QSBS With a Foreign Subsidiary: Assets, IP and Work Abroad

Does QSBS require US operations?

No. Section 1202 asks where the issuer is incorporated, not where it works: the issuer must be a domestic C corporation (1202(d)(1) and (e)(4)). Nothing in the statute requires US employees, US assets or US customers. No regulation or published IRS guidance addresses foreign operations under section 1202 either, so the answer rests on the statute's text and its silence.

A foreign subsidiary changes three things the company must get right:

• Gross assets. The parent and every subsidiary owned more than 50% share one limit: $75,000,000 for stock issued after July 4, 2025, $50,000,000 for stock issued earlier.
• Active business. At least 80% of assets by value must be used in a qualified business. A subsidiary owned more than 50% is looked through, so its assets and work count.
• Portfolio stock. A stake of 50% or less is not looked through. Stock in such companies can be no more than 10% of net assets.

What makes a case not simple: a flip of a foreign startup under a new US parent, IP that moved abroad, a subsidiary that is only partly owned, or a gross asset figure near the limit. Gather an org chart with ownership percentages, a balance sheet for each entity at each share issuance, and the IP assignment records.

For the company tests in general and attestation letters, see the small business stock exclusion for startups. Whether a holder's shares qualify, and for how much, is in QSBS for founders and early employees.

Can a Delaware company with a subsidiary abroad issue QSBS?

Yes, if the Delaware parent is the issuer and passes the company tests. Only the parent's shares can be qualified small business stock; shares of the foreign subsidiary never can, because it is not a domestic corporation (1202(d)(1)). Investors who buy into the subsidiary directly get no section 1202 benefit on those shares.

How does the look-through treat a foreign subsidiary the parent owns more than half of?

The parent ignores its stock in, and loans to, the subsidiary and is treated as owning its ratable share of the subsidiary's assets and doing its ratable share of the subsidiary's activities (1202(e)(5)(A)). A corporation is a subsidiary if the parent owns more than 50% of its voting power or more than 50% of the value of its stock (1202(e)(5)(C)).

So a wholly owned subsidiary's laptops, servers, cash and IP are tested as if the parent held them. A subsidiary the parent owns only partly contributes just the parent's share of its assets and activities to the active business test.

The look-through cuts both ways. If the subsidiary runs a business section 1202 excludes, such as consulting or financial services sold to outside customers, the parent is treated as conducting its share of that activity (1202(e)(3)).

What if the parent owns half or less of the foreign company?

A stake of 50% or less is not a subsidiary. The parent holds stock, not assets, and that stock is tested under the portfolio rule: the parent fails the active business test for any period when more than 10% of the value of its assets in excess of liabilities is stock or securities of companies that are not its subsidiaries, other than working capital assets (1202(e)(5)(B)).

Exactly half does not count as a subsidiary; the statute says "more than." A joint venture owned equally with a local partner falls under the portfolio rule.

Does the foreign subsidiary's cash and equipment count toward the gross assets limit?

Yes, if the parent owns more than 50% of it. All corporations in the same parent-subsidiary controlled group are treated as one corporation for the gross assets test (1202(d)(3)). That group follows section 1563(a)(1) but with the lower more-than-50% ownership test. Section 1202 does not borrow the 1563(b) rule that leaves some foreign corporations out, so a foreign subsidiary is generally included; no IRS guidance says otherwise.

Gross assets means cash plus the adjusted tax basis of other property (1202(d)(2)). The group must stay at or under the limit at all times before an issuance and immediately after it, counting the money the issuance brings in.

Three points the statute leaves open, with no published IRS guidance: how to remove intercompany loans and the parent's stock in the subsidiary so nothing is counted twice; whether a subsidiary owned less than fully counts in full or only in part; and which exchange rate converts the subsidiary's cash and basis to dollars. Decide these with a CPA before the round, and use the same method every time.

Does it matter that most engineers and the work are abroad?

Not under the statute's text. The active business test asks how assets are used, not where (1202(e)(1)). Assets used for research and experimentation, or start-up activity for a future qualified business, count as active even before the company has revenue (1202(e)(2)). For amounts paid in tax years beginning after 2024, that rule names foreign research under section 174 as well as domestic research under section 174A (Public Law 119-21, section 70302).

What matters is the kind of work. Building the company's own product is generally a qualified business. Selling engineering or consulting hours to others is in an excluded field, wherever it happens.

Work abroad still has costs outside section 1202. Whether to hire through an employer of record, contractors or the subsidiary is covered in hiring employees abroad for a US startup. The deduction for research paid abroad is in deducting software development done abroad.

What if the IP sits in the foreign subsidiary, or moves there?

IP held by a subsidiary owned more than 50% counts as the parent's ratable share of assets. Used in the business, it is an active asset under the look-through (1202(e)(5)(A)).

