revrul2001-48

Rev. Rul. 2001-48

Released: September 27, 2001

Section 872. -- Gross Income

(Also Section 883, 894.)

26 CFR 1.872-2. Exclusions from gross income of nonresident alien individuals

(Also 26 CFR 1.883-1.)

PURPOSE

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 U.S. taxation under section 872(b) or 883(a) of the Internal Revenue Code of 1986, by providing a current list of countries that grant United States persons equivalent exemptions from tax for various categories of income from the international operation of ships and aircraft. This revenue ruling modifies and supersedes Rev. Rul. 89-42, 1989- 1 C.B. 234, as supplemented by Rev. Rul. 97-31, 1997-2 C.B. 77.

Section 872(b) of the Code provides that gross income shall not include income from the international operation of a ship or ships or aircraft, and such income shall be exempt from U.S. Federal income taxation, if the income is derived by an individual resident of a foreign country, and such foreign country grants an equivalent exemption to individual residents of the United States. Section 883(a) provides a similar exemption for such income derived by corporations organized in a foreign country that grants an equivalent exemption to corporations organized in the United States. For purposes of sections 872(b) and 883(a), a foreign country may grant an equivalent exemption from tax through an exchange of diplomatic notes or other agreement, by not imposing a tax on income from the international operation of ships or aircraft, or by a decree or specific statutory exemption.

Part A of Table I provides a list of the countries that grant exemptions through diplomatic notes exchanged with the United States.

Part B of Table I provides a list of the countries for which the Service has determined, upon examination of their domestic law, that an equivalent exemption is granted by statute or decree, or by not imposing a tax on income from the international operation of ships or aircraft. This determination is made on a country-by-country basis and relies upon information submitted to the Internal Revenue Service by the foreign country regarding the foreign law in effect at the time of the submission. The date of the Service's review is reflected in the first column of Part B of Table I. Since its initial review, the Service has not attempted to determine whether any of the foreign laws of the countries listed in Part B of Table I have been amended or repealed. Therefore, taxpayers should independently verify the accuracy of the information in Part B of Table I at such time that a determination is relevant.

Part B of Table I does not represent an exclusive list of countries the domestic law of which provides an equivalent exemption. Other countries that have not submitted the information necessary for the Service to make a determination also may grant an equivalent exemption. In those cases, an individual resident of, or a corporation organized in, such a foreign country may be treated as a resident of, or a corporation organized in, a foreign country that grants an equivalent exemption, even though the foreign country is not included in Part B of Table I. Consistent with past practice, the Service will entertain a request from a foreign government to determine whether the

domestic law of the country provides an equivalent exemption. Accordingly, taxpayers may seek to have the relevant foreign government request a determination that the particular country qualifies as an equivalent-exemption jurisdiction.

Table II provides a list of countries that grant an exemption under the shipping and aircraft article or capital gains article of an income tax convention to which the United States is a party. Table II is provided to assist a foreign corporation organized in one of the countries listed in Table I in demonstrating that it also meets the ownership requirements of section 883(c). In general, a foreign corporation can demonstrate that it meets the ownership requirements of section 883(c) if the corporation can show that more than 50 percent of the value of the stock of the corporation is owned by individuals who are residents of countries that grant an equivalent exemption to corporations organized in the United States. For the sole purpose of determining if an individual shareholder's country of residence grants an equivalent exemption for purposes of section 883(c), a foreign country will also be considered to grant an equivalent exemption if it grants such an exemption through an income tax convention with the United States.

Accordingly, Table II is relevant only in determining whether a shareholder of a foreign corporation seeking an exemption from tax under section 883 is a shareholder that qualifies under section 883(c)(1) because the shareholder's country of residence grants an equivalent exemption under an income tax convention with the United States. Table II is not relevant in determining whether a nonresident alien individual or a foreign corporation itself is eligible to claim an exemption under section 872(b) or 883(a), respectively.

Table II includes a summary of the requirements for the exemption, such as whether the exemption is based solely on residence, or, as in the case of certain older income tax conventions, the exemption has an additional requirement of documentation or registration. Table II does not set forth other benefits relating to a shipping or an air transport business that may be provided under articles covering business profits, rentals and royalties, and other income because such benefits are not relevant for purposes of section 883(c).

