26 Apr Will incorporating a Mexican subsidiary affect my company’s S-Corp status?
No. S-Corp status is a tax designation, whereby a corporation’s owners are taxed on their personal income and the corporation itself is not taxed. The corporation is therefore treated as a “pass-through” entity. Beginning in 1996, an S-Corp may own 80% or more of a domestic or foreign subsidiary without sacrificing its S-Corp status. However, the foreign subsidiary will not be able to make an S-Corp designation for tax purposes in the United States. By operating a subsidiary, a business can avoid being taxed on income from the foreign jurisdiction so long as the income is reinvested abroad and not repatriated to the United States in the form of Dividends.
The Internal Revenue Code at §1362(b)(1) and (b)(3) outlines the requirements for an S-Corporation and its subsidiaries. S-Corporations:
May not have more than 100 shareholders
- May not have a non-resident alien shareholder
- May not have a shareholder that is not a natural person (other than an estate, trust, or other organization),
- May not have more than one class of stock.
- Corporations engaged in certain activities such as insurance may not elect the S-Corp status either.
The code provides that so long as the S-Corp continues to meet the above criteria, it will not loose its S-Corp status. Incorporating a subsidiary in Mexico will not disqualify the S-Corp’s status. However, the Mexican subsidiary should not acquire stock in the United States Corporation in exchange. The subsidiary as owner of stock will violate bullet three above [§1362(b)(1)(B)]