Indian entities generating revenue from conducting trade or business within the U.S. have effectively connected income (ECI) and taxable in the U.S. Broadly, ECI may include income, gain or loss:
- derived from the capital assets used, or held for, or activities that are material for conducting sale or exchange of capital assets that have been accounted for through the U.S. trade or business;
- derived from sources within the U.S.;
- from sale or exchange of certain partnership interest;
- attributable to an Indian entity that has an office or other fixed place of business within the United States and consists of:
- rent or royalties for use of or privilege of using patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and similar properties;
- dividends, interest, or amounts received for the provision of guarantees of indebtedness, and is either derived in the active conduct of a banking, financing, or similar business within the U.S. or is received by a corporation the principal business of which is trading in stocks or securities for its own account;
- sale or exchange of inventory outside the U.S. through a U.S. office’s that materially participated in the sale activities.
There is no bright-line test under the U.S. code or regulations to define terms, ECI or ‘trade or business in the United States’, and therefore, the determination of whether you or your Indian entity has U.S. sourced income is on case to case basis. Please note that the above list is inclusive and other sections need should be analyzed to see if the income generated in the U.S. is effectively connected from conducting U.S. trade or business or not. For example, agency contracts between Indian entities and a U.S. agent require additional analysis of the agency relationship to assign an income as U.S. sourced or not.