Nonresident alien individuals permitted as S corporation shareholders

(a) In general Section 1361(b)(1) is amended by adding and at the end of subparagraph (B), by striking subparagraph (C), and by redesignating subparagraph (D) as subparagraph (C). (b) Gain or loss of nonresident aliens from sale or exchange of S corporation stock Section 864(c) is amended by adding at the end the following new paragraph: (9) Gain or loss of nonresident aliens from sale or exchange of S corporation stock (A) In general Notwithstanding any other provision of this subtitle, if a nonresident alien individual owns, directly or indirectly, stock of an S corporation which is engaged in any trade or business within the United States, gain or loss on the sale or exchange of all (or any portion of) such stock shall be treated as effectively connected with the conduct of such trade or business to the extent such gain or loss does not exceed the amount determined under subparagraph (B). (B) Amount treated as effectively connected The amount determined under this subparagraph with respect to any S corporation stock sold or exchanged— (i) in the case of any gain on the sale or exchange of the S corporation stock, is— (I) the portion of the shareholder’s pro rata share of the amount of gain which would have been effectively connected with the conduct of a trade or business within the United States if the S corporation had sold all of its assets at their fair market value as of the date of the sale or exchange of such stock, or (II) zero if no gain on such deemed sale would have been so effectively connected, and (ii) in the case of any loss on the sale or exchange of the S corporation stock, is— (I) the portion of the shareholder’s pro rata share of the amount of loss on the deemed sale described in clause (i)(I) which would have been so effectively connected, or (II) zero if no loss on such deemed sale would have been so effectively connected. (C) Application of certain other rules Except as otherwise provided by the Secretary, rules similar to the rules of subparagraphs (C), (D), and (E) of paragraph (8) shall apply for purposes of this paragraph.. (c) Withholding tax Subchapter A of chapter 3 is amended by adding at the end the following new section: 1447. Withholding tax on nonresident alien S corporation shareholder’s pro rata share of effectively connected income (a) In general If— (1) an S corporation has effectively connected taxable income for any taxable year, and (2) any shareholder of such S corporation is a nonresident alien, such S corporation shall pay a withholding tax under this section at such time and in such manner as the Secretary may provide. (b) Amount of withholding tax The amount of the withholding tax payable by any S corporation under subsection (a) shall be equal to the product of— (1) the highest rate of tax specified in section 1, multiplied by (2) the aggregate pro rata shares of the effectively connected taxable income of such S corporation with respect to shareholders who are nonresident aliens. (c) Effectively connected taxable income For purposes of this section, the term effectively connected taxable income means the taxable income of the S corporation which is effectively connected (or treated as effectively connected) with the conduct to a trade or business in the United States. For purposes of the preceding sentence, the S corporation shall be allowed a deduction for depletion with respect to oil and gas wells but the amount of such deduction shall be determined without regard to sections 613 and 613A. (d) Treatment of nonresident alien shareholders (1) Allowance of credit Each nonresident alien who is a shareholder of an S corporation shall be allowed a credit under section 33 for such shareholder’s share of the withholding tax paid by the S corporation under this section. Such credit shall be allowed for the shareholder’s taxable year in which (or with which) the S corporation taxable year (for which such tax was paid) ends. (2) Credit treated as distributed to shareholder Except as provided in regulations, a nonresident alien shareholder’s share of any withholding tax paid by the S corporation under this section shall be treated as distributed to such shareholder by such S corporation on the earlier of— (A) the day on which such tax was paid by the S corporation, or (B) the last day of the S corporation’s taxable year for which such tax was paid. (e) Special rules for withholding on dispositions of S corporation stock (1) In general Except as provided in this subsection, if any portion of the gain (if any) on any disposition of stock in an S corporation would be treated under section 864(c)(9) as effectively connected with the conduct of a trade or business within the United States, the transferee shall be required to deduct and withhold a tax equal to 10 percent of the amount realized on the disposition. (2) Exception if nonforeign affidavit furnished; other special rules Except as otherwise provided by the Secretary, rules similar to the rules of paragraphs (2) through (6) of section 1446(f) shall apply for purposes of this subsection. (f) Regulations The Secretary shall prescribed such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this section, including regulations or other guidance providing— (1) that for purposes of section 6655, the withholding tax imposed under this section shall be treated as a tax imposed by section 11 and any S corporation required to pay such tax shall be treated as a corporation to which such section applies, and (2) appropriate adjustments in applying section 6655 with respect to such withholding tax.. (d) Conforming amendments (1) Section 1361(c)(2)(B)(v) is amended by striking the last sentence. (2) Section 6401(b)(2) is amended by inserting or 1447 after section 1446. (3) The table of sections for subchapter A of chapter 3 is amended by adding at the end the following new item: Sec. 1447. Withholding tax on nonresident alien S corporation shareholder’s pro rata share of effectively connected income.. (e) Effective dates (1) In general Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years beginning after December 31, 2025. (2) Gain or loss; withholding The amendments made by subsections (b), (c), (d)(2), and (d)(3) shall apply to sales, exchanges, and dispositions after December 31, 2025.