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Understanding Effectively Connected Income (ECI) and Its Tax Implications
Definition & Meaning
Effectively Connected Income (ECI) refers to income earned by non-resident alien individuals and foreign corporations that is linked to a trade or business conducted within the United States. This income can originate from both U.S. and foreign sources, as long as it is considered effectively connected to the U.S. business activities. To qualify as ECI, the income must be derived from assets used in the U.S., and the activities of the U.S. business must play a significant role in generating that income.
Table of content
Legal Use & context
ECI is primarily relevant in the context of U.S. tax law. It is used to determine the tax obligations of foreign entities and individuals engaged in business activities in the U.S. This term is significant in international tax law, and understanding it is crucial for compliance with U.S. tax regulations. Users can manage their tax obligations using legal templates provided by services like US Legal Forms, which offer resources tailored for foreign businesses operating in the U.S.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: A foreign corporation operates a manufacturing facility in the U.S. and sells products both domestically and internationally. The income from sales in the U.S. is considered ECI.
Example 2: A non-resident alien provides consulting services to a U.S. company while residing outside the U.S. If the services are performed in the U.S., the income generated is ECI. (hypothetical example)
State-by-state differences
This is not a complete list. State laws vary, and users should consult local rules for specific guidance.
State
ECI Treatment
California
Taxed on all income effectively connected to a trade or business in the state.
New York
Similar treatment as California, with specific rules for certain types of income.
Florida
No state income tax, but federal ECI rules still apply.
Comparison with related terms
Term
Definition
Effectively Connected Income (ECI)
Income linked to a U.S. trade or business, subject to U.S. tax.
Fixed, Determinable, Annual, or Periodical Income (FDAP)
Income that is subject to a different tax treatment, typically withholding tax.
Common misunderstandings
What to do if this term applies to you
If you believe that Effectively Connected Income applies to your situation, consider the following steps:
Review your income sources to determine if they are effectively connected to a U.S. trade or business.
Consult with a tax professional who specializes in international tax law to ensure compliance.
Explore US Legal Forms for templates that can assist you in managing your tax obligations.
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