IRS Updates List Of Countries Exempting U.S. Ship And Aircraft Operators From Income Tax

Rev. Rul. 97-31

PURPOSE

[1] The purpose of this revenue ruling is to supplement Rev. Rul. 89-42, 1989-1 C.B. 234, by providing a current list of countries that grant United States persons equivalent exemptions from tax for income from the international operation of ships and aircraft for purposes of section 872(b) of the Internal Revenue Code, section 883 of the Code, and the shipping and air transport articles in United States income tax conventions.

[2] A foreign country may grant an equivalent exemption from 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 includes a current list of such countries and summarizes the types of income that qualify for exemption.

[3] Part I of the Table summarizes equivalent exemptions under shipping and aircraft articles and capital gains articles of income tax conventions to which the United States is a party. Part I includes a summary of 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 I generally does not set forth other benefits that may be provided under articles covering business profits, rentals and royalties, and other income.

[4] Part II of the Table summarizes exemptions available in countries that have exchanged diplomatic notes with the United States that cover shipping and aircraft income.

[5] Finally, Part III of the Table provides a list of the countries for which the Service has determined, upon examination of their laws, that an equivalent exemption is granted by statute or decree, or by not imposing a tax on such income.

[6] 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 III of the Table. Since its initial review, the Service has not attempted to determine whether any of the foreign laws of the countries listed in Part III have been amended or repealed. Therefore, taxpayers should independently verify the accuracy of the information in Part III of the Table at such time that a determination is relevant.

[7] In addition, this list does not represent an exclusive list of countries whose domestic law provides an equivalent exemption. Other countries that have not submitted the information necessary for the Service to make a determination also may grant an exemption. In those cases, a corporation organized in, or an individual resident of, such a foreign country may qualify for an exemption even though the Internal Revenue Service has not yet made a determination to include the country in Part III of the Table.

[8] The Table is intended only as a summary. The full text of any relevant income tax convention, diplomatic note, or foreign law 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. Income tax conventions and diplomatic notes are published in the Cumulative Bulletin. The Table will be updated periodically.

CHANGES TO REV. RUL. 89-42

[9] The changes to the Table published in Rev. Rul. 89-42 are summarized as follows. In Part I, the following countries have been added to the list of countries that provide an exemption under an income tax convention: Czech Republic, India, Indonesia, Israel, Mexico, Portugal, the Russian Federation, the Slovak Republic, Spain, Sweden, and Tunisia. The following countries have entered into new income tax conventions with the United States that supersede prior income tax conventions reported in Rev. Rul. 89-42: Finland, France, Germany, and the Netherlands. The income tax conventions between the United States and the Netherlands, as extended to the Netherlands Antilles and Aruba, and between the United States and Malta have been terminated, in relevant part, effective January 1, 1988, and January 1, 1997, respectively, and have been deleted from the list.

[10] In Part II, new diplomatic notes have been exchanged with Chile, Hong Kong, India, Isle of Man, Japan, Luxembourg, Malaysia, Malta, Marshall Islands, Norway, Pakistan, Peru, and St. Vincent and the Grenadines. After the publication of Rev. Rul. 89-42, Mexico entered into a diplomatic note with the United States effective retroactively to January 1, 1987. ¹ This note, however, terminated on January 1, 1994, the general effective date of the new U.S.-Mexico Income Tax Convention. In addition, the Russian Federation entered into a diplomatic note effective retroactively to January 1, 1991. ² This note also terminated on January 1, 1994, the general effective date of the new U.S.-Russian Federation Income Tax Convention. Although a diplomatic note was signed with Bolivia, that note has never entered into force. Therefore Bolivia has been removed from the list.

[11] In Part III, Antigua and Barbuda, Barbados, Ecuador (shipping only), Israel, Qatar (aircraft only), Turks and Caicos, and the U.S. Virgin Islands have been added to the list of countries whose domestic law has been determined to provide an equivalent exemption.

[12] Consistent with past practice, the Service will entertain a request from a foreign government to make a determination that the domestic law of the country provides an equivalent exemption. However, the Service will not accept requests from individual taxpayers; instead, taxpayers should seek to have the relevant foreign government request a determination that the particular country qualifies as an equivalent exemption jurisdiction.

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

EFFECT ON OTHER REVENUE RULINGS

[14] Rev. Rul. 89-42 is supplemented.

DRAFTING INFORMATION

[15] The principal author of this revenue ruling is Patricia C. Bray of the Office of Associate Chief Counsel (International). For information regarding this revenue ruling contact Ms. Bray on (202) 622-3840 (not a toll-free call).

² This note is published at 1996-36 I.R.B. 6.

                                 TABLE

² Unless otherwise footnoted, an X indicates full exemption 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 The U.S. tax exemption is available only if the income is incidental to operating income.

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 residents only.

⁹ This treaty exempts gains derived by an enterprise of a Contracting State if the ships, aircraft or containers are owned and operated by the enterprise and the income from them is taxable only in that State.

¹⁰ Income from the bareboat rental of aircraft used in international traffic is exempt. Income from the bareboat rental of ships is also exempt if the ship is operated in international traffic and if the lessee is not a resident of, or does not have a permanent establishment in, the other Contracting State.

¹¹ See also the diplomatic notes or protocol accompanying this treaty.

¹² With regard to residents of Japan, the ships or aircraft need not be registered in Japan if the ships or aircraft are leased by such a resident.

¹³ As a result of correspondence, it was clarified that income from the international operation of ships or aircraft includes this category of income.

¹⁴ This exemption applies to aircraft only.

¹⁵ This exemption applies if the ships or aircraft are operated in international traffic by the lessee, or the rental income is incidental to the operation of ships or aircraft in international traffic by the lessor.

¹⁶ This exemption applies to shipping only.

¹⁷ This exemption is generally effective for all open years beginning on or after January 1, 1987.

¹⁸ Brazilian and Portuguese laws exempt only companies.

¹⁹ The Spanish statute exempts only corporations.

²⁰ See Rev. Rul. 87-18, 1987-1 C.B. 178.

²¹ This exemption applies if the ship or aircraft is operated in international traffic or if the rental income is incidental to income from such international operation.

²² The following income tax treaties were ratified after the publication of Rev. Rul. 89-42 and were generally effective on the following dates:

 Czech Republic                      January 1, 1993

²⁴ This treaty is effective for the eastern States of Germany (the former East Germany) from January 1, 1991.

²⁵ The U.S.-U.S.S.R. income tax treaty signed June 20, 1973, continues to apply to the countries of Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.

²⁶ The country generally imposes no income tax.

²⁷ This exemption applies if the ships or aircraft are operated in international traffic by the lessee, and the rental income is incidental to the operation of ships or aircraft in international traffic by the lessor.

²⁸ The exemption applies except where the containers are used solely between places within the other Contracting State.

²⁹ Pursuant to Notice 97-40, 1997-28 I.R.B. dated July 14, 1997, the treaty between the United States and the People's Republic of China (China) will continue to apply only to China and will not apply to the Hong Kong Special Administrative Region of the People's Republic of China.

³⁰ A dialogue is currently taking place between the Governments of the United States and Singapore concerning the scope of the reciprocal exemption.

³¹ This diplomatic note applies to Hong Kong before July 1, 1997, and pursuant to Notice 97-40, 1997-28 I.R.B. dated July 14, 1997, 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.