S corporation shareholder lives overseas and manages the business remotely, with all customers in the U.S. and no activity in their country of residence. Are they exempt from U.S. tax under §911?
No. The foreign earned income exclusion under §911 does not exempt S corporation income from U.S. taxation. S corporation income passes through to shareholders as their pro rata share of the corporation's income, losses, deductions, and credits, and this income is generally passive (distributions/dividends) rather than earned income from personal services. The §911 exclusion applies to earned income — compensation for personal services performed abroad — not to S corporation pass-through income.
Why the exemption does not apply:
Your client remains a U.S. person subject to U.S. tax on worldwide income. The fact that they manage the S corporation remotely from overseas does not convert the S corporation's pass-through income into foreign earned income eligible for the §911 exclusion. S corporations are pass-through entities: the corporation itself does not pay tax, and shareholders report their share of income on their individual returns. This income retains its character as S corporation income, not as compensation for services.
The §911 foreign earned income exclusion is designed for wages, salaries, and self-employment income earned abroad through personal services. Managing an S corporation remotely — even from a foreign country — does not create the type of earned income the exclusion targets. The income your client receives from the S corporation (whether as distributions or allocations of the corporation's earnings) is not compensation for personal services performed for a foreign employer or client.
Additional considerations:
No foreign activity in host country: The fact that your client conducts no business in their country of residence and serves only U.S.-based customers reinforces that the income is U.S.-source S corporation income, not foreign earned income.
Nonresident alien shareholders prohibited: S corporations cannot have nonresident alien shareholders. If your client were to lose U.S. citizenship or residency status, the S election would terminate. This rule underscores that S corporation shareholders are expected to remain subject to U.S. taxation.