What is FDAP Income?

How it works

FDAP is the first of two categories the US uses to tax non-residents (the second is ECI). The mechanics, drawn straight from PwC US Corporate Withholding Taxes:

A foreign person generally is subject to 30% US tax on the gross amount of certain US-source income. All persons ('withholding agents') making US-source FDAP payments to foreign persons must report and withhold 30% of the gross. Withholding agents may apply a lower rate if the beneficial owner certifies eligibility — either by US tax-code exception or by tax treaty.

Three things make a payment FDAP:

1. US-source. Sourcing rules under §§861–865. Dividends from US corporations, interest from US obligors, royalties on US-used IP, rents on US property — all US-source. Royalties on IP used outside the US are foreign-source and not FDAP.
2. Fixed, determinable, annual or periodic. Recurring, calculable, paid as compensation for capital — passive in nature.
3. Not effectively connected with a US trade or business. If it is, it's ECI, not FDAP.

The default rate is 30% of gross (no deductions). A treaty typically reduces this to 0% (interest, often royalties), 5% / 10% / 15% (dividends), or 0% / 10% (royalties), depending on the country and the article invoked. The recipient claims the treaty rate by giving the payer a W-8BEN (individuals) or W-8BEN-E (entities).

The withholding agent reports each payment on a Form 1042-S by 15 March of the following year — even if no tax was withheld.

What is and is not FDAP

Common FDAP items: dividends from US corporations, interest from US obligors (with portfolio-interest exemption for many cases), rents on US real property (where no §871(d) net election made), royalties on US-used patents / copyrights / trademarks, scholarship and fellowship grants from US sources, certain gambling winnings, certain insurance premiums, prize money from US contests.

Not FDAP:

• Capital gains by non-resident individuals — generally exempt unless tied to ECI or US real property under FIRPTA.
• Effectively connected income — moved out of FDAP into ECI by definition, taxed on net at graduated rates.
• Foreign-source income — outside US taxing jurisdiction entirely.

Examples

• French resident receives a $5,000 US dividend. Default: 30% withholding = $1,500. With a valid W-8BEN claiming the France-US 15% treaty rate on portfolio dividends: $750 withheld, $4,250 received. Reported on a 1042-S.
• Indian author receives $50,000 of US book royalties. Royalty on IP used in the US is US-source. India-US treaty caps royalty WHT at 15%. With a W-8BEN claiming Article 12 of the treaty, $7,500 withheld instead of $15,000.

Common mistakes

• Assuming all dividends are 15%. Rates vary by treaty and by the level of cross-ownership. Switzerland 5/15, France 5/15, India 15/25, Germany 0/5/15 — all different. Read the actual treaty article.
• Skipping W-8BEN. No certification = full 30% gross. The refund route via Form 1040-NR works but is slow and document-heavy.
• Conflating FDAP with ECI. Royalties paid to a foreign licensor whose business is in the US (US office, dependent agents, customers) can be reclassified as ECI — different rate (graduated), different return (1040-NR), different deductibility.
• Forgetting portfolio interest exemption. Most US-source bank-deposit interest and "portfolio interest" paid to non-US persons is exempt from US WHT — don't over-withhold.