Rev. Rul. 89-42
1989-1 C.B. 234, 1989-14 I.R.B. 9.
Internal Revenue Service
Revenue Ruling
INTERNATIONAL OPERATION OF SHIPS AND AIRCRAFT; INCOME EXEMPT FROM TAX
Published: April 3, 1989
SECTION 872. - GROSS INCOME
(Also Section 883; 1.883-1.)
International operation of ships and aircraft; income exempt from tax. Listed are those countries that provide equivalent exemptions for income derived from the international operation of ships or aircraft.
The purpose of this revenue ruling is to assist foreign persons who derive income from the international operation of ships or aircraft in determining whether such income is exempt from United States taxation under section 872(b) or 883(a) of the Internal Revenue Code of 1986.
Gross income derived by an individual resident of a foreign country from the international operation of ships or aircraft is not included in the gross income of the nonresident alien individual and is exempt from United States tax under section 872(b)(1) and (2) of the Code, if such foreign country grants an equivalent exemption to individual residents of the United States. Section 872(b)(5) extends the exemption to income derived from the rental (on a full or bareboat basis) of ships or aircraft. Section 872(b)(6) permits the reciprocal exemption rules to be applied separately with respect to different types of income from the international operation of ships and aircraft.
Similarly, section 883(a)(1) and (2) of the Code provides that gross income derived by a corporation organized in a foreign country from the international operation of ships or aircraft is exempt from United States taxation if such foreign country grants an equivalent exemption to corporations organized in the United States. Section 883(a)(4) extends the exemption to income derived by a foreign corporation from the rental (on a full or bareboat basis) of ships or aircraft and provides that the reciprocal exemption rules may be applied separately with respect to different types of income from the international operation of ships and aircraft.
A foreign country may grant an exemption from tax by exempting persons from that tax through an income tax convention or exchange of diplomatic notes, by not imposing a tax, or by a decree or specific statutory exemption if a tax is generally imposed.
The following Table provides a list of countries which are known to grant an equivalent exemption for various types of international shipping or aircraft income. This Table is intended only as a summary. The full text of the relevant document should be consulted. It may be necessary to consult the technical explanation of an income tax convention, a protocol, or a diplomatic note accompanying a convention to determine the items of income exempted. An income tax convention between the United States and the foreign country may provide benefits under articles covering business profits, shipping and aircraft, rentals and royalties, capital gains or other income. However, to determine whether a convention provides an equivalent exemption for purposes of section 883(c), only the exemptions in articles providing for a full exemption (rather than, for example, articles that base exemption on the absence of a permanent establishment), are to be considered. This is because a full exemption is not granted under the business profits article and under many royalties, rentals, and capital gains articles. The look-through requirements of section 883(c) of the Code do not apply to a foreign corporation deriving income from the international operation of a ship or aircraft, if such income is exempt from U.S. tax under an income tax convention. However, the following income tax conventions contain a look-through provision: Australia, Article 16; Barbados, Article 22; Cyprus, Article 26; France, Article 7; Italy, Article 2(a) of the Protocol with respect to gains from the alienation of ships and aircraft; Jamaica, Article 17; Malta, Article 8(5); and New Zealand, Article 16. These provisions may differ from the requirements of section 883(c).
Part I of the Table summarizes exemptions available under income tax conventions with the United States. Part I also summarizes the requirements for the exemption, such as whether the exemption is based solely on residence or has an additional requirement of documentation or registration.
Part II of the Table summarizes exemptions available in countries that have exchanged diplomatic notes with the United States covering shipping and aircraft income.
Finally, the Service may determine, upon examination of the law of a foreign jurisdiction, that a country offers an equivalent exemption by statute or decree, or by not imposing a tax on such income. This determination will be made on a country by country basis. Part III provides a list of the countries for which such a determination has been made and summarizes the types of income that qualify for the exemption.
A taxpayer may request a ruling that a particular country qualifies as an equivalent exemption jurisdiction. For instructions see Rev. Proc. 87-4, 1987-1 C.B. 529, as modified and amplified by Rev. Proc. 88-8, 1988-4 I.R.B. 22. Any request for a ruling should include a certified English translation of any applicable foreign statute, decree, etc., supplemented by an official statement from the foreign government. The statement should indicate whether income from the international operation of ships and aircraft includes rental (on a full or bareboat basis) of ships or aircraft, rental of containers and related equipment, and gains from the sale or exchange of a vessel or aircraft used in international transportation, and whether such income is exempt only when incidental to the operation of a ship or aircraft.
This Table will be updated periodically.
The principal author of this revenue ruling is Patricia C. Bray, Office of the Associate Chief Counsel (International). For further information on the ruling, call Ms. Bray at (202) 566-6645 (not a toll-free call).
Countries
and
Territories
---------------
PART 1 TREATIES
Aruba [FN1]
Australia
Austria
Barbados
Belgium
Canada
Cyprus
Denmark
Egypt
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Jamaica
Japan [FN9]
Korea
Luxembourg
Malta
Morocco
Netherlands
Netherlands
Antilles [FN11]
New Zealand
Norway [FN9]
Pakistan [FN12]
Peoples
Republic of
China
Philippines
Poland
Romania
Sweden
Switzerland
Trinidad &
Tobago
USSR
U.K.
