Foreign individuals who can't leave the U.S. for reasons related to the outbreak won't see their time in the country count toward determining taxable residency, according to a revenue procedure from Treasury and the Internal Revenue Service. On Tuesday, Treasury also issued a separate revenue procedure outlining tax relief for U.S. citizens who are based in a foreign country but left that jurisdiction due to the global spread of the virus, which causes the respiratory disease COVID-19.
Foreign businesses also received tax relief procedures in FAQ guidance the IRS posted Tuesday. According to this third piece of guidance, foreign individuals who don't usually work in the U.S. likely won't trigger a taxable presence for their employers if they're stuck within American borders due to travel restrictions aimed at containing the virus.
As for foreign individuals who may be risking taxable residency, the relevant revenue procedure noted that "regardless of whether they were infected with the COVID-19 virus, individuals may have become severely restricted in their movements, including by order of government authorities."
Under the IRS' substantial presence test, foreign individuals can establish U.S. residency — and therefore owe taxes on their worldwide income — if they spend at least 183 days in the country over three years. People who unknowingly pass this threshold can seek insulation from U.S. income taxes under their home country's treaty with the U.S., but they're still considered U.S. residents in other ways that could have a resonating impact for themselves and others.
Now that the pandemic has led to cross-border travel restrictions, the revenue procedure noted that foreign individuals who can't leave the U.S. won't see up 60 consecutive days in the country counted toward the substantial presence test. The measurement of these days must begin during the COVID-19 emergency period, which started on Feb. 1 and lasted until April 1, according to the guidance.
Paul Sczudlo, who is of counsel at Withers LLP, told Law360 on Tuesday that the guidance is welcome news from the IRS and Treasury.
"It definitely gives foreigners who are stuck in the U.S. due to COVID-19 restrictions … some additional wriggle room," he said.
Meanwhile, U.S. citizens who had to leave the country where they're usually based can get a waiver for the time requirements under Internal Revenue Code Section 911
, according to the second revenue procedure. Under this provision, U.S. citizens are considered to have their tax home in a foreign country if they meet certain requirements, including by spending at least 330 days in another jurisdiction during a 12-month period.A waiver for the time requirements under Section 911 will apply to Americans who weren't able to conduct their usual business in China as of Dec. 1 and any other country as of Feb. 1, according to the revenue procedure. The guidance noted that this exception will apply through July 15, unless the IRS announces an extension.
In the third piece of guidance issued Tuesday, the FAQ explained relief procedures for foreign individuals who are only working in the U.S. due to COVID-19 travel restrictions. According to the FAQ, the services or activities related to a foreign worker's employment won't be taken into account when determining whether the employee or the employer is engaged in a U.S. trade or business.
In addition, these services or activities won't go toward determining whether the foreign company has a permanent establishment — a taxable presence — in the U.S., according to the guidance.
Tuesday's guidance comes after the Organization for Economic Cooperation and Development said earlier this month that people working in countries other than their usual ones because of the coronavirus pandemic aren't likely to trigger new taxation requirements for employers under global treaty rules.
--Editing by Neil Cohen.
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