ECI or NEC

Hi guys,

My client who is nonresident has 100% ownership of US corporation which specializes in residential rental business.
When that corporation issues dividends, would that be considered NEC since it would fall under FDAP category?

Thank you for reading!

26 CFR § 1.871-10 - Election to treat real property income as effectively connected with U.S. business.

When you file 1040NR for your client, you can make the election. The election is only made in the initial year. Don't forget it.

When that corporation issues dividends, would that be considered NEC since it would fall under FDAP category?

Yes. The corporation should withhold US tax on the dividend, 30% or lower treaty rate. If the proper amount is withheld on the dividend, no Form 1040NR would be required.

Thank you guys!

The Sec.871 election mentioned above would not apply in this case: the corporation is a US corporation. 871 applies to NRA and NRCorps only (and not the shareholders thereof).

Agreed with @dellpaul: 30% default withholding rate on the dividends, unless a lower Treaty rate could apply.

If your Client received any other US source income and you do file a 1040NR then the dividend income needs to be shown on pg 4, the withholding on pg 2, for a net $0 effect - in addition to that other US source income.