COVID-19: IRS Provides “US Trade or Business” / “Permanent Establishment” Relief for Foreign Businesses

As COVID-19 continues to wreak havoc across the globe, individuals and companies are being faced with new and very difficult challenges.  One of the challenges involves unanticipated tax consequences that may arise as a result of travel disruptions and unintended stays in the US due to travel lock-downs.  My earlier blog posts explained the US Internal Revenue Service (IRS) relief provided to US individuals wishing to use the “foreign earned income exclusion” benefits and to foreigners who wish to avoid US tax resident status, both groups being impacted by the pandemic. Businesses are also facing US tax considerations related to their employees or agents who may be working remotely in the US and who cannot leave due to government travel restrictions.

Today’s post explains the IRS relief to foreign businesses with agents or employees in the US that, due to the COVID emergency may cause the business to become subject to US tax on account of the agent’s/employee’s prolonged presence and activity in the US. The IRS has not said much, and the only guidance we have to date is in a short FAQ promulgated on April 21, 2020.

Brief Summary

The IRS introduced the problem by explaining a few background points, which I will simplify.  In a nutshell, foreign persons  (individuals or entities) can be taxed in the US if they are considered “engaged in a US trade or business” (USTB).  If engaged in a USTB, the business is taxable on its business income that is effectively connected with that USTB.  Tax filings are required and there is always the risk that the IRS may try to tax more income than is reported as being effectively connected with the USTB.

The activities in the US of agents or employees working for the foreign person are attributed to that foreign person and are determining factors whether a USTB is being conducted. If certain conditions are met, the relief provided in the FAQ will disregard certain days of physical presence in making the USTB determination (as well as for tax treaty purposes whether a “permanent establishment” or PE is being maintained) .  Essentially, in order for the relief to apply, the individuals performing the US services or other activities must be temporarily in the United States solely due to COVID-19 Emergency Travel Disruptions and their services or other activities would not have occurred in the US “but for” these COVID-19 disruptions.

Now, for more detail!

US Trade or Business / Permanent Establishment

These are concepts central to the FAQ.  They are important in order to understand the COVID-19 relief being provided by the IRS.


The US Internal Revenue Code does not clearly define what is meant by being engaged in a USTB. The case law indicates that a foreign person’s business activity will not constitute a USTB unless the activity is considerable, continuous and carried out on a regular basis. Unfortunately, the cases are old, ambiguous and involve fact patterns that often are not directly applicable to many situations. Despite the case law language requiring considerable, continuous and regular activity, some of the cases find that lower levels of activity satisfy the USTB standard, leaving little real guidance.  The IRS has taken a very strict position in published rulings that activities beyond mere passive receipt of income, if conducted in the United States, are sufficient to constitute engaging in a USTB.  Furthermore, a foreign business is engaged in a USTB if it is so engaged at any time during the tax year.  Therefore, an annual determination as to whether the taxpayer is engaged in a USTB needs to be made.  It is possible to be engaged in a USTB in one year, but not in the next.


A treaty can provide extra insulation if the home country of the foreign business has entered into a tax treaty with the US.  The treaty usually provides a higher threshold for taxation than the USTB standard. This higher threshold is commonly referred to as a “permanent establishment”.  The business operations of the home country entity will be protected from US taxation as long as those activities do not create a PE in the US. Generally, the PE standard is met if the foreign enterprise has an office or other physical facility in the US, or maintains inventory there or uses a dependent agent in the US who exercises habitual authority to conclude contracts on behalf of the business.

IRS COVID-19 Relief

The IRS released guidance is in the form of its brief FAQ.  The guidance provides that a nonresident alien or foreign corporation (whether directly or indirectly through a partnership) 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 carried out in the US will not be taken into account in determining whether the nonresident alien or foreign corporation is engaged in a USTB. The IRS makes clear that this exception is contingent on such activities being performed by one or more individuals who are temporarily present in the United States and that the activities would not have otherwise been performed in the United States “but for” COVID-19 disruptions. For purposes of the FAQs, an “individual temporarily present in the United States” means an individual who is present in the United States on or after February 1, 2020, and on or before April 1, 2020, and is a nonresident alien, or a US citizen or lawful permanent resident who had a “tax home” outside the United States in 2019 and reasonably expects to have a tax home outside the United States in 2020. In addition, to determine the nonresident status of an alien individual, the relief provided in Rev. Proc. 2020-20 is applicable.

If a tax treaty can apply, the IRS guidance provides that during the COVID-19 Emergency Period, the services or other activities performed by individuals temporarily present in the US will not be taken into account to determine whether the nonresident or foreign corporation has a PE in the US.  Again this relief is available only if the services or other activities of these individuals would not have occurred in the US “but for” COVID-19 disruptions.

Keep Good Records

IRS warns that one should retain contemporaneous documentation to establish (i) the period chosen as the COVID-19 Emergency Period and (ii) that the relevant business activities conducted by individuals temporarily present in the US during the COVID-19 Emergency Period would not have been undertaken in the US “but for” COVID-19 Emergency Travel Disruptions. Be prepared to provide that documentation upon request by the IRS.

Protective Tax Filings

Protective tax filings may be recommended. Foreign individuals and businesses may make protective filings of their annual US income 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 (or, if a treaty applies, because they believe they did not have a PE). Protective filings can preserve certain benefits and protections that arise only when a tax return is filed (e.g., deductions, commencement of statutes of limitations, and claiming tax treaty-based relief).  If you need help navigating this difficult area of tax law, please contact me.

Watch this Space

The effects of the momentous pandemic are changing at a rapid pace.  The IRS will continue to monitor the evolving effects of the COVID-19 Emergency on nonresident alien individuals and foreign corporations and may update the FAQs as appropriate.

Posted May 6, 2020

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