Effectively Connected Income

Unlike FDAP income, the United States taxes effectively connected income ("ECI") on a net basis.  Effectively connected income is income that is effectively connected with the conduct of a U.S. trade or business.  It also includes gains from the disposition of U.S. real property under FIRPTA, which are treated as ECI.

Generally, when determining whether income constitutes effectively connected income, the IRS employs two tests: (i) the asset-use test; and (ii) the business-activities test.  The asset-use test looks to whether the income or gain is derived from assets used in, or held for use in, the conduct of the trade or business in the United States.  The business-activities test looks to whether the activities of the trade or business were conducted in the United States and were a material factor in the realization of the income or gain at issue.