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Income effectively connected with the conduct of a trade or business in the United States is not a withholdable payment under chapter 4 and thus is not subject to withholding under FATCA.
Generally, when a foreign person engages in a trade or business in the United States, all income from sources within the United States connected with the conduct of that trade or business is considered to be Effectively Connected Income (ECI).
Why Does the IRS Require Form W-8BEN? The Internal Revenue Service requires W-8BEN because foreign individuals are normally subject to a 30% tax withholding, but they may qualify for a reduced rate of taxation. W-8BEN helps to establish this eligibility, although other factors also play a role, such as type of income.
The regular U.S. tax rates apply to a nonresident alien individual or foreign corporation on all income that is effectively connected with the conduct of a trade or business in the United States (IRC 871(b) and IRC 882).
If your income is Not Effectively Connected (NEC), it is generally taxed at a 30% rate. However, if your resident country has a tax treaty with the U.S., the rate may be lower or the income may be exempt from tax. Income is reported depending on whether or not it is ECI.
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Effectively Connected Income Defined Foreign workers and businesses frequently conduct business with U.S. entities. This setup helps everyone because business owners get access to more service providers and workers. Foreigners also get more work-related opportunities instead of only looking within their own countries.
Two important IRS acronyms are FDAP and ECI. FDAP refers to Fixed, Determinable, Annual and Periodic. It essentially means passive income. ECI on the other hand refers to Effectively Connected Income, which includes income generated from a trade or business connected to the U.S. The same income can qualify for both.
Effectively Connected Income is income that is effectively connected with the conduct of a trade or business in the United States and is not subject to NRA withholding. ECI is, however, often subject to reporting. In addition, partnerships are required to withhold on ECI allocated to foreign partners.