Effectively Connected Income

In most cases, when a foreign person engages in a trade or business in the United States, all income from sources in the United States connected with the conduct of that trade or business is considered effectively connected with a U.S. business. FDAP income may or may not be effectively connected with a U.S. business. For example, effectively connected income (ECI) includes rents from real property if the alien chooses to treat that income as effectively connected with a U.S. trade or business.

The factors to be considered in establishing whether FDAP income and similar amounts are effectively connected with a U.S. trade or business include:

• Whether the income is from assets used in, or held for use in, the conduct of that trade or business; or

• Whether the activities of that trade or business were a material factor in the realization of the income.

Income from securities. There is a special rule determining whether income from securities is effectively connected with the active conduct of a U.S. banking, financing, or similar business.

If the foreign person’s U.S. office actively and materially participates in soliciting, negotiating, or performing other activities required to arrange the acquisition of securities, the U.S. source interest or dividend income from the securities, gain or loss from their sale or exchange, income or gain economically equivalent to such amounts, or amounts received for providing a guarantee of indebtedness, is attributable to the U.S. office and is ECI.

Withholding exemption. In most cases, you do not need to withhold tax on income for purposes of chapter 3 or 4 if you receive a Form W-8ECI on which a foreign payee represents that:

• The foreign payee is the beneficial owner of the income;

• The income is effectively connected with the conduct of a trade or business in the United States; and

• For purposes of chapter 3 withholding, the income is includible in the payee’s gross income.

This withholding exemption applies to income for services performed by a foreign partnership or foreign corporation (unless item (4) below applies to the corporation). The exemption does not apply, however, to:

1. Pay for personal services performed by an individual for purposes of chapter 3 (see Pay for Personal Serv- ices Performed, later),

38 Publication 515 (2026)

2. ECTI of a partnership that is allocable to its foreign partners (see Partnership Withholding on ECTI , later),

3. Income from the disposition of a USRPI (see U.S. Real Property Interest , later), or

4. Payments to a foreign corporation for personal services if all of the following apply.

a. The foreign corporation otherwise qualifies as a

personal holding company for income tax purposes,

b. The foreign corporation receives amounts under a

contract for personal services of an individual whom the corporation has no right to designate,

c. 25% or more in value of the outstanding stock of

the foreign corporation at some time during the tax year is owned, directly or indirectly, by or for an individual who has performed, is to perform, or may be designated as the one to perform, the services called for under the contract.

Withholding exemption for purposes of chapter 4. 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 for chapter 4 purposes. You do not need to withhold tax under chapter 4 if you receive a Form W-8ECI on which a foreign payee makes the representations described in Withholding exemptions, earlier.

Notional principal contract income. Certain payments attributable to a notional principal contract are not subject to withholding regardless of whether a Form W-8ECI is provided. However, payments of dividend equivalents (described later under Dividend equivalent ) are generally subject to withholding.

Income from a notional principal contract is subject to reporting on Form 1042-S if it is effectively connected with the conduct of a trade or business in the United States. You must treat the income as effectively connected with a U.S. trade or business if you pay the income to, or to the account of, a qualified business unit (a branch) of a foreign person located in the United States or a qualified business unit located outside the United States and you know, or have reason to know, the income is effectively connected with the conduct of a U.S. trade or business. You do not need to treat notional principal contract income as effectively connected if you receive a Form W-8BEN-E that represents that the income is not effectively connected with the conduct of a U.S. trade or business or if the payee provides a representation in a master agreement or in the confirmation on the particular notional principal contract transaction that the payee is a U.S. person or a non-U.S. branch of a foreign person.

Income paid to U.S. branch of foreign bank or insur- ance company. A payment to a U.S. branch of a foreign bank subject to regulatory supervision by the Federal Reserve Board or a U.S. branch of a foreign insurance company required to file an annual statement on a form approved by the National Association of Insurance

Commissioners with the Insurance Department of any U.S. state, a U.S. territory, or the District of Columbia is presumed to be effectively connected with the conduct of a trade or business in the United States if you have an EIN for the branch, unless the branch provides a Form W-8BEN-E or Form W-8IMY for the income. If a U.S. branch of a foreign bank or insurance company receives income that the payer did not withhold upon because of the presumption that the income was effectively connected with the U.S. branch’s trade or business, the U.S. branch is required to withhold on the income if it is in fact not effectively connected with the conduct of its trade or business in the United States. Withholding is required whether the payment was collected on behalf of other persons or on behalf of another branch of the same entity.