Can an S-Corp Own Interest in a Foreign Subsidiary?

Can an S-Corp Own Interest in a Foreign Subsidiary?

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Hopefully, you’ve already learned about if an S-Corp can have subsidiaries and partnerships. If so, you’re likely already familiar with the idea that an S-Corp can own QSubs, which are businesses owned entirely by the S-Corp elect to be subsidiaries under the parent S-Corp. You’ve also already learned that S-Corps can own interest in other C-Corps and can enter into general partnerships, with the S-Corp as a whole being the partner. But what about foreign subsidiaries?

As you know, there are specific rules about the eligible shareholders in an S-Corp, but that doesn’t address the question of when the roles are reversed and the S-Corp is the shareholder, which is what we’ll be diving into today.

The quick answer to the question is yes, an S-Corp can absolutely own interest in a foreign subsidiary. But like usual, there’s a little more to it. Looking for tailored advice for your business? Give us a call, and our S-Corp accountants are more than happy to talk through scenarios and give your small business a helping hand in navigating structure and taxes.

Does the Type of Foreign Entity Matter for an S-Corp to Own Interest in It?

It typically doesn’t matter what entity type the foreign company or interest is registered as. Despite all foreign entities and non-U.S. citizens being ineligible shareholders of an S-Corp, the S-Corp as a whole can still have interest in them.

S-Corps are allowed to enter into partnerships, foreign or otherwise, which can be a useful tool for small business owners to get around eligibility requirements if going into business with a foreign company or individual. S-Corps are also allowed to own interest in other companies whether they are foreign or domestic.

What if an S-Corp Owns 100% of a Foreign Subsidiary?

An S-Corp can absolutely have full ownership of a foreign subsidiary. Keep in mind though, despite the S-Corp having full ownership of the subsidiary, it will not be eligible for the QSub election like its domestic counterparts. This is because in order for a subsidiary to be eligible as a QSub, it must meet all the eligibility requirements for the S-Corp election if its owners were to hold the stock directly. And in this case, its owner is an S-Corp, which would be an ineligible shareholder for the S-Corp election.

How Do Taxes Work for an S-Corp that Owns Interest in a Foreign Subsidiary?

A foreign subsidiary would fall under the same parameters and tax treatment as a C-Corp subsidiary or a multi-member LLC respectively. This may include paying taxes at the corporate rate and being subject to pass through income limits. Even if the S-Corp owns 100% of the foreign subsidiaries, the dometic tax benefits will not apply.

If the S-Corp is considered a member of a multi-member LLC, then it will be treated as a partnership and thus taxed as partnership income to its owners. In the case of C-Corp subsidiary treatment, the S-Corp will continue filing its own return. If the S-Corp owns more than 50% of the stock, it has the right to control the subsidiary C-Corp, and if the S-Corp owns more than 80% of the stock, an affiliated group relationship is established, but the S-Corp is still excluded from filing a consolidated return with the affiliated group.

There’s a lot that goes into establishing the best business structures and it only gets more complicated the deeper you go, which is why we recommend you consult an expert who specializes in small business and S-Corp accounting. Foreign subsidiaries, QSubs, and partnerships can all be excellent work-arounds in overcoming specific S-Corp drawbacks, but the last thing you want to do is jeopardize your S-Corp filing status in the process.

Categories: tax