Effectively Connected Income
Non-U.S. investors that are engaged in a trade or business in the United States are taxed on their income that is “effectively connected” with that business, often referred to as “effectively connected income” or ECI.
Non-U.S. investors that are engaged in a U.S. trade or business are required to file U.S. tax returns.
Many non-U.S. investors seek to avoid ECI so that they are not required to file U.S. federal income tax returns.
If a fund is not engaged in a U.S. trade or business, a non-U.S. investor generally will not be subject to U.S. income tax on capital gains upon the sale of portfolio investments by the fund.
To avoid ECI, the fund cannot invest in flow-through operating entities, except through blocker structure.