SERVICE RULES THAT TRANSPORTATION INCOME OF TURKISH PERSONS WILL BE EXEMPTED RECIPROCALLY FROM U.S. TAXATION.

Rev. Rul. 87-18

ISSUE

Whether an exemption from taxation in Turkey, provided by the Government of Turkey in Turkish Decree No. 86-11330, for certain transportation profits of United States persons is an equivalent exemption under sections 872 and 883 of the Internal Revenue Code of 1986, so that certain transportation income of Turkish persons will be exempted reciprocally from United States taxation.

FACTS

Turkey has enacted Turkish Decree No. 86-11330, effective January 1, 1987, which provides generally that profits derived by United States persons from sources in Turkey from the operation of ships or aircraft shall not be taxable in Turkey. Under the decree, individuals or corporations are taxed in Turkey as follows:

A) Profits derived from sources in Turkey in respect of shipping or air transport of passengers, goods or luggage by corporations which are organized in the United States, are more than 50 percent owned, directly or indirectly, by individuals who are residents of the United States or citizens of the United States, and are taxed according to Articles 18 and 19 of the Turkish Corporation Tax Law No. 5422, shall be subject to corporation tax at a rate of (0) zero percent.

B) The withholding tax under the provisions of Subparagraph 7 of Paragraph A of Article 94 and Subparagraph 4 of the second paragraph of Article 75 of the Turkish Income Tax Law No. 193, shall be applied at a rate of (0) zero percent for the United States corporations which are specified above in paragraph A.

C) Profits derived from sources in Turkey in respect of shipping or air transport of passengers, goods or luggage by individuals who are considered fully liable taxpayers according to the United States laws, are taxed according to the United States laws, and are taxed according to the provisions of Article 45 of the Income Tax Law No. 193, shall be subject to income tax at a rate of (0) zero percent.

The provisions of this decree are applicable to profits derived on or after January 1, 1987. The zero rate of Turkish tax is only applicable if the United States provides a reciprocal exemption.

Representatives of the Government of Turkey have indicated that the phrase "profits derived from sources in Turkey in respect of shipping or air transport of passengers, goods, or luggage" includes: (1) profits derived from the operation of ships and aircraft, and (2) profits derived from the use of containers in international traffic, if such container profits are incidental to other exempt transportation profits. Profits "in respect of shipping or air transport of passengers, goods, or luggage" do not include (1) profits derived from the rental of ships and aircraft on a full (time and voyage) basis, or (2) profits derived from the rental of ships and aircraft on a bareboat basis.

LAW AND ANALYSIS

Section 872(b)(1) of the Internal Revenue Code excludes from gross income and exempts from taxation under subtitle A the gross income derived by a nonresident alien individual from the operation of a ship or ships if the foreign country in which the alien resides grants an equivalent exemption to citizens of the United States and to corporations organized in the United States. Section 872(b)(2) provides for the same reciprocal exemption with respect to gross income derived by a nonresident alien individual from the operation of aircraft.

Section 883(a)(1) excludes from gross income and exempts from taxation under subtitle A the gross income derived by a corporation organized in a foreign country from the operation of a ship or ships if such foreign country grants an equivalent exemption to citizens of the United States and to corporations organized in the United States. Section 883(a)(2) provides for the same reciprocal exemption with respect to gross income derived by a corporation organized in a foreign country from the operation of aircraft.

Sections 872(b)(6) and 883(a)(4) provide the Service with authority to apply the exemptions provided by sections 872(b) and 883(a) separately with respect to income from different types of transportation. The Service may, therefore, exempt from taxation under sections 872 and 883 the types of transportation income exempted by Turkey.

The application of section 883(a) to foreign corporations is limited by the beneficial ownership test of section 883(c). Section 883(c) requires generally that the exemption shall not apply to any foreign corporation if 50 percent or more of the value of the stock of such corporation is owned by individuals who are not residents of such foreign country or another foreign country to which the reciprocal exemption provided by 883(a) applies.

For purposes of determining whether a corporation would be eligible to receive the benefits of a reciprocal exemption under section 883 for corporations organized in Turkey, a foreign corporation that has its legal head office registered in Turkey under the Turkish Code of Commerce would be considered organized in Turkey. For purposes of section 883(c), the Government of Turkey would be considered the ultimate owner of any stock it holds in a foreign corporation, and the value of such stock would be included in calculating the beneficial ownership of the corporation. For these purposes, the Government of Turkey would not be treated as an individual resident of a foreign country other than Turkey.

HOLDING

Under the authority provided by section 872(b)(6), the Service will apply separately the exclusion provided by section 872(b) to income derived by nonresident aliens resident in Turkey to exempt those items of gross income for which Turkish Decree No. 86-11330 provides an equivalent exemption. Under the authority provided by section 883(a)(4), the Service also will apply separately the exclusion provided by section 883(a) to corporations organized in Turkey to exempt those items of gross income for which Turkish Decree No. 86-11330 provides an equivalent exemption, provided that the beneficial ownership test of section 883(c) is met. For purposes of section 883(c), the Government of Turkey shall not be treated as an individual resident of a foreign country other than Turkey.

EFFECTIVE DATE

This revenue ruling applies to tax years beginning on or after January 1, 1987.