More on Pre Immigration US Tax Planning - Part IV - Substantial presence and exceptions

There are certain exceptions to the Substantial Presence Test:

(a) the closer connection/tax home exception; and

(b) the exception for exempt individuals or for certain medical conditions.

The closer connection/tax home exception provides that if an alien:

(i) is present in the United States for fewer than one hundred eighty-three (183) days during the

current year; and

(ii) establishes that he has a “closer connection” with a foreign country and a “tax home” in that country, then he will not be treated as a RA under the Substantial Presence Test for the current year [Section 7701(b)(3)(B)]. The commentary to Section 451 of H.R. 4170 by the House Ways and Means Committee (the “House Commentary”) clarifies somewhat the interpretation to be given to the “closer connection/tax home” exception by providing that the “maintenance of a United States abode will not automatically prevent an individual from establishing a tax home in a foreign country.”

Significantly, the “closer connection/tax home” exception will not apply with respect to an alien who has at any time during the current year, an application pending to change his status to permanent resident or who has taken other affirmative steps to apply for status as a lawful permanent U.S. resident.

The exception for exempt individuals provides that under certain circumstances, “foreign government-related individuals”, students and teachers or trainees are defined as exempt individuals and may avoid application of the Substantial Presence Test. However, the application of this exception in the case of students and teachers or trainees is limited to a certain number of years.

In addition, an alien individual who is unable to leave the United States because of a medical condition which arose while the individual was present in the United States is not treated as being present in the United States for purposes of the Substantial Presence Test on any day that such individual was unable to leave the United States because of the medical condition. It should be noted that this is a narrow exception limited to persons who require medical attention after arriving in the United States and are “unable” to leave the United States.

Finally, the Joint Statement notes that the residence definition contained is not intended to override treaty obligations of the United States. Therefore, in the event of a conflict, the treaty definition of residence will prevail. However, the Joint Statement also stated that: “...notwithstanding the treatment of the alien as a resident of the other country for treaty purposes, the Conference Agreement will treat the alien as a U.S. resident for purposes of the internal tax laws of the United States. For example, if the alien owns more than fifty percent (50%) of the voting power of a foreign corporation, the foreign corporation will be a controlled foreign corporation.”