The risk is ownership, not location. If the parent's stake later drops to 50% or less, for example because local investors buy into the subsidiary, the IP is no longer looked through. The parent then holds only stock, and the portfolio limit applies.

Moving IP from the US parent to a foreign subsidiary has its own US tax: under section 367(d), a transfer of intangible property to a foreign corporation in a tax-free exchange is treated as a sale for payments that depend on the IP's use, received each year over its useful life. Plan that move before it happens.

Do shares from a Delaware flip count as originally issued QSBS?

Read literally, shares founders receive in a flip for their foreign company's shares do not qualify. Section 1202 counts stock acquired at original issue for money, services, or property "not including stock" (1202(c)(1)(B)). A share-for-share swap is stock for stock.

The stock-swap relief in 1202(h)(4) applies only when the shares given up were already qualified small business stock. Shares of a foreign corporation cannot be. No published IRS guidance addresses flips under section 1202, so the structure and its reading need professional judgment before closing.

A continuance of the foreign company into Delaware is no clearer: its shares were issued while it was a foreign corporation (1202(c)(1)(A) and (d)(1)).

Two points are clearer:

• Later shares. Stock the Delaware parent issues after the flip for cash or services can qualify, if the company tests are met at that issuance.
• Property, not stock. When someone transfers property other than money or stock for new shares, such as a business's assets or IP, section 1202 treats the shares as acquired on that date with a basis of at least the property's fair market value (1202(i)(1)). That value also counts in gross assets at fair market value (1202(d)(2)(B)). Section 1202(i) does not apply to a share swap.

Tax on the flip itself, in both countries, is in moving a Canadian startup under a Delaware parent.

What will the lead investor's counsel ask the company to confirm?

Counsel drafts a representation that the shares are qualified small business stock when issued, and may add a covenant to try to keep that status. The company's CPA supplies the figures behind it. With a foreign subsidiary, expect these points:

Other tax representations in the purchase agreement are covered in tax representations and the disclosure schedule.

What records back the answer each year?

Keep a dated file for every share issuance and each year-end. The active business test must be met during substantially all of each holder's holding period (1202(c)(2)(A)), so one test at closing is not enough.

• Org chart with each entity's country, vote and value ownership, and any change in ownership.
• Balance sheet for each entity at each issuance, at US tax basis in dollars, with the exchange rate used.
• Asset use list: what each entity's assets do, and which are cash held for working capital or research.
• IP assignment agreements from founders, employees and contractors in every country, and any intercompany license or transfer.
• The parent's Form 5471 for each controlled foreign subsidiary. Its Schedule F balance sheet is reported in US dollars, generally translated under US GAAP rules (IRS instructions), so it may not match the tax-basis figures the gross assets test uses. Filing it is covered in US parent of a foreign operating company.

Example

All figures are in US dollars and are illustrative.

Delaware parent with a wholly owned subsidiary in India

The parent, formed eight months ago, holds $3,000,000 in cash. Its Indian subsidiary holds laptops and servers with a $400,000 tax basis, used by engineers building the product. Group gross assets are $3,400,000, under the limit. Through the look-through, the servers and laptops are active assets of the parent, and the cash counts as active if held for working capital or research needs. Neither the country nor the team's location changes the result. Once the company is two years old, no more than 50% of its assets can count as active through that working capital rule; with cash at about 88% of assets, the 80% test would then fail unless more of the money is put to work.

Parent owns 40% of a foreign affiliate

The parent's 40% stake is worth $2,000,000. Its other assets are worth $8,000,000 and it has no liabilities. The stake is not a subsidiary, so it is portfolio stock: $2,000,000 is 20% of $10,000,000 of net assets, over the 10% limit. The parent fails the active business test for as long as that lasts. Raising the stake above 50%, or cutting its value to 10% or less of net assets, changes the result.

Canadian founders flip under a new Delaware parent

Two founders exchange all their Canadian company shares for new Delaware parent common stock. Read literally, those Delaware shares were acquired for stock, so they are not qualified small business stock, and section 1202(i) sets no basis for them. Six months later, the parent sells preferred stock to investors for $5,000,000 in cash. Those shares can qualify if group gross assets, including the Canadian subsidiary's, stay under the limit before and right after that sale, and the other company tests are met.

Different for you?

• The company tests in general, or an attestation letter: see the small business stock exclusion for startups.
• Whether your own shares qualify, and the holding tiers: see QSBS for founders and early employees.
• Form 5471 and the US tax on the subsidiary's income: see US parent of a foreign operating company.
• The flip is still being planned, or you need its tax in both countries: see moving a Canadian startup under a Delaware parent.
• Choosing an employer of record, contractors or a subsidiary abroad: see hiring employees abroad for a US startup.
• Foreign investors are joining the round: see foreign investors in a startup round.
• Gross assets near the limit, IP that moved abroad, a partly owned subsidiary or flip shares on the cap table: these need figures and judgment before counsel's representation is signed; see startup tax services.