---------------
COUNTRIES GRANTING EQUIVALENT EXEMPTIONS FOR
INCOME FROM THE OPERATION OF
SHIPS AND AIRCRAFT IN INTERNATIONAL TRAFFIC
Basis for ExemptionTYPES OF
SHIPPING AND AIRCRAFT INCOME
EXEMPTED [FN2]
Residence Full Rental
Based Residence Residence (Time or
No & Flag & Flag Operating voyage Bare-Boat
Flag Reciprocal Unilateral Income charter) Rental
------------------------------------------------------------------------
[FN1]
X X [FN3]
X X [FN3] X [FN4] X [FN5]
X X [FN3]
X X X X
X [FN7] X X [FN5] X [FN5]
X X X X
X X X X
X X [FN3]
X X X [FN5] X [FN5]
X X X [FN5] X [FN5]
X X X X
X X [FN3]
X X [FN3]
X X X [FN5] X [FN5]
X [FN8] X X [FN5] X [FN5]
X X [FN3]
X X X X [FN5]
X X X X
X [FN10] X X [FN5] X [FN5]
X X [FN3]
X X [FN3]
X X X X
X [FN7] X [FN3]
X X [FN3]
X X [FN3]
X X X X [FN5]
X X X [FN5] X [FN5]
X X [FN3]
X X X X
X
X [FN8] X X [FN5] X [FN5]
X [FN8] X X [FN5] X [FN5] X [FN5]
X X [FN3]
X [FN3]
X [FN8] X X [FN5] X [FN5]
X X X X
X X X X [FN5]
------------------------------------------------------------------------
Container [FN5] Capital [FN5]
Rental Gains
--------------------------------
X [FN5] X [FN5]/ [FN6]
X X
X [FN5] X [FN5]
X X
X X
X [FN5]
X [FN5] X
X [FN5] X [FN5]
X [FN5] X
X X [FN5]
X [FN5] X
X X [FN5]
X X [FN5]
X [FN5] X [FN5]
X [FN5]
X X
X [FN5]
X [FN5]
X [FN5] X [FN6]
X [FN5] X
X X
X [FN5]
X [FN5] X
X
X
X X
X X [FN5]
--------------------------------
PART II EXCHANGE OF NOTES [FN16]
Argentina X X X
Bahamas X X X
Belgium X X X
Bolivia X X X
Colombia X X X
Cyprus X X X
Czechoslovakia X [FN12] X [FN3]
Denmark X X X
El Salvador X X X
[FN12]
Finland X X X
Greece X X X
Jordan X X X
Liberia X X X
Panama X X X
Singapore X X X
Sweden X X X
Taiwan X X X
Venezuela X X X
----------------------------------------------------------------------------
PART III DOMESTIC LAW
Bermuda X X X
Brazil [FN15] X X X
Bulgaria X X X X
Cayman
Islands X X X X
Chile [FN14] X X X
Netherlands X X X
Netherlands
Antilles X X X
Portugal [FN12] X X X
[FN15]
Spain [FN17] X X X
Turkey [FN13] X
Vanuatu X X X
X X [FN5] X [FN5]
X X [FN5]
X [FN5]
X X X [FN5]
X X [FN5]
X X X [FN5]
X X [FN5]
X X [FN5] X [FN5]
X X X [FN5]
X X X [FN5]
X X X [FN5]
X X [FN5] X [FN5]
X X X [FN5]
X X X [FN5]
X [FN5] X [FN5]
X X [FN5]
[FN5] X [FN5] X [FN5]
-------------------------------------------
X X [FN5] X [FN5]
[FN5] X [FN5]
X X [FN5] X [FN5]
X [FN5] X [FN5]
[FN5] X [FN5] X [FN5]
X [FN5] X [FN5]
X X [FN5] X [FN5]
X#
X [FN5]
X [FN5]
X [FN5] X [FN5]
FN1. A reciprocal exemption based on treaty relief is limited to the
available.
circumstances in which the treaty itself would be
FN2. An X indicates full exemption unless otherwise footnoted, whether or not
there is a permanent establishment.
FN3. Operating income is not defined.
FN4. Lessor must either regularly lease ships or aircraft on a full basis or
operate them in international traffic.
FN5. If incidental to operating income. In the case of the Netherlands, see
Rev. Rul. 76-568, 1976-2 C.B. 492. In the case of Germany, see Rev. Rul.
74-92, 1974-1 C.B. 373. Certain countries that have exchanged diplomatic
notes with the United States, or countries whose domestic law permits the
shipping and aircraft exemptions, may permit full exemption of income derived
from the rental of containers and gain from the sale or exchange of a vessel
or aircraft used in international traffic. However, sections 872(b) and 883
permit a reciprocal exemption only for income that is incidental to the
international operation of a vessel or aircraft.
FN6. Except to the extent depreciation has been allowed in the other country.
FN7. In the case of aircraft only, the registration may be in the country of
residence or in any country with a treaty providing for such exemption
between such country and the country of residence.
FN8. Documentation or Registration required for ships or aircraft of United
States enterprises only.
FN9. See also the diplomatic notes accompanying this treaty.
FN10. With regard to residents of Japan, the ships or aircraft need not be
registered in Japan if the ships are leased by such a resident.
FN11. This treaty terminated January 1, 1988.
FN12. This exemption applies to aircraft only.
FN13. See Rev. Rul. 87-18, 1987-1 C.B. 178.
FN14. This exemption covers shipping only.
FN15. Brazilian and Portugese law exempts only companies.
FN16. Notes signed prior to the Technical and Miscellaneous Revenue Act of 1988
(Technical Corrections) will be interpreted in accordance with Technical
Corrections.
FN17. The Spanish statute exempts only corporations.
Rev. Rul. 89-42, 1989-1 C.B. 234, 1989-14 I.R.B. 9.