FDAP Income

FDAP stands for fixed, determinable, annual, or periodical, which is IRS language for passive-style income. Dividends from US stocks, royalties for software or content used in the US, rent from US property, and certain interest all fall in this bucket. The name describes how the income behaves: predictable payments whose amount can be calculated, rather than profits from actively running a business.

FDAP is taxed very differently from business income. Instead of graduated rates on net profit, the US taxes a foreign person's FDAP income at a flat 30% of the gross amount, collected by withholding before the money leaves the US. No deductions apply. If a US company pays you a $1,000 royalty, the default result is $300 held back and $700 paid out. A tax treaty between the US and your country can cut that rate, sometimes to zero, but only if you claim it, usually by giving the payer a Form W-8BEN.

The FDAP and ECI buckets are the two halves of US taxation for non-residents. The same dollars cannot be both: income effectively connected with a US business is taxed as ECI on a return, at graduated rates on net profit, while FDAP is handled through flat withholding at the source with no deductions allowed. For many foreign founders running service businesses entirely from abroad, neither bucket produces any US tax at all, yet the reporting rules still apply in full.

That is the trap to avoid. Your foreign-owned single-member LLC must file Form 5472 with a pro forma Form 1120 by April 15 whenever it has reportable transactions with you, whether its income was FDAP, ECI, or entirely foreign. The $25,000 penalty under section 6038A does not care how the income was taxed. Multi-member LLCs report through Form 1065, due March 15, with partner-level withholding rules layered on top when ECI exists.