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IRS FAQ addresses cross-border travel disruptions

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Tax Hot Topics newsletterThe IRS released frequently asked questions (FAQ) that provide guidance on U.S. business activities conducted by a nonresident alien or foreign corporation that would not have occurred in the United States but for COVID-19 emergency travel disruptions. The FAQs address whether such activities result in the nonresident alien or foreign corporation being treated as engaged in a U.S. trade or business (USTB) or whether a permanent establishment exists under an applicable income tax treaty.

COVID-19 has significantly limited the ability of many individuals to leave the United States. If individuals performing services or other activities are temporarily in the United States solely due to COVID-19 emergency travel disruptions, the nonresident alien or foreign corporation may become engaged in a USTB when they would not have been otherwise. USTB activities generally are subject to U.S. federal income tax unless a U.S. income tax treaty applies. If a treaty does apply, the nonresident alien individual or foreign corporation generally will not be liable for tax on the income of its USTB unless the business is conducted through a permanent establishment in the United States.

The FAQs provide that an affected person may choose an uninterrupted period of up to 60 calendar days, beginning on or after Feb. 1, 2020, and on or before April 1, 2020, to exclude from the USTB or U.S. permanent establishment determination. During this COVID-19 emergency period, services or other activities conducted in the United States will not be taken into account in determining whether the nonresident alien or foreign corporation is engaged in a USTB or has a U.S. permanent establishment, provided that such activities were performed by one or more “individuals temporarily present in the United States” and would not have been performed in the United States but for COVID-19 emergency travel disruptions.

The FAQs define an “individual temporarily present in the United States” as an individual who is in the U.S. on or after Feb. 1, 2020, and on or before April 1, 2020, and is a nonresident alien, or a U.S. citizen or lawful permanent resident who had a tax home outside the U.S. in 2019 and reasonably expects to have a tax home outside the U.S. in 2020. The FAQs further provide that the relief provided in Rev. Proc. 2020-20 is applicable in determining the nonresident status of an alien. For more details on Rev. Proc. 2020-20, see our story “IRS addresses cross-border individual tax issues.”

An affected person should retain and be prepared to provide the IRS with contemporaneous documentation to substantiate the COVID-19 emergency period and that the relevant business activities would not have been conducted in the U.S. but for COVID-19 emergency travel disruptions. They should also consider filing protective returns to safeguard their right to receive the benefit of deductions and credits in the event that they incorrectly determined that they were not engaged in a USTB or did not have a U.S. permanent establishment.

Contacts:
David Sites
Partner
Washington National Tax Office
T +1 202 861 4104

David Zaiken
Managing Director
Washington National Tax Office
T +1 202 521 1543

Cory Perry
Senior Manager
Washington National Tax Office
T +1 202 521 1509

Yasmin Dirks
Manager
Washington National Tax Office
T +1 202 521 1506

Mike Del Medico
Manager
Washington National Tax Office
T +1 202 521 1522

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