The Implications of the Force of Attraction Rule for Certain Credit Funds

The question of whether a foreign person’s income would be treated as income “effectively connected” with a trade or business in the United States (“ECI”) often invites significant confusion and challenges. The concept of “U.S. trade or business” is inherently ambiguous and fact dependent, unless a taxpayer can rely on certain statutory safe harbors. Once a foreign taxpayer is deemed engaged in a U.S. trade or business, it can be even more challenging to determine the exact scope of ECI, particularly in light of the potential application of the limited force of attraction rule under Code Sec. 864(c)(3) of the Internal Revenue Code (the “Code”).