These Tables are intended only as a summary. The full text of any relevant diplomatic note, foreign law, or income tax convention should be consulted. It may be necessary to consult the technical explanation of an income tax convention, including any protocol thereto, any agreement, or any diplomatic note accompanying a convention, to determine the items of income exempted. Income tax conventions and diplomatic notes are published in the Cumulative Bulletin and Internal Revenue Bulletins. These Tables will continue to be updated periodically.

CHANGES TO REV. RUL. 97-31

The changes to the table published in Rev. Rul. 89-42, as supplemented by Rev. Rul. 97-31, are summarized below. The table in the prior rulings has been reorganized to clarify the limited relevance of Part I of that table, relating to treaties, as discussed above. Accordingly, in this revenue ruling Part II of the prior table (diplomatic notes) has become Part A of Table I; Part III (domestic law) of the prior table has become Part B of Table I; and Part I of the prior table (treaties) has become Table II. In Part A of Table I, Bahrain, Ethiopia, Saudi Arabia, and the United Arab Emirates have been added to the list of countries that have exchanged diplomatic notes with the United States. Although a diplomatic note was signed with Bolivia in November 1987, that note required ratification by the Bolivian Government to enter into force. The diplomatic note was ratified on March 24, 1999, and officially became effective upon publication in the official Gazette on March 31, 1999, for income earned after that date. Therefore, Bolivia also has been added to the list.

In Part B of Table I, Aruba, Peru (with respect to aircraft), and the Republic of Surinam have been added to the list of countries whose domestic law has been determined to provide an equivalent exemption.

In Table II, the following countries have been added to the list of countries that provide an exemption under an income tax convention: Estonia, Latvia, Lithuania, Slovenia, South Africa, Thailand, Turkey, the Ukraine, and Venezuela. The following countries have entered into new income tax conventions with the United States that supersede prior income tax conventions reported in Rev. Rul. 97-31: Austria, Denmark, Ireland, Luxembourg, and Switzerland.

TO CLAIM AN EXEMPTION

Taxpayers claiming an exemption from U.S. Federal income tax under section 872(b) of the Code must file a return on Form 1040NR (U.S. Income Tax Return of a Nonresident Alien). Taxpayers claiming an exemption from U.S. Federal income tax under section 883 must file a return on Form 1120F (U.S. Income Tax Return of a Foreign Corporation). Both must comply with the relevant provisions of section 8 of Rev. Proc. 91-12, 1991-1 C.B. 473.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 97-31 and Rev. Rul. 89-42 are modified and superseded.

DRAFTING INFORMATION

The principal author of this revenue ruling is Patricia A. Bray of the Office of Associate Chief Counsel (International).

For information regarding this revenue ruling contact Ms. Bray on (202) 622- 3880 (not a toll-free call).

TABLE I

Countries Currently Granting Equivalent Exemptions For Income From The

International Operation of Ships and Aircraft

-------------------------------------------------------------------------------

PART A - EXCHANGE OF NOTES [FN1]

-------------------------------------------------------------------------------

TYPES OF SHIPPING AND AIRCRAFT INCOME

EXEMPTED [FN2]

Countries And Cumulative Bulletin Or Oper- Full Bare- Cont- Capi-

Territories Internal Revenue at- Re- -B- ai- tal

Citation ing nt- oat ner Ga-

In- al Re- Re- ins

co- (T- nt- nt- [F-

me ime al al N3]

or [F-

voy N3]

age

ch-

ar-

te-

------------- ---------------------- ----------------------------------------

Argentina 1988-1 C.B. 456 X X X X X

Bahamas 1988-1 C.B. 458 X X X X -

Bahrain 2000-46 I.R.B. 475 X X X X X

Belgium 1988-1 C.B. 459 X X - X -

Bolivia [FN4] 1988-1 C.B. 460 X X X X -

Chile [FN5] 1991-1 C.B. 304 X X X [F- X -

N3]

