rr-08-17.pdf

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Part II. Nonresident Aliens and Foreign Corporations

Section 883 --Exclusions from Gross Income
(Also Section 872, 894)

26 CFR §1.883: Exclusion of Income from the International Operation of Ships or
Aircraft

Rev. Rul. 2008-17

Purpose
The purpose of this revenue ruling is to assist a foreign corporation engaged in
the international operation of ships or aircraft, and its shareholders, in determining
whether the foreign corporation is organized in a country that grants an “equivalent
exemption” from tax for purposes of section 883(a) and (c) of the Internal Revenue
Code (Code). This revenue ruling is also intended to assist a nonresident alien
individual engaged in the international operation of ships or aircraft in determining
whether a country grants an equivalent exemption from tax for purposes of section
872(b) of the Code. This revenue ruling provides lists of countries that may provide
various forms of equivalent exemptions. This revenue ruling does not, however, provide
substantive guidance under section 883 of the Code. For detailed guidance, see Treas.
Reg. §1.883-0 through §1.883-5 (T.D. 9087, 2003-2 C.B. 781, as amended by T.D.
9218, 2005-2 C.B. 503), and Treas. Reg. § 1.883-0T through §1.883-5T (T.D. 9332,
2007-32 I.R.B. 300).
Background

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Section 883(a) of the Code generally provides that gross income derived by a
foreign corporation from the international operation of ships or aircraft shall not be included
in the gross income of such foreign corporation, and shall be exempt from U.S. taxation, if
the country in which the corporation is organized grants an equivalent exemption to
corporations organized in the United States (U.S. corporations). Section 883(c)(1) provides
that the exemption provided by section 883(a) is not available if 50 percent or more of the
value of the stock of the foreign corporation is owned by individuals who are not residents
of a country that grants an equivalent exemption to U.S. corporations. Thus, a foreign
corporation seeking to avail itself of the exemption from tax under section 883 must
determine whether it is organized in a country that provides an equivalent exemption to
U.S. corporations and whether its shareholders are organized in, or residents of, a country
that provides an equivalent exemption to U.S. corporations. Treasury regulation §1.883-
1(c)(3) also requires a foreign corporation claiming an exemption from tax to provide the
applicable authority for an equivalent exemption with its Form 1120-F (U.S. Income Tax
Return of a Foreign Corporation).
Treasury regulation §1.883-1(h)(1) provides that an equivalent exemption may exist
if a foreign country generally imposes no tax on income or specifically provides an
exemption under domestic law for income derived from the international operation of ships
or aircraft. Alternatively, a foreign country may exchange a diplomatic note, or enter into an
agreement, with the United States that provides for an equivalent exemption for purposes
of section 883. Treas. Reg. §1.883-1T(h)(1) broadens the definition of equivalent
exemption to include an exemption provided by income tax convention, provided the
foreign corporation meets certain additional conditions set forth in §1.883-1T(h)(3).

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Table I
Part A of Table I of this revenue ruling provides a list of countries that grant an
equivalent exemption as evidenced by a diplomatic note exchanged with the United States.
Part B of Table I provides a list of countries that grant an equivalent exemption to
U.S. corporations by statute or decree, or by not imposing tax on income from the
international operation of ships or aircraft. The Internal Revenue Service (IRS) generally
has made the determinations based upon information submitted by the foreign country
regarding its domestic law in effect at the time of the submission. The date of the IRS's
review of the foreign country’s law is reflected in the first column of Part B of Table I. The
list of countries included in Part B of Table I is not an exhaustive list of the countries which
provide an equivalent exemption under domestic law. Other countries that have not
submitted the information necessary for the IRS to make a determination also may grant an
equivalent exemption.
Because Part B of Table I does not reflect any changes to a country’s domestic law
since the IRS’s review, a foreign corporation and its shareholders should independently
verify the accuracy of the information in Part B of Table I as it relates to the relevant taxable
year.
Consistent with past practice, the IRS will entertain a request from a foreign
government to determine whether the domestic law of the foreign country provides an
equivalent exemption for one or more categories of income that may be exempt from U.S.
taxation under section 883. Accordingly, taxpayers may ask the relevant foreign
government to contact the IRS for this purpose. The letter from the foreign government
official should be addressed to the Associate Chief Counsel (International), Internal

