Characterization of Income of Nonresident Aliens
For U.S. tax purposes the income of a nonresident alien is divided into two categories as follows:
FDAP — Fixed, Determinable, Annual, or Periodical
Basic Definition: All U.S.—Source gross income includible in income under Section 61 of the Internal Revenue Code, as adjusted by other sections of the Code, which exclude certain items from gross income.
- Usually consists primarily of passive investment income — interest, dividends, rents, royalties, etc.; but, in theory, may consist of any kind of U.S. source income attributable to a foreign person.
- Deductions are not allowed against FDAP income, and it is taxed at a flat 30% rate or lesser rate under a tax treaty.
- The FDAP income of an individual is reported on page 4 of form 1040NR.
ECI — Effectively Connected Income
- Income which is Effectively Connected with a U.S. Trade or Business;
- The income must relate to an activity which is considered to be a trade or business under the principles of U.S. tax law (including the personal service income of an individual who performs services in the United States);
- Investment income will be considered to be ECI if:
- The income must be associated with U.S. assets used in, or held for use in, the conduct of that trade or business; or
- The activities of that trade or business conducted in the United States are a material factor in the realization of the income.
- Deductions are allowed against ECI, and net ECI is taxed at the same graduated rates used by U.S. citizens.
- The ECI of an individual is reported on page 1 of form 1040NR.
Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.