Can a Foreigner, Non-citizen, Resident Alien Be an S Corp Shareholder?
Yes, under the U.S. tax code, a foreigner, non-citizen, resident alien may be an S corp shareholder. Said another way, an S corporation can be owned by a foreigner, non-citizen, resident alien. However, an S corporation generally cannot be owned by a nonresident alien.
Resident Aliens May Own S Corporations
Many owners of companies in the United States are not citizens. Informally, they are foreigners. They may want to have their company (including an LLC, partnership, or corporation) elect to be taxed as an S corp. This requires filing an S corp election. One key question is whether they are a resident alien or nonresident alien.
Under United States tax law, an S corporation generally cannot have a “nonresident alien as a shareholder.” IRC § 1361(b)(1)(C). A nonresident alien is neither a citizen of the United States nor a resident alien. Id. § 7701(b)(1)(B). A person qualifies as a “resident alien” if the person is “a lawful permanent resident of the United States,” fulfills the “substantial presence test,” or fulfills the “first-year election” requirements. Id. § 7701(b)(1)(A).
IRC § 7701(b) provides as follows:
Definition of resident alien and nonresident alien
(1) In general. For purposes of this title (other than subtitle B)—
(A) Resident alien. An alien individual shall be treated as a resident of the United States with respect to any calendar year if (and only if) such individual meets the requirements of clause (i), (ii), or (iii):
(i) Lawfully admitted for permanent residence. Such individual is a lawful permanent resident of the United States at any time during such calendar year.
(ii) Substantial presence test. Such individual meets the substantial presence test of paragraph (3).
(iii) First year election. Such individual makes the election provided in paragraph (4).
(B) Nonresident alien. An individual is a nonresident alien if such individual is neither a citizen of the United States nor a resident of the United States (within the meaning of subparagraph (A)).
See IRC § 7701(b).
IRS Instructions for the Substantial Presence Test
The IRS provides the following guidance:
You will be considered a United States resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States (U.S.) on at least:
- 31 days during the current year, and
- 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
- 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.
You were physically present in the U.S. on 120 days in each of the years 2012, 2013, and 2014. To determine if you meet the substantial presence test for 2014, count the full 120 days of presence in 2014, 40 days in 2013 (1/3 of 120), and 20 days in 2012 (1/6 of 120). Since the total for the 3-year period is 180 days, you are not considered a resident under the substantial presence test for 2014.
Days of Presence in the United States
You are treated as present in the U.S. on any day you are physically present in the country, at any time during the day. However, there are exceptions to this rule. Do not count the following as days of presence in the U.S. for the substantial presence test.
- Days you commute to work in the U.S. from a residence in Canada or Mexico if you regularly commute from Canada or Mexico.
- Days you are in the U.S. for less than 24 hours, when you are in transit between two places outside the United States.
- Days you are in the U.S. as a crew member of a foreign vessel.
- Days you are unable to leave the U.S. because of a medical condition that develops while you are in the United States.
- Days you are an exempt individual (see below).
For details on days excluded from the substantial presence test for other than exempt individuals, refer to Publication 519, U.S. Tax Guide for Aliens.
The term United States (U.S.) includes the following areas.
- All 50 states and the District of Columbia.
- The territorial waters of the United States.
- The seabed and subsoil of those submarine areas that are adjacent to U.S. territorial waters and over which the United States has exclusive rights under international law to explore and exploit natural resources.
The term does not include U.S. possessions and territories or U.S. airspace.
Do not count days for which you are an exempt individual. The term “exempt individual” does not refer to someone exempt from U.S. tax, but to anyone in the following categories:
- An individual temporarily present in the U.S. as a foreign government-related individual under an “A” or “G” visa, other than individuals holding “A-3” or “G-5” class visas.
- A teacher or trainee temporarily present in the U.S. under a “J” or “Q” visa, who substantially complies with the requirements of the visa.
- A student temporarily present in the U.S. under an “F,” “J,” “M,” or “Q” visa, who substantially complies with the requirements of the visa.
- A professional athlete temporarily in the U.S. to compete in a charitable sports event.
If you exclude days of presence in the U.S. for purposes of the substantial presence test because you were an exempt individual or were unable to leave the U.S. because of a medical condition or medical problem, you must include Form 8843, Statement for Exempt Individuals and Individuals With a Medical Condition, with your income tax return. If you do not have to file an income tax return, send Form 8843 to the address indicated in the instructions for Form 8843 by the due date for filing an income tax return.
If you do not timely file Form 8843, you cannot exclude the days you were present in the U.S. as an exempt individual or because of a medical condition that arose while you were in the U.S. This does not apply if you can show, by clear and convincing evidence that you took reasonable actions to become aware of the filing requirements and significant steps to comply with those requirements.
Closer Connection Exception to the Substantial Presence Test
Even if you passed the substantial presence test you can still be treated as a nonresident alien if you qualify for one of the following exceptions;
- The closer connection exception available to all aliens. Please refer to Conditions for a Closer Connection to a Foreign Country.
- The closer connection exception available only to students. Please refer to The Closer Connection Exception to the Substantial Presence Test for Foreign Students and Sample Letter.
To learn more, you may find this Wikipedia article helpful. In general, it is best to consult with a CPA or tax attorney before relying on online information.