US individuals are subject to US federal income tax on their worldwide income, regardless of source, at rates of approximately 40% (while certain long-term gains and qualifying dividends are subject to a lower rate of 20%). In contrast, nonresidents are generally only subject to US federal income tax on certain types of US source income, via a flat 30% withholding tax (absent a tax treaty, reduced rate). Foreign individuals and companies engaged in certain activities in the US are generally subject to US filing requirements and US federal income tax, at the standard US rates for income that is “effectively connected” with a US trade or business. Similarly, if a foreign corporation carries on business in the United States through a “permanent establishment,” it may also be subject to the “branch profits tax,” which imposes a 30% tax on the corporation’s after-tax US profits from a US trade or business (unless this tax is reduced or eliminated by an applicable tax treaty). Therefore, the distinction between being characterized as a US person versus a non-US person is significant for US federal income tax purposes (for foreign individuals and for the foreign corporations, employing those individuals).
US individuals are subject to US federal income tax on their worldwide income, regardless of source, at rates of approximately 40% (while certain long-term gains and qualifying dividends are subject to a lower rate of 20%). In contrast, nonresidents are generally only subject to US federal income tax on certain types of US source income, via a flat 30% withholding tax (absent a tax treaty, reduced rate). Foreign individuals and companies engaged in certain activities in the US are generally subject to US filing requirements and US federal income tax, at the standard US rates for income that is “effectively connected” with a US trade or business. Similarly, if a foreign corporation carries on business in the United States through a “permanent establishment,” it may also be subject to the “branch profits tax,” which imposes a 30% tax on the corporation’s after-tax US profits from a US trade or business (unless this tax is reduced or eliminated by an applicable tax treaty). Therefore, the distinction between being characterized as a US person versus a non-US person is significant for US federal income tax purposes (for foreign individuals and for the foreign corporations, employing those individuals).
A nonresident alien may be treated as US person for federal income tax purposes if they are characterized as a resident under applicable law. A non-US citizen will be treated as a US person if they are a lawful permanent resident of the United States at any time during the calendar year, or if they satisfy the substantial presence test. A person meets the substantial presence test if they are present in the United States for at least 31 days during the calendar year, and the number of days they are present in the United States for the current and prior two calendar years equals or exceeds 183 days. The calculation for the number of days that a person is present in the United States includes: (1) the number of days present in the current calendar year; (2) one third of the number of days present in the United States during the preceding calendar year; and (3) one sixth of the number of days present in the United States during the second preceding calendar year.
Rev. Proc. 2020-20 — The COVID-19 Medical Condition Travel Exception
Rev. Proc. 2020-20 provides relief to nonresident aliens who would not have become US residents in 2020, but for the days they remained in the United States during their COVID-19 Emergency Period. The “COVID-19 Emergency Period” is defined as a single period of up to 60 consecutive calendar days selected by an individual starting on or after 1 February 2020 and on or before 1 April 2020 during which the individual is physically present in the United States on each day. A nonresident alien who intended to leave the United States during the individual’s COVID-19 Emergency Period, but was unable to do so due to COVID-19 may exclude this period of up to 60 calendar days of presence in the United States. The Revenue Procedure further explains that each individual claiming this exception will be presumed to have intended to leave the United States and it will be presumed that they were unable to do so.
The Revenue Procedure provides this relief by treating the COVID-19 Emergency as a medical condition, under the medical condition exception to the substantial presence test. That exception provides that an individual is not considered present on any day that he or she intended to leave and was unable to do so because of a medical condition that arose while they were present in the United States. In the event that a nonresident alien remains in the United States for a period of time exceeding 60 days, due to other medical conditions, or medical problems related to the COVID-19 virus, such person may also claim the medical condition exception (in addition to the COVID-19 Medical Condition Travel Exception enumerated above), assuming that the individual satisfies the requirements to do so.
Revenue Procedure 2020-20 goes on to provide instructions for claiming the COVID-19 exception to the substantial presence test. In relevant part, it provides that if you are a nonresident alien who is not required to file a Form 1040-NR, then you will not be required to file a Form 8843, “Statement for Exempt Individuals and Individuals with a Medical Condition” to claim the exception, but you should still retain all relevant paperwork. Normally, when a nonresident alien claims the medical condition exception to the substantial presence test, they must substantiate their claim with a physician’s statement. However, Rev. Procedure 2020-20 removes this requirement, and further modifies the instructions for completing Form 8843.
As a final point, Rev. Proc. 2020-20 also extends this exception to individuals who receive personal services income, and could be exempt from withholding under an applicable income tax treaty provision. This is consistent with the standard US treaty day count computation, which does not count the days that an individual is prevented from leaving the United States due to an illness, as present in the United States. In order to claim this exception, an individual should provide his or her employer or other withholding agent a Form 8233 (“Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual”), certifying that the income is exempt.
FAQs for Individuals Claiming the Medical Condition Exception in 2020
In the subsequently issued 27 May 2020, guidance, the IRS clarified a number of points concerning the completion of Form 8843 (which modifies the requirements for completing Part V of that Form). The IRS acknowledges that “due to considerations unique to the COVID-19 Emergency, it may be difficult to obtain a signed statement by a physician … attesting to the alien individual’s inability to leave due to a medical condition.” Accordingly, this guidance provides that any alien individual who is eligible for the medical condition exception may file Form 8843 without a physician’s statement to cover a single period of up to 30 consecutive calendar days in calendar year 2020 (irrespective of whether the condition is COVID-19-related).
In order to document medical conditions without a physician’s statement, the IRS advises individuals to retain: (1) evidence of consultations with a health care providers (e.g., phone bills or a text messages), (2) receipts related to healthcare purchases, (iii) evidence of cancelled or changed travel reservations, or (iv) official medical records or written healthcare correspondence that the individual received (for example, automated responses instructing an individual to self-isolate). In the event that an individual claims multiple medical conditions, they should fill out their Form 8843 to indicate that they are claiming more than one condition.
This guidance goes on to explain that individuals should also retain evidence of their presence in the United States during the claimed COVID-19 Emergency Period (e.g., through Customs and Border Protection Form I-94, hotel receipts, and travel reservations, including records of changes or cancellations).
FAQs for Nonresident Alien Individuals and Foreign Businesses with Employees or Agents Impacted by COVID-19 Emergency Travel Disruptions
The IRS released additional guidance on 12 June 2020. That guidance provides that an individual or a company will not have their activities, which were temporarily conducted in the United States because of COVID-19, considered in determining whether they or their company are engaged in a US trade or business.
The second FAQ topic concerns nonresident aliens or foreign corporations that are engaged in a US trade or business. The guidance explains that nonresident aliens or foreign corporations would not be treated as conducting business through a US permanent establishment, due to services or other activities conducted by individuals temporarily present in the United States during the COVID-19 Emergency Period.
Conclusion
In summary, this Revenue Procedure and the subsequent guidance issued thereunder, provide relief to nonresidents by expanding an exception to the substantial presence test and by ensuring that individuals and companies will not be unduly subject to US federal income tax and filing requirements, solely because of COVID-19.
