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COUNTRIES PROVIDING EQUIVALENT EXEMPTION FOR INCOME DERIVED FROM THE INTERNATIONAL OPERATION OF SHIPS AND AIRCRAFT LISTED.

APR. 3, 1989

Rev. Rul. 89-42; 1989-1 C.B. 234

DATED APR. 3, 1989
DOCUMENT ATTRIBUTES
  • Institutional Authors
    Internal Revenue Service
  • Code Sections
  • Subject Areas/Tax Topics
  • Index Terms
    transportation income
    income exempt from tax
  • Jurisdictions
  • Language
    English
  • Tax Analysts Electronic Citation
    89 TNT 73-10
Citations: Rev. Rul. 89-42; 1989-1 C.B. 234

Supplemented by Rev. Rul. 97-31 Modified and Superseded by Rev. Rul. 2001-48 Modified and Superseded by Rev. Rul. 2008-17

Rev. Rul. 89-42

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 GRANTING EQUIVALENT EXEMPTIONS FOR

 

                     INCOME FROM THE OPERATION OF

 

              SHIPS AND AIRCRAFT IN INTERNATIONAL TRAFFIC

 

 

                                    Basis for Exemption

 

 

                          Residence

 

 Countries                Based           Residence       Residence

 

 and                      No              & Flag          & Flag

 

 Territories              Flag            Reciprocal      Unilateral

 

 _____________________________________________________________________

 

 

 PART 1 TREATIES 1

 

 

 Aruba 11                                   X

 

 Australia                 X

 

 Austria                   X

 

 Barbados                  X

 

 Belgium                                      X 7

 

 Canada                    X

 

 Cyprus                    X

 

 Denmark                                      X

 

 Egypt                     X

 

 Finland                                      X

 

 France                    X

 

 Germany                   X

 

 Greece                                       X

 

 Hungary                   X

 

 Iceland                                                      X 8

 

 Ireland                                      X

 

 Italy                     X

 

 Jamaica                   X

 

 Japan 9                                    X 10

 

 Korea                     X

 

 Luxembourg                                   X

 

 Malta                     X

 

 Morocco                                      X 7

 

 Netherlands                                  X

 

 Netherlands Antilles 11                    X

 

 New Zealand               X

 

 Norway 9                X

 

 Pakistan 12                                X

 

 Peoples Republic of

 

   China                   X

 

 Philippines               X

 

 Poland                                                       X 8

 

 Romania                                      X

 

 Sweden                                       X

 

 Switzerland                                  X

 

 Trinidad & Tobago                                            X 8

 

 USSR                                         X

 

 U.K.                      X

 

 

                           (PART I continued)

 

 

                    Types of Shipping and Aircraft

 

                           Income Exempted 2

 

 

                               Full

 

                               Rental

 

 Countries          Operating  (Time or   Bare-  Container  Capital

 

 and                 Income    voyage     Boat     Rental    Gains

 

 Territories                   charter)  Rental     5       5

 

 ___________________________________________________________________

 

 

 PART 1 TREATIES 1

 

 

 Aruba 11             X 3

 

 Australia              X         X 4    X 5     X 5     X

 

                                                            5 /6/

 

 Austria                X 3

 

 Barbados               X         X        X         X         X

 

 Belgium                X         X 5    X 5     X 5     X 5

 

 Canada                 X         X        X         X         X

 

 Cyprus                 X         X        X         X         X

 

 Denmark                X 3

 

 Egypt                  X         X 5    X 5     X 5

 

 Finland                X         X 5    X 5     X 5     X

 

 France                 X         X        X         X 5     X 5

 

 Germany                X 3                        X 5     X

 

 Greece                 X 3

 

 Hungary                X         X 5    X 5     X         X 5

 

 Iceland                X         X 5    X 5     X 5     X

 

 Ireland                X 3

 

 Italy                  X         X        X 5     X         X 5

 

 Jamaica                X         X        X         X         X 5

 

 Japan 9              X         X 5    X 5     X 5     X 5

 

 Korea                  X 3                        X 5

 

 Luxembourg             X 3

 

 Malta                  X         X        X         X         X 5

 

 Morocco                X 3                                  X 5

 

 Netherlands            X 3                        X 5

 

 Netherlands

 

   Antilles 11        X 3

 

 New Zealand            X         X        X 5     X 5     X 6

 

 Norway 9             X         X 5    X 5     X 5     X

 

 Pakistan 12          X 3

 

 Peoples Republic

 

   of China             X         X        X         X         X

 

 Philippines                                                   X 5

 

 Poland                 X         X 5    X 5     X 5     X

 

 Romania                X         X 5    X 5     X 5     X

 

 Sweden                 X 3

 

 Switzerland            X 3

 

 Trinidad &

 

   Tobago               X         X 5    X 5               X

 

 USSR                   X         X        X         X         X

 

 U.K.                   X         X        X 5     X         X 5

 

 ___________________________________________________________________

 

 

                       PART II EXCHANGE OF NOTES 16

 

 

                          Basis for Exemption

 

 

                          Residence

 

