What Is Effectively Connected Income (ECI)?
Effective Connected Income (ECI), statutorily effectively connected income, refers to United States tax income of foreign persons linked with a United States trade or business.
Also known as: Effectively Connected Income, ECI.
How Effective Connected Income (ECI) works
Effective Connected Income (ECI), properly called effectively connected income, arises when a nonresident alien or foreign corporation is engaged in a United States trade or business, meaning considerable, continuous and regular activity, and income is connected with that business, so the United States taxes the net amount at graduated rates after allowable deductions. Personal services performed in the United States generally create a US trade or business. Investment income becomes ECI only under the asset-use or business-activities test, otherwise remaining FDAP income. Treaties may limit taxation of business profits to a permanent establishment, subject to treaty terms.
Effective Connected Income (ECI) vs FDAP Income
Unlike FDAP income, taxed on gross amounts at a flat 30 percent or lower treaty rate without deductions, Effective Connected Income (ECI) is taxed on net income at graduated rates.
Example
Illustrative example: A Country A designer works for US clients entirely from Country A. Services performed outside the United States generally do not create ECI. If the designer later works on site in the United States regularly for months, that income may become ECI.
Common misconception
Myth: Any income paid by US clients is effectively connected income.
Reality: Effective Connected Income (ECI) generally depends on a US trade or business, so services performed abroad are usually foreign-source income.
Frequently asked questions
What is the difference between ECI and FDAP income?
Effective Connected Income (ECI) is taxed on net income at graduated rates after deductions, while FDAP income of nonresident aliens is taxed on gross amounts at a flat 30 percent or a lower treaty rate.
Does remote work for US clients create ECI?
Effective Connected Income (ECI) generally requires a US trade or business; personal services performed in the United States generally create one, whereas services performed entirely abroad generally do not, subject to the facts.
Related terms
- Non-Resident Alien — Taxpayer category subject to ECI rules
- Form W-8ECI — Form claiming ECI treatment for withholding
- Source of Income — Determines whether income is US-source
- Permanent Establishment (PE) — Treaty threshold limiting business profit taxation
Related guides
- Global tax reform and US digital nomads — US international tax context
- Incorporation options for location-independent entrepreneurs — Entity choices including US LLCs for non-US owners
Sources
Last verified: 2026-10-08. This entry is general information, not tax or legal advice; rules vary by country and change over time.
