, their tax home must be in a foreign country, and they must be one of the following:
- A US citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year;
- A US resident alien who is a citizen or national of a country with which the US has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year; or
- A US citizen or a US resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
US authorities have said, in Revenue Procedure 2020-27, that days spent away from a foreign country due to the COVID-19 emergency will not be taken into account within certain dates.
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Finally, US authorities have issued a second FAQ for non-resident taxpayers and foreign businesses on the impact of COVID-19 travel disruptions on their affairs.
This FAQ clarifies that certain US business activities conducted by a non-resident alien or foreign corporation will not be counted for up to 60 consecutive calendar days in determining whether the individual or entity is engaged in a US trade or business or has a US permanent establishment, but only if those activities would not have been conducted in the US but for travel disruptions arising from the COVID-19 emergency.
Full details of the measures being put in place in the US in response to COVID-19 can be found on a dedicated "Coronavirus Tax Relief" page on the Internal Revenue Service's website.
Disclaimer: The blog does not represent taxation or legal advice and that independent advice should always be sought in respect of such matters etc.