Non-Resident Alien Shareholders: Everything You Need to Know
Non-resident alien shareholders own stock in a corporation but are not United States citizens or resident aliens.3 min read
Who Are Non-Resident Aliens?
Non-resident aliens are people living in the United States that are neither resident aliens or citizens. If a person is either not required to take or has not passed the Green Card exam, they would be a non-resident alien.
Non-resident aliens can be:
- People who are in the country for medical treatment.
After a non-resident alien has been in the country of a certain period of time, the Substantial Presence Test may give them resident alien status. A non-resident alien can only pass the Substantial Presence Test to qualify for resident alien status if they have been in the country at least 31 days in the current year and 183 days or more over a period of three years.
To calculate the 183 days, you should include all days in-country in the current year, one-third of days present in the preceding year, and one-sixth of your days present in the second year before the current year. Any days you are physically present in the United States can count towards the substantial presence test with certain exceptions.
The following circumstances do not count as substantial presence:
- Days spent commuting to the U.S. from Mexico or Canada if you reside in one of these countries and commute on a regular basis.
- A day when you are in the country for less than 24 hours because you are traveling to locations outside of the U.S.
- Days where you are working on a foreign ship and your presence in the U.S. is a requirement of your work.
- Days where a medical condition forces you to stay inside the country.
Can Non-Resident Aliens Be Shareholders in C and S Corporations
Under United States tax law, corporations can be treated in one of two ways. In many cases, the owners, or shareholders, of a U.S. corporation are not residents of the country.
With C corporations, corporate income is taxed twice. The income is first taxed directly at the corporate level. Income is next distributed to company shareholders and then taxed on their individual tax returns. Shareholders of a C corporation only have to pay taxes on distributed dividends or on gains earned by selling stock. This means that non-resident aliens can legally be shareholders of a traditional C corporation.
An S corporation is a corporation that has chosen a special tax status with the Internal Revenue Service (IRS). To make this special election, the corporation must be eligible under IRS rules and needs to file Form 2553. If a corporation wishes to choose S corporation status, they must file Form 2553 by the third month of their tax year. For instance, if the corporation uses the calendar year, Form 2553 would be due by March 15.
A corporation must qualify as a small business corporation to be eligible for S corporation status. Requirements for small business corporation qualification include:
- Possessing less than 100 shareholders.
- Being a domestic corporation, meaning a corporation formed in the United States.
- No partnerships or corporations are shareholders, only individuals, trusts, and estates.
- Only United States citizens, or those who qualify as residents under tax laws, are shareholders.
- The company only has one stock class.
Corporations typically elect S corporation status so that they can be taxed as a flow-through entity. As a flow-through entity, an S corporation's income is only taxed once at the individual level and not at the corporate level. Shareholders of S corporations are distributed income and then report this income on their individual returns. The S corporation tax election can either be involuntarily or voluntarily revoked. When S corporation status is voluntarily revoked, it means that more than half of the 100 shareholders have consented to the revocation.
An involuntary revocation occurs when the corporation no longer meets one of the S corporation eligibility requirements. For instance, if the corporation adds shareholders and the total number of shareholders rises above 100, the company would no longer be eligible for S corporation tax treatment.
Generally, if an S corporation is no longer a small business corporation, they will lose their tax status immediately. For instance, if a resident alien shareholder loses their status and becomes a non-resident alien, the company would lose S corporation status on the day that the shareholder's residency changed. Non-resident aliens cannot be S corporation shareholders.
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