As of May 2, 2020, over 40 cruise ships were dealing with positive cases of the COVID-19. The New York Times published an article on April 14, 2020, pointing out that over 80,000 crew members were stranded on 100 cruise ships. There is great uncertainty of when they may disembark. And then how to deal with the day-to-day reality of COVID-19. But from a tax perspective, the big issue that comes into play for non-US residents who are either crew members or passengers is the Substantial Presence Test for US tax residency purposes.
It raises the question: Will crew and passengers stranded on cruise ships due to COVID-19 become US tax residents if their ships are currently locked down in US territorial waters?
If US nonresidents spend enough time in the US, they can trigger the US Substantial Presence Test of residency. Nonresidents who meet the requirements of the Substantial Presence Test are considered US tax residents. As such, they become taxable in the US on their worldwide income (even if another country also taxes that income) and subject to US informational reporting requirements for foreign assets.
The US Substantial Presence Test looks at days of presence over a three-year period. To meet the Substantial Presence Test, an individual must be physically present inside the US for:
- At least 31 days during the current year, and
- At least 183 days during the 3-year period that includes the current year and the two years immediately before that, counted as follows:
- All the days you were present in the current year, and
- 1/3 of the days you were present in the first year before the current year, and
- 1/6 of the days you were present in the second year before the current year.
But what does it mean to be physically present “inside the United States”? The term includes the following areas (among others):
- All 50 states and the District of Columbia,
- The territorial waters of the US, and
- The seabed and subsoil of those submarine areas that are adjacent to US territorial waters and over which the United States has exclusive rights under international law to explore and exploit natural resources.
Based on this definition, all nonresident alien crew members and passengers could start incurring US days of presence (under the Substantial Presence Test) from the moment they entered the territorial waters of the United States. The following cruise ships are docked in the United States:
- Grand Princess – 2,422 passengers and 1,111 crew
- Costa Magica – 2,309 passengers and 945 crew
- Carnival Valor – Unknown
- Norwegian Breakaway – Unknown
- Carnival Freedom – Unknown
- Celebrity Infinity – Unknown
- Costa Favolosa – 1,009 crew
- Zaandam – 1,243 passengers and 586 crew
- Oasis of the Seas – Unknown
- Liberty of the Seas – 1,250 crew
- Coral Princess – 1,020 passengers and 878 crew
- Disney Wonder – Unknown
- Pride of America – 500 crew
- Symphony of the Seas – Unknown
- Celebrity Eclipse – Unknown
Fortunately for the crew members, the US excludes explicitly days spent as a crew member of a foreign vessel as US days of presence for purposes of the Substantial Presence Test. These individuals need to be careful to remain crew members. Once they stop being an active crew member and stay inside of the US, their days begin to count for purposes of the Substantial Presence Test.
However, nonresident individuals who are NOT current crew members may inadvertently trigger US tax residency. Nonresident individuals who are either passengers or former crew members stranded in US territorial waters should review their 2020 tax situation with a qualified tax practitioner. Tax planning will be essential to determine all of the ramifications of the Substantial Presence Test, the 60-day COVID-19 exemption under Rev. Proc. 2020-20, and the general rules of US nonresident alien taxation.
The Wolf Group has been providing US tax consulting and tax preparation services for US nonresidents and foreign nationals since 1983. Please reach out if you need assistance with this or similar tax matters.