If a non resident and non citizen (NRNC) trades securities in a registered broker dealer account, they pay withholding taxes on dividends, but they do not pay US tax on capital gains. If the NRNC instead has an interest in a US-based limited partnership that passes through capital gains on a Schedule K-1, is the NRNC taxed on those capital gains? I read in a trader tax book that any income from a US based limited partnership is recharacterized as effectively connected income (ECI) of a US-based business, and would be taxed. What's not clear to me is does this specifically mean that capital gains income clearly shown as capital gains on the Schedule K-1 must be treated as ECI on the 1040NR and subject to a 30%+ tax rate?
If yes, I guess that would explain why so many hedge funds end up having to create both a US based partnership as well as an offshore partnership.