What is FDAP?

The IRS categorizes FDAP as taxable income other than gains from sale of real or personal property and items excludable from gross income (tax exempts, scholarships, etc.) or stock and securities trades through a US broker.

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It is very important to test every FIRPTA disposition for FDAP income which is a form of Effectively Connected Income (ECI) and know how to report it to the IRS or suffer an audit well after the transaction has closed and you think you are home free, because different tax rates and rules apply.

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Income is fixed when you can determine payments or the basis of amounts to be paid ahead of time, such as in periodic payments paid from time to time. FDAP does not have to be paid at regular intervals, such as monthly, quarterly, annually or any other interval. It doesn't matter if these payment intervals can be increased or decreased. 

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Certain kinds of FDAP may be ECI for income purposes but not treated as ECI for withholding purposes!

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​The IRS lists the following included in FDAP income items:

• Compensation for personal services

• Dividends

• Interest

• Original issue discount

• Pensions and annuities

• Alimony

• Real property income, such as rents, other than gains from the sale of real property

• Royalties

• Scholarships and fellowship grants

• Other grants, prizes and awards

• Sales commission paid or credited monthly

• Commission paid for a single transaction

• The distributed net income of an estate or trust that is FDAP income, and that must be distributed currently, or has been paid or credited during the tax year, to a nonresident alien beneficiary

• Distribution from a partnership that is FDAP income, or such an amount that, although not actually distributed, is included in the gross income of a foreign partner

• Taxes, mortgage interest, or insurance premiums paid to, or for the account of, a nonresident alien landlord by a tenant under the terms of a lease

• Prizes awarded to nonresident alien artists for pictures exhibited in the United States

• Purses paid to nonresident alien boxers for prize fights in the United States

• Prizes awarded to nonresident alien professional golfers in golfing tournaments in the United States