by Katherine Jean Barnes, J.D., LL.M.
IRS: FAQs for Nonresident Alien Individuals and Foreign Businesses with Employees or Agents Impacted by COVID-19 Emergency Travel Disruptions (Updated June 12, 2020)
On its website, the IRS has said that nonresident aliens and foreign corporations (and partnerships in which either is a partner), that do not have a U.S. trade or business (USTB) due to IRS-provided relief from COVID-19 travel disruptions, will not be subject to the 30% tax on US-source income that is not effectively connected to a USTB.
Nonresident alien individuals who perform services or other activities in the United States, and foreign corporations who employ individuals or engage individuals as agents to perform services or other activities in the United States, may be considered engaged in a USTB. Generally, a nonresident alien or foreign corporation that is engaged in a USTB is taxable on its business income connected to that USTB. (Code Sec. 871(b); Code Sec. 882(a))
If a US income tax treaty applies, however, the nonresident alien individual or foreign corporation generally will not be liable to tax on the income of its USTB (i.e., business profits) unless the business is conducted through a Reg. § 521.104(b)(1) permanent establishment in the US (PE).
In April, the IRS issued two FAQs ("the FAQs") regarding USTBs and PEs. The first FAQ says that a nonresident alien, foreign corporation, or a partnership in which either is a partner ("Affected Person") 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 other activities conducted in the US will not be taken into account in determining whether the nonresident alien or foreign corporation is engaged in a USTB, provided that such activities were performed by one or more individuals temporarily present in the US and would not have been performed in the US but for COVID-19 travel disruptions.
The second FAQ says that during an Affected Person's COVID-19 Emergency Period, services or other activities performed by one or more individuals temporarily present in the US will not be taken into account to determine whether the nonresident or foreign corporation has a PE, provided that the services or other activities of these individuals would not have occurred in the US but for COVID-19 travel disruptions.
In general, there is a 30% tax imposed on US-source income that:
- Is not effectively connected with the conduct of a USTB and
- Is received by a nonresident alien individual or foreign corporation. (Code Sec. 871(a), Code Sec. 881(a))
An Affected Person's income earned during the COVID-19 Emergency Period will not be subject to the 30% tax imposed under Code Sec. 871(a) or Code Sec. 881(a) solely because the Affected Person is not treated as having a USTB or PE under the FAQs.
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About the Author
Katherine Jean Barnes, J.D., LL.M., is the Deputy Director of Tax Planning at Castro & Co. Ms. Barnes is an esteemed graduate of Florida Levin College of Law as well as Samford University's Cumberland School of Law and manages the entire New York office of Castro & Co. Ms. Barnes also holds a Masters in Business Administration from Samford University's Brock School of Business.
Bluebook Citation: John Anthony Castro, COVID-19 Relief for Entities with Income Not Effectively Connected to U.S. Trade or Business, Int’l Tax Online Law Journal (Jul. 2, 2020) url.