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Revenue Service, 1111 Constitution Avenue NW, Washington, DC 20224, Attn:
CC:INTL:Br1. The letter should state the name, citation, and effective date of the statute or
decree, and generally describe the application of the country’s domestic law to income
derived by U.S. persons from the international operation of ships or aircraft and from calling
on ports or airports in that country. For example, the letter should discuss whether the law
provides an exemption for each category of income described in §1.883-1(h)(2)(i) through
(viii). A copy of the relevant statute or decree as published in an official government
publication and a certified English translation of the document, if it was not published in
English, should be attached to the letter.
Table II
Table II of this revenue ruling provides a list of countries that have entered into
income tax conventions with the United States that include a shipping and air transport
article or a gains article. Prior to the issuance of §1.883-1T(h)(3), a foreign corporation
organized in a country that only provided an exemption from tax through an income tax
convention with the United States was not considered organized in a country that granted
an equivalent exemption for purposes of section 883. For taxable years of foreign
corporations beginning on or after June 25, 2007, §1.883-1T(h)(3)(i) provides that if a
foreign corporation is organized in a foreign country that only provides an exemption from
tax for profits from the operation of ships or aircraft in international transport or international
traffic under the shipping and air transport or gains article of an income tax convention with
the United States, then such foreign corporation may treat the exemption from tax provided
by the income tax convention as an equivalent exemption for purposes of section 883, but
only if: (1) the foreign corporation meets all the conditions for claiming benefits with respect

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to such profits under the income tax convention, including the limitation on benefits article;
and (2) the profits that are exempt from tax pursuant to the income tax convention also fall
within a category of income described in §1.883-1(h)(2)(i) through (viii).
A foreign corporation that relies on an income tax convention as providing an
equivalent exemption with respect to a particular category of income under §1.883-
1T(h)(1)(ii) must demonstrate not only that it qualifies for benefits under the income tax
convention but also that it meets the requirements of section 883. For example, a
corporation that is considered a resident of a foreign country that grants an equivalent
exemption because it is managed and controlled in that country will not qualify for an
exemption from tax under section 883(a) unless the corporation is also organized in that
country. Similarly, a foreign corporation that does not meet one of the stock ownership
tests described in §1.883-1(c)(2) may not claim an exemption from tax under section 883,
even if it qualifies for benefits under the limitation on benefits article of the relevant income
tax convention.
Table II summarizes the bases for claiming an exemption under each income tax
convention, including whether the exemption under the shipping and air transport article 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 now
also includes limitation on benefits articles as a condition for claiming benefits. 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, or other income
because such benefits are not relevant for purposes of section 883(a) or (c).
Table I and Table II are intended only as a summary, and the full text of any relevant

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diplomatic note, foreign law, or income tax convention (including any protocol thereto, any
agreement, any diplomatic note accompanying the convention, or the technical explanation
of the income tax convention) should be consulted. The IRS and Treasury Department
intend to update the tables periodically.
CHANGES TO REV. RUL. 2001- 48
In Part A of Table I, Angola, the Cape Verde Islands, Ghana, and the Bailiwick of
Jersey have been added to the list of countries that have exchanged diplomatic notes with
the United States.
In Part B of Table I, the British Virgin Islands, Croatia, Gibraltar, Kuwait (shipping
only), Monaco, Qatar (shipping only), and Uruguay 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: Bangladesh and Sri Lanka. The
following countries have entered into new income tax conventions or protocols with the
United States that contain new shipping and air transport articles that supersede prior
income tax conventions reported in Rev. Rul. 2001-48: Australia, Belgium, Japan, and the
United Kingdom.
A subheading has been added under the heading Basis for Exemption
to notify any
foreign person, whether it is the corporation seeking an exemption from tax under section
883, or a shareholder of such corporation, that it may not treat an income tax convention as
granting an equivalent exemption unless that person qualifies for benefits under the
limitation on benefits article, if any, in that income tax convention. Footnote number 35

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has also been added to identify those countries that provide an equivalent exemption from
tax only through an income tax convention with the United States.
TO CLAIM AN EXEMPTION
Nonresident alien individuals claiming an exemption from U.S. taxation under
section 872(b) of the Code must file a return on Form 1040NR (U.S. Income Tax Return of
a Nonresident Alien), follow the accompanying instructions, and claim the exemption.
Foreign corporations claiming an exemption under section 883 must file a return on Form
1120F (U.S. Income Tax Return of a Foreign Corporation), follow the accompanying
instructions, and comply with the relevant reporting provisions of Treas. Reg. §1.883-
1(c)(3).
EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 89-42, Rev. Rul. 97-31, and Rev. Rul. 2001-48 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 further information regarding this revenue
ruling, contact Patricia A. Bray at (202) 622-5871 (not a toll-free call).

