TL;DR: Passive US income paid to a foreigner — dividends, most interest, rents, royalties. No US return needed, but 30% is skimmed off the top before the cash leaves the US.

FDAP is the other bucket (the first is ECI). It covers passive payments: dividends, interest, rents, royalties, and similar recurring income. Instead of filing a return, the foreign investor gets taxed by withholding: whoever pays the money holds back 30% of the gross amount and sends it to the IRS. No deductions, no return — just a flat haircut.

Tax treaties often cut the 30% (for example to 15% or 0% on dividends, depending on the country and the investor), and big chunks of interest escape entirely through the portfolio interest exemption. Capital gains from selling stock are generally not FDAP for a foreign investor — which is why exits matter so much.

FDAP withholding on a dividendA US company pays a $100 dividend; the withholding agent keeps $30 for the IRS and sends $70 to the foreign investor.US companypays a dividendWithholding agentbank / fund adminForeign investorno US returnIRS$30 (30%)$100$70$100$30$70
Tax collected at the source, on the gross amount. A treaty can shrink the 30%.

Worked example

A Cayman feeder fund owns shares in a US company that pays it a $1,000,000 dividend. The paying agent withholds $300,000 and the fund receives $700,000. Cayman has no treaty with the US, so there is nothing to claim back.

Where you'll see it: W-8BEN / W-8BEN-E forms, Form 1042-S at year-end, and every investor-onboarding questionnaire.

Code: IRC §§ 871(a), 881, 1441, 1442 · Related: ECI, Portfolio interest exemption, Blocker

See all 53 terms in the glossary

This glossary is general information, simplified for learning. It is not tax, legal or investment advice, and real structures turn on facts and documents not shown here.