The US generally taxes non-US Persons on “territorial income,” not “worldwide income.” Territorial income taxed by the US includes:

• Income effectively connected with a US trade or business (ECI), and
• US source income that is not effectively connected with US trade or business.

Absent application of a superseding tax treaty, ECI, after allowable exclusions, exemptions and deductions, is taxed at graduated rates. These are the same rates that apply to US citizens, residents and corporations (as the case may be). In the case of a foreign partner’s share of a partnership’s ECI, the ECI is subject to 35% withholding.

US source income that is not ECI such as non-bank interest and dividends is taxed at a flat 30% rate (or lower treaty rate, as discussed below) on the gross amount (no deductions). The 30% tax is paid through withholding by the payor who remits the withheld tax to the IRS.