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TABLE I

Countries Granting Equivalent Exemptions For
Income From The International Operation of

Ships and Aircraft

PART A - EXCHANGE OF NOTES
1

TYPES OF SHIPPING AND AIRCRAFT INCOME EXEMPTED
2

Countries
And
Territories
Cumulative Bulletin
Or
Internal Revenue
Bulletin Citation
Operating
Income
Full
Rental
(Time
or voyage
charter)
Bareboat
Rental
Incidental
Container
Rental
Cap
3
Gains

Angola 2007-42 I.R.B. 801 X X X X X
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
4
1988-1 C.B. 460 X X X X -
Cape Verde 2005-2 C.B. 855 X X X X X
Chile
5
1991-1 C.B. 304 X X X
3
X -
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 Salvador
5
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 -
Ghana 2002-1 C.B. 725 X X X X X
Greece 1988-2 C.B. 366 X X X X -
Hong Kong
6/7
1995-1 C.B. 228 X X X X X
India 1990-2 C.B. 316 X X X
3
X X
Isle of Man
6
1990-2 C.B. 317 X X X X X
Japan 1990-2 C.B. 318 X X X X -
Jersey 2007-10 I.R.B. 665 X X X X X
Jordan 1996-2 C.B. 202 X X X X -

9
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
3
X X
Malta 1997-1 C.B. 314 X X X X X
Marshall Islands 1990-2 C.B. 321 X X X X X
Norway 1991-1 C.B. 304 X X X X X
Pakistan
6
1991-1 C.B. 305 X
8
- - - -
Panama 1988-2 C.B. 366 X X X X -
Peru
6
1989-2 C.B. 335 X X X
3
X -
St. Vincent & Grenadines 1989-2 C.B. 336 X X X X -
Saudi Arabia
9
2000-22 I.R.B. 1126 X X X X X
Singapore 1990-2 C.B. 323 X X X X X
Sweden 1988-1 C.B. 466 X X X
3
X -
Taiwan 1989-2 C.B. 337 X X X X -
United Arab Emirates 1998-2 C.B. 528 X X X X X
Venezuela 1988-1 C.B. 467 X X X
3
X X

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PART B - DOMESTIC LAW

TYPES OF SHIPPING AND AIRCRAFT INCOME EXEMPTED
2

Countries
And
Territories
Date Foreign Law
Reviewed
Operating
Income
Full
Rental
(Time
or voyage
charter)
Bareboat
Rental
Incidental
Container
Rental
Cap
3
Gains

Antigua & Barbuda
6
NOV 1991 X X X X X
Aruba JUNE 1999 X X X X -
Barbados OCT 1989 X X X X X
Bermuda NOV 1988 X X X X X
Brazil
10
DEC 1988 X X X
3
X -
British Virgin Islands MAR 2003 X X - - -
Bulgaria FEB 1989 X X X X X
Cayman Islands
11
JAN 1987 X X X X X
Chile
6
OCT 1988 X X X X X
Croatia FEB 2007 X X X X X
Ecuador
6/12
DEC 1989 X X X
3
X X
Gibraltar JULY 2006 X X X X X
Israel FEB 1991 X X X X X
Kuwait
6
APRIL 2007 X X X X -
Monaco JAN 2005 X X X X X
Netherlands OCT 1988 X X X
3
X -
Netherlands Antilles MAY 1988 X X X X X
Peru
5
SEPT 1995 X X X X X
Portugal
10
Ships
Aircraft
JUNE 1989
FEB 1989
X
X
X
X
X
X
-
-
-
-
Qatar

