Can a Foreigner be a Shareholder of a S-Corporation?

Although the tax code permits certain foreigners to be shareholders of S-corporations, we do not casually suggest it, because a foreigner who does not stay in the country long enough during a particular year can inadvertently cause the corporation to lose its status as a S-corporation.  This can cause disastrous and unfair tax consequences to the other S-corporation shareholders.

The tax code provides that a S-Corporation must not have a nonresident alien as a shareholder (see, IRC Section 1361(b)(1)(C)).  Treasury Regulation Section 1.1361-1 states that “a corporation having a shareholder who is a ‘nonresident alien’ as defined in Section 7701(b)(1)(B) does not qualify as a small business corporation.”  Section 7701(b)(1)(B) provides — in typical IRC legalese — that a person is a nonresident alien if he isn’t a resident alien.  Having a particular visa has no impact on whether a non-resident alien can be a S-corporation shareholder.  Only a green card or meeting the IRS’ “substantial presence test” enables an alien to be eligible to be an S Corporation shareholder.

Section 7701(b) and the implementing Treasury Regulations (i.e., Section 301.7701(b)-1) provides that to be a resident alien (and thus an eligible S corporation shareholder) one either has to have a green card or meet the substantial presence test by being in the US for at least 183 days during a three year period that includes the current year.  This is the only area where having a certain visa may be relevant.  Section 7701(b)(3)(D)(i) provides that an individual shall not be treated as being present in the US on any day if such individual is an exempt individual.  Section 7701(b)(5) defines exempt individuals as those who are a foreign government-related individuals (including those temporarily present in the US on a visa which the IRS determines represents full-time diplomatic or consular status), teachers, trainees, students or professional athletes temporarily in the US to compete in a charitable sports event.  Thus, the visa classification of these types of individuals could, actually, hinder them meeting the substantial presence test.