Colombia 1988-1 C.B. 461 X X X X -

Cyprus 1989-2 C.B. 332 X X X X -

Denmark 1988-1 C.B. 462 X X X X -

El Salvador5 1988-1 C.B. 463 X X X X X

Ethiopia 1999-1 C.B. 1134 X X X X X

Fiji 1996-2 C.B. 202 X X X X X

Finland 1989-2 C.B. 334 X X X X -

Greece 1988-2 C.B. 366 X X X X -

Bulletin Hong 1995-1 C.B. 228 X X X X X

Kong [FN6]

[FN7]

India 1990-2 C.B. 316 X X X [F- X X

N3]

Isle of Man 1990-2 C.B. 317 X X X X X

[FN6]

Japan 1990-2 C.B. 318 X X X X -

Jordan 1996-2 C.B. 202 X X X X -

Liberia 1988-1 C.B. 463 X X X X X

Luxembourg 1996-2 C.B. 203 X X X X -

Malaysia 1990-2 C.B. 319 X X X [F- X X

N3]

Malta 1997-1 C.B. 314 X X X X X

Marshall 1990-2 C.B. 321 X X X X X

Islands

Norway 1991-1 C.B. 304 X X X X X

Pakistan 1991-1 C.B. 305 X [F- - - - -

[FN6] N8]

Panama 1988-2 C.B. 366 X X X X -

Peru [FN6] 1989-2 C.B. 335 X X X [F- X -

N3]

Saudi Arabia 2000-22 I.R.B. 1126 X X X X X

[FN9]

St. Vincent & 1989-2 C.B. 336 X X X X -

Grenadines

Singapore 1990-2 C.B. 323 X X X X -

Sweden 1988-1 C.B. 466 X X X [F- X -

N3]

Taiwan 1989-2 C.B. 337 X X X X -

United Arab 1998-2 C.B. 528 X X X X

Emirates

Venezuela 1988-1 C.B. 467 X X X [F- X X

N3]

FN1. Notes signed prior to the Technical and Miscellaneous Revenue Act of 1988

will be interpreted in accordance with Technical Corrections enacted by that

Act.

FN2. Unless otherwise footnoted, an "X" indicates full exemption whether or not

there is a permanent establishment.

FN3. The tax exemption is available only if the income is incidental to

operating income.

FN4. The note was ratified by the Bolivian Congress and signed by the Bolivian

President. The note and exemption officially became effective upon

publication in the official Gazette on March 31, 1999, for income earned

after that date.

FN5. This exemption applies to aircraft only.

FN6. This exemption applies to shipping only.

FN7. This diplomatic note applies to Hong Kong before July 1, 1997, and

pursuant to Notice 97-40, 1997-2 C.B. 287, to the Hong Kong Special

Administrative Region of the People's Republic of China on or after July 1,

1997. The note does not apply with respect to the People's Republic of China,

which will continue to be treated as a separate country for purposes of the

Internal Revenue Code.

FN8. Operating income is not defined.

FN9. The note is effective for all taxable years beginning on or after January

1, 1999, and for all prior open taxable years.

TYPES OF SHIPPING AND AIRCRAFT INCOME

EXEMPTED [FN2]

Countries Date Foreign Law Oper- Full Bare- Cont- Capi-

and Terri- Reviewed at- Re- -B- ai- tal

tories ing nt- oat ner Ga-

In- al Re- Re- ins

co- (T- nt- nt- [F-

me ime al al N3]

or [F-

vo- N3]

ya-

ch-

ar-

te-

Antigua & NOV 1991 X X X X X

Barbuda

[FN6]

Aruba JUNE 1999 X X X X -

Barbados OCT 1989 X X X X X

Bermuda NOV 1988 X X X X X

Brazil DEC 1988 X X X [F- X -

[FN10] N3]

Bulgaria FEB 1989 X X X X X

Cayman JAN 1987 X X X X X

Islands

[FN11]

Chile [FN6] OCT 1988 X X X X X

Ecuador DEC 1989 X X X [F- X X

[FN6] N3]

[FN12]

Israel FEB 1991 X X X X X

Netherlands OCT 1988 X X X [F- X -

N3]

Netherlands MAY 1988 X X X X X

Antilles

Peru [FN5] SEPT 1995 X X X X X

Portugal JUNE 1989 X X X - -

[FN10]

Ships

Aircra- FEB 1989 X X X - -