What Is the Difference Between FDAP Income and Effectively Connected Income?
The U.S. divides all income earned by nonresident aliens into two categories: FDAP and ECI. FDAP (Fixed, Determinable, Annual, or Periodical) income is passive income, such as dividends, interest, rents, and royalties, that is taxed at a flat 30% rate with no deductions. Effectively Connected Income (ECI) is income connected to a U.S. trade or business, taxed at graduated rates (10% to 37%) with deductions allowed. The classification determines how the U.S. taxes nonresident aliens and former citizens on their U.S.-source income (IRS: NRA – Source of Income).
What FDAP income is: any U.S.-source income that is fixed (a set amount or determinable in advance), received periodically or annually, and passive in nature. Think of it as income you earn by not actively performing services or running a business in the U.S. You sit abroad, and a U.S. company sends you a dividend check. That is FDAP.
What ECI is: income that is directly connected to your active conduct of a trade or business within the United States. You are performing work, selling goods, or providing services in the U.S. that generate income. The connection to U.S. business activity is what makes it “effectively connected.”
| Feature | FDAP Income | Effectively Connected Income |
| What it is | Passive U.S.-source income (dividends, interest, rents, royalties, pensions) | Income from actively conducting a U.S. trade or business |
| Tax rate | Flat 30% (or treaty-reduced) | Graduated rates (10%-37%) |
| Deductions allowed | No | Yes (business expenses, depreciation, losses) |
| How tax is collected | Withholding at source by the payer (reported on Form 1042-S) | Self-reported on Form 1040-NR with Schedule C or other business forms |
| Treaty reduction | Often reduced to 15%, 10%, or 0% depending on income type and country | Treaty may exempt business profits if no permanent establishment |
| Net result | Gross tax, often higher effective rate | Net tax after deductions, often lower effective rate |
Common FDAP examples:
- Dividends from U.S. stocks held in a brokerage account
- Interest on U.S. bank deposits (though some bank interest is exempt for NRAs)
- Rents from U.S. property (if you do not elect to treat them as ECI)
- Royalties from U.S. intellectual property
- Pension distributions from U.S. retirement accounts (IRA, 401(k))
Common ECI examples:
- Wages earned for work performed in the U.S.
- Business profits from a U.S. sole proprietorship or partnership
- Rental income if you make the Section 871(d) election to treat it as ECI
- Gain from the sale of U.S. real property under FIRPTA (treated as ECI by statute)
Why the distinction matters for expats and former citizens:
- After renouncing citizenship, your U.S.-source dividends become FDAP (30% flat withholding) while U.S. business income becomes ECI (graduated rates with deductions). Knowing which category your income falls into determines your post-renunciation tax bill.
- The Section 871(d) election allows nonresident aliens to treat U.S. rental income as ECI rather than FDAP. This allows depreciation and expense deductions that typically yield an effective rate much lower than the 30% flat tax on gross rent.
- Treaty benefits can reduce FDAP rates significantly (U.K. treaty: 0% on qualified pension distributions; Canada treaty: 15% on dividends), but generally exempt ECI only if you have no permanent establishment in the U.S.
For more on NRA taxation, see our Taxation of Nonresident Aliens guide.
Last updated on April 29, 2026