Ships
6

Aircraft
5

JAN 1993
AUG 1994
X
8
X
8

-
-
-
-
-
-
-
-
Spain
13
DEC 1988 X X - X -
Surinam NOV 1999 X X X X X
Turkey
14
JAN 1987 X - - X -
Turks & Caicos
11
FEB 1990 X X X X X
Uruguay JAN 2007 X
8
- - - -
U.S. Virgin Islands OCT 1988 X X X X X
Vanuatu MAY 1987 X X X X X

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TABLE II

Countries Granting Exemptions from Tax by Income Tax Convention
15

BASIS FOR EXEMPTION
TYPES OF SHIPPING AND AIRCRAFT INCOME EXEMPTED
2

Countries
And
Territories
Resi-
dence
Based
No Flag
Resi-
dence
& Flag
Reci-
procal
LOB
29

Article
Operating
Income
Full
Rental
(Time
or voyage
charter)
Bare-
Boat
Rental
Incidental
Container
Rental
Cap

Gains

Australia
19/35
X - X X X
16
X
3
X X
Austria
35
X - X X X
20
X
20
X X
Bangladesh
19/35
X - X X X
20
X
20
X X
Barbados X - X X X
20
X
20
X X
Belgium
19
X X X X X
20
X X
Canada
35
X - X X X X X X
China
22/35
(People’s
Republic)
X - X X X
20
X
20
X X
Cyprus X - X X X
20
X
20
X X
Czech Republic
35
X - X X X X
3
X X
Denmark X - X X X X
20
X X
Egypt X - - X X
3
X
3
X -
Estonia
35
X - X X X X
3
X X
Finland X - X X X
3
X
3
X X
France
35
X - X X X X
20
X X
Germany
24/35
X - X X X - X X
Greece - X - X
8
- - - -
Hungary
35
X - - X X
3
X
3
X X
Iceland
35
- X
25
- X X
3
X
3
X X
India X - X X X
3
X
3
X X
Indonesia
35
X - X X X X
27
X X
Ireland
35
X - X X X X
20
X X
Israel X - X X X
3
X
3
X X
Italy
28/29/35

-
X
25
X X X
30
X
3
X X
Jamaica
35
X - X X X
20
X
20
X X
Japan
28/19
X - X X X
3
X X X

12
Kazakhstan
35
X - X X X X
20
X X
Korea
35
X - - X X
32
- X -
Latvia
35
X - X X X X
17
X X
Lithuania
35
X - X X X X
17
X X
Luxembourg X - X X X X
20
X X
Mexico
35
X - X X X X
23
X X
Morocco
35
- X
21
- X
8
- - - X
Netherlands X - X X X
3
X
3
- X
New Zealand
35
X - X X X X
3
X X
Norway
28
X - - X X
32
X
3
X X
Pakistan
5
- X - X
8
- - - -
Philippines
6/35
X - - - - - - X
Poland
35
- X
25

-
X X
3
X
3
X X
Portugal
35
X - X X X X
3
- X
Romania
35
- X - X X
3
X
3
X X
Russian
Federation
35

X - X X X X
20
X X
Slovak Republic
35
X - X X X X
3
X X
Slovenia
35
X - X X X X
20
X X
South Africa
35
X - X X X X
20
X X
Spain X - X X X X
3
X X
Sri Lanka
5/19/31/35
X - X X X
20
X
20

-

-

Sweden X - X X X X
3
X X
Switzerland
35
X - X X X
33
X
3
- X
Thailand
35
X
5
X
6

-
-

X
X
X
-
X
-
X
3
-
X

-
X
X
Trinidad &
Tobago
35

- X
25
- X X
3
X
3
- X
Tunisia
35
X - X X X
20
X
20
X X
Turkey X - X X X X
3
X X
Ukraine
35
X - X X X X
20
X X
USSR/NIS
34/35
- X - X
8
- - - X
U.K.
19/35
X - X X X X
3
X X
Venezuela
35
X - X X X X
20
X X

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FOOTNOTES TO TABLES

1 Notes signed prior to the Technical and Miscellaneous Revenue Act of 1988 are
interpreted in accordance with the technical corrections enacted by that Act.

2 Under the heading “Types of Shipping and Aircraft Income Exempted” unless otherwise
footnoted, an “X” indicates full exemption whether or not there is a permanent
establishment.

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

4 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.

5 This exemption applies to aircraft only.

6 