 Countries                Based           Residence       Residence

 

 and                      No              & Flag          & Flag

 

 Territories              Flag            Reciprocal      Unilateral

 

 ___________________________________________________________________

 

 

 Argentina                 X

 

 Bahamas                   X

 

 Belgium                   X

 

 Bolivia                   X

 

 Colombia                  X

 

 Cyprus                    X

 

 Czechoslovakia            X 12

 

 Denmark                   X

 

 El Salvador 12          X

 

 Finland                   X

 

 Greece                    X

 

 Jordan                    X

 

 Liberia                   X

 

 Panama                    X

 

 Singapore                 X

 

 Sweden                    X

 

 Taiwan                    X

 

 Venezuela                 X

 

 

                          (PART II continued)

 

 

                    Types of Shipping and Aircraft

 

                           Income Exempted 2

 

 

                                Full

 

                               Rental

 

 Countries          Operating  (Time or   Bare-  Container  Capital

 

 and                 Income    voyage     Boat     Rental    Gains

 

 Territories                   charter)  Rental     5       5

 

 ___________________________________________________________________

 

 

 Argentina              X         X        X         X 5     X 5

 

 Bahamas                X         X        X         X 5

 

 Belgium                X         X                  X 5

 

 Bolivia                X         X        X         X 5

 

 Colombia               X         X        X         X 5

 

 Cyprus                 X         X        X         X 5

 

 Czechoslovakia         X 3

 

 Denmark                X         X        X         X 5

 

 El Salvador 12       X         X        X         X 5     X 5

 

 Finland                X         X        X         X 5

 

 Greece                 X         X        X         X 5

 

 Jordan                 X         X        X         X 5

 

 Liberia                X         X        X         X 5     X 5

 

 Panama                 X         X        X         X 5

 

 Singapore              X         X        X         X 5     X 5

 

 Sweden                 X         X        X 5     X 5

 

 Taiwan                 X         X        X         X 5

 

 Venezuela              X         X        X 5     X 5     X 5

 

 ___________________________________________________________________

 

 

                         PART III DOMESTIC LAW

 

 

                          Basis for Exemption

 

 

                          Residence

 

 Countries                Based           Residence       Residence

 

 and                      No              & Flag          & Flag

 

 Territories              Flag            Reciprocal      Unilateral

 

 ___________________________________________________________________

 

 

 Bermuda                    X

 

 Brazil 15                X

 

 Bulgaria                   X

 

 Cayman Islands             X

 

 Chile 14                 X

 

 Netherlands                X

 

 Netherlands Antilles       X

 

 Portugal 12 /15/         X

 

 Spain 17                 X

 

 Turkey 13

 

 Vanuatu                    X

 

 

                         (PART III continued)

 

 

                    Types of Shipping and Aircraft

 

                          Income Exempted 2

 

 

                                Full

 

                               Rental

 

 Countries          Operating  (Time or   Bare-  Container  Capital

 

 and                 Income    voyage     Boat     Rental    Gains

 

 Territories                   charter)  Rental     5       5

 

 __________________________________________________________________

 

 

 Bermuda                X         X        X         X 5     X 5

 

 Brazil 15            X         X        X 5     X 5

 

 Bulgaria               X         X        X         X 5     X 5

 

 Cayman Islands         X         X        X         X 5     X 5

 

 Chile 14             X         X        X 5     X 5     X 5

 

 Netherlands            X         X        X 5     X 5

 

 Netherlands

 

   Antilles             X         X        X         X 5     X 5

 

 Portugal 12 /15/     X         X        X

 

 Spain 17             X         X                  X 5

 

 Turkey 13            X                            X 5

 

 Vanuatu                X         X        X         X 5     X 5

 

 ___________________________________________________________________

 

 

1 A reciprocal exemption based on treaty relief is limited to the circumstances in which the treaty itself would be available.

2 An X indicates full exemption unless otherwise footnoted, whether or not there is a permanent establishment.

3 Operating income is not defined.

4 Lessor must either regularly lease ships or aircraft on a full basis or operate them in international traffic.

5 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.

6 Except to the extent depreciation has been allowed in the other country.

7 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.

8 Documentation or Registration required for ships or aircraft of United States enterprises only.

9 See also the diplomatic notes accompanying this treaty.

10 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.

11 This treaty terminated January 1, 1988.

12 This exemption applies to aircraft only.

13 See Rev. Rul. 87-18, 1987-1 C.B. 178.

14 This exemption covers shipping only.

15 Brazilian and Portugese law exempts only companies.

16 Notes signed prior to the Technical and Miscellaneous Revenue Act of 1988 (Technical Corrections) will be interpreted in accordance with Technical Corrections.

17 The Spanish statute exempts only corporations.

DOCUMENT ATTRIBUTES
  • Institutional Authors
    Internal Revenue Service
  • Code Sections
  • Subject Areas/Tax Topics
  • Index Terms
    transportation income
    income exempt from tax
  • Jurisdictions
  • Language
    English
  • Tax Analysts Electronic Citation
    89 TNT 73-10
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