Generally, a U.S. person is subject to U.S. tax on worldwide income. However, U.S. only taxes a foreign person (e.g., nonresident alien individuals and foreign corporations) on two categories of income: (1) income effectively connected with a trade or business in the U.S. (ECI); and (2) fixed, determinable, annual, or periodical income (FDAP) from sources within the U.S. that are not effectively connected with a trade or business in the United States. FDAP income consists passive investment income such as interest, dividends, rents, royalties, annuities and other income such as scholarships, grants, prizes and awards etc.
FDAP income is defined very broadly and generally includes all U.S. source income except gains derived from the sale of real or personal property and income specifically excluded from gross income such as tax-exempt interest.