Non-US Shareholders / Non-Resident Alien Taxation
If you are a non-US shareholder of a corporation, then you have likely faced some difficulties when it comes to tax considerations. Maybe you have also noticed that it can be difficult to discern the difference between a US shareholder and a non-US shareholder.
This article will provide general information on what it means to be a non-US shareholder of a corporation along with some of the tax considerations. This article specifically focuses on individual shareholders, not corporate shareholders.
What does it mean to be a non-US shareholder?
The Internal Revenue Service (IRS) treats foreign persons and US persons differently for tax purposes. A foreign person can include a nonresident alien, foreign corporation, foreign partnership, and other non-US person. For non-US shareholders, this distinction is very important. Specifically, for foreign individuals, the distinction between being a resident alien and a non-resident alien is necessary to understand for tax purposes.
There are two main ways in which a foreign individual can be considered a resident alien: the Substantial Presence Test (SPT) and the Green Card Test.
Substantial Presence Test
Generally, the SPT provides that an individual who has been physically present in the US for at least 31 days of the year in question and for at least 183 days over the previous three years is considered a resident alien for tax purposes. It is important to highlight that only days in which an individual is physically present in the US will count towards the time periods.
There are also a number of exceptions that apply, as well as some further considerations.
Green Card Test
The second way in which a foreign individual can be considered a resident alien for tax purposes is through the green card test. Generally, the green card test provides that an individual who is given lawful permanent residency status at any time during a calendar year is a resident for tax purposes.
If a foreign individual does not meet the SPT test or the green card test, then the foreign individual would generally be considered a non-resident alien.
Taxation for Resident Aliens Versus Non-Resident Aliens
Foreign Shareholders with Resident Alien Status
A foreign individual with resident alien status is generally subject to the same taxation as a US citizen. This means that resident alien shareholders are considered US shareholders for tax purposes and are required to pay federal income tax on any earnings from dividends and capital gains.
Foreign Shareholders with Non-Resident Alien Status
Generally, non-US shareholders of corporations that do not have resident alien status will not be subject to US federal income tax. However, there are certain exceptions.
One important exception involved with businesses having foreign owners is if a nonresident alien and the business entity are engaged in a trade or business in the US and the trade or business is effectively connected to the shareholder’s income, capital gains or dividends. To be considered an individual shareholder that is engaged in trade or business in the US, it is important to consider all the facts and circumstances linked to the trade or business. Note that effectively connected income typically comes from US sources.