S-Corporation after Expatriation

S-Corporation after Expatriation

S-Corporation after Expatriation

S-Corporation after Expatriation: When a US citizen or Long-Term Resident formerly expatriates from the United States, they are no longer considered a US person. There are many benefits to this, especially from a tax perspective. It also means the US person now becomes a nonresident alien (NRA). As a nonresident alien, the NRA is only taxed on their U.S. sourced income and not their worldwide income. In addition, unless certain elections are made, the nonresident alien no longer has to report their foreign assets, accounts , or investments on a myriad of different international information reporting forms that are required for US persons.

There are a some downsides for investors due to the change in US Person status — especially for the entrepreneurial type who operates as an S-Corp.

S-Corporations & Nonresident Aliens

An S-Corporation is a flow-through company.

Without getting into too many complicated aspects of the company requirements, exceptions, exclusions and limitations — it is essentially a closed company thar cannot have more than 100 shareholders and one class of stock.

Most importantly is that individual shareholders must be US persons.

In other words, a nonresident alien can no longer be considered the owner of an S Corporation.

Of course, if the nonresident alien is married to a US person spouse and the shares are transferred to the US person spouse — this may quickly absolve the issue and could qualify as effective exit tax planning for the expatriate — although attribution/constructive ownership rules may apply.

Can I form a US Corporation to Hold the S-Corp Shares?

Not explicitly, since shareholders cannot be partnerships or corporations. This is a commonly misapplied strategy of forming a US Corporation on behalf of a nonresident alien in order to own shares of an S-Corp.

Can I Form a Trust to Hold the Shares?


Whereas corporations and partnerships are not eligible to be shareholders of an S Corp — certain trusts may qualify.

Depending on the way that the trust is structured, it may mimic a Corporation or at least provide the benefits of what the nonresident alien may require in order to hold the S-Corp shares.

One thing to keep in mind is now it will be a nonresident alien with a US Corporation in a trust which may have tax implications that the nonresident alien did not foresee or consider before placing the shares in a trust. 

This is why exit tax planning is crucial before expatriating.

Plan Before Exiting

In conclusion, while there are many benefits to expatriation — especially from a tax perspective — there are some downsides to consider. One major hurdle for US shareholders who own S Corporation stock is that after they relinquish their US status, they may no longer be eligible to personally own shares of an S-Corporation.

Interested in Exit Tax Planning & Expatriation Representation?

Our firm specializes exclusively in international tax and a focus on offshore compliance and expatriation.

Contact our firm today for assistance.

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