On April 9, we published an article, Global Tax Implications of COVID-19 on Stranded Cross-Border Workers and Multinational Companies, that discussed the analysis released by the Organization for Economic Cooperation and Development (“OECD”). The subject of the analysis was the COVID-19 crisis impact on various tax treaty provisions, particularly permanent establishment (“PE”) and residency issues.
On April 21, 2020, the United States (“U.S.”), which is not a member country of the OECD, through the Internal Revenue Service (“IRS”), released the much-awaited guidance regarding the U.S. tax implications of “COVID-19 Emergency Travel Disruptions” (i.e., restriction of movements of individuals due to canceled flights/other means of transportation, shelter-in-place orders, quarantines, border closures or self-imposed travel restriction due to recommendations on social distancing) affecting the non-U.S. persons unable to physically leave the U.S.
In general, a nonresident alien (“NRA”) who performs services in the U.S. and a foreign corporation (“FC”) that is engaged in business activities in the U.S. through employees or individual agents may be considered engaged in a U.S. trade or business (“USTB”). The temporary stay in the U.S. of these individuals due solely to COVID-19 Emergency Travel Disruptions may unintentionally result in the creation of a USTB, which will subject such NRA or FC to U.S. taxes on business income connected to such USTB. However, if a U.S. tax treaty applies, neither the NRA or FC will be subject to U.S. tax unless the business is conducted through a PE as defined in the applicable tax treaty.
The IRS guidance answered two key questions:
First, will an NRA or FC (whose employees or agents are in the U.S.) not otherwise engaged in a USTB be treated as engaged in USTB as a result of services or activities by the individual(s) temporarily present in the U.S., if those services or activities would not have been conducted in the U.S., but for the COVID-19 Emergency Travel Disruptions?
The IRS indicated that an “Affected Person” (i.e., NRA, FC, or a partnership in which either the NRA or FC is a partner) may choose an uninterrupted period of up to 60 calendar days, beginning on or after February 1, 2020, and on or before April 1, 2020 (the “COVID-19 Emergency Period”), during which services or activities conducted in the U.S. will not be taken into account in determining the existence of USTB. This benefit is only applicable if the activities of the individual temporarily present in the U.S. were performed in the U.S. solely due to COVID-19 Emergency Travel Disruptions. The guidance defines “individual temporarily present in the U.S.” as an individual who is present in the U.S. on or after February 1, 2020, and on or before April 1, 2020, and is either: (a) an NRA; or (b) a U.S. citizen or lawful permanent resident who had a tax home as defined in U.S. Tax Code Section 911(d)(3) outside the U.S. in 2019 and reasonably expects to have a tax home outside the U.S. in 2020. It further clarified that relief provided in Revenue Procedure 2020-20 is applicable in determining the nonresident status of an alien.
Second, assuming a U.S. tax treaty applies, if an NRA or FC is engaged in USTB (taking into account the application of the treatment in the first question), but otherwise does not carry on such USTB through a PE under the applicable tax treaty, will the NRA or FC be treated as conducting business through a PE, if those services or activities would not have been conducted in the U.S., but for the COVID-19 Emergency Travel Disruptions?
The IRS advised that during an Affected Person's COVID-19 Emergency Period, services or other activities performed by individuals temporarily present in the U.S. will not be taken into account to determine whether the NRA or FC has a PE. Similar to the answer to the first question, this only applies if the activities were performed in the U.S. solely due to COVID-19 Emergency Travel Disruptions.
In both cases, the IRS requires that Affected Persons retain contemporaneous documentation with respect to the following: (a) establishing the period chosen as the COVID-19 Emergency Period; and (b) the fact that the relevant business activities conducted by individuals during the COVID-19 Emergency Period would not have been undertaken in the U.S., but for the COVID-19 Emergency Travel Disruptions. Such documents should be provided by the Affected Person upon request by the IRS.
Further, in order for Affected Persons to avail of benefits and protections, such as those relating deductions, statutes of limitations and claiming tax traty-based relief, they are allowed to make protective filings of their annual U.S. tax returns, even if they believe they are not required to file for the 2020 taxable year because they were not engaged in a USTB.
Finally, it is worth noting that both tests are met if “services or activities would not have been conducted in the U.S., but for the COVID-19 Emergency Travel Disruptions”. On the flipside of this, if the activity could only be conducted or performed in the U.S. such as, visiting or meeting with a U.S.-based client, then, by definition, that activity will fail this requirement.
Footnotes:
- IRS Provides Relief for Stranded Travelers Impacted by COVID-19).
