Income and US tax filings by non-US persons

When a non-US person engages in a trade or business in the United States, the income they earn from sources within the US connected to that trade or business is considered Effectively Connected Income (ECI).

To be treated as ECI, individuals must generally be engaged in a trade or business during the tax year. This typically involves performing personal services in the US. Whether someone is engaged in a US trade or business depends on the nature of their activities. Deductions are allowed against ECI, and it is taxed at graduated rates or a lower rate if there is a tax treaty in place.

Certain types of income, known as Fixed, Determinable, Annual or Periodical (FDAP) income, are treated as ECI due to specific provisions in the Internal Revenue Code. Additionally, some investment income may be treated as ECI if it satisfies either the Asset-Use Test or the Business Activities Test. However, only under specific circumstances can foreign source income be considered effectively connected to a US trade or business.

The following categories of income are typically connected to a US trade or business:

Nonimmigrants: Nonimmigrants holding an “F”, “J”, “M” or “Q” visa are considered engaged in a trade or business in the US. The taxable portion of any US source scholarship or fellowship grant received by nonimmigrants in these visa categories is treated as effectively connected with a trade or business in the US.
Partnership members: If you are a member of a partnership that engages in a trade or business in the US at any time during the tax year, you are considered to be engaged in a trade or business in the US.
Personal services: Performing personal services in the US generally constitutes engagement in a US trade or business.
Business owners: Operating a business in the US that sells services, products or merchandise is, with certain exceptions, considered engagement in a trade or business in the US. Profit from the sale of inventory property in the US, whether purchased domestically or abroad, is also treated as effectively connected trade or business income.
Real property: Gains and losses from the sale or exchange of US real property are, regardless of their classification as capital assets, taxed as if they are connected to a trade or business in the US. Income from the rental of real property can also be treated as ECI if the taxpayer so elects.

It’s important to note that trading in stocks, securities or commodities through a US resident broker or agent does not constitute engagement in a trade or business in the US.

If you would like to speak to us about any of the issues raised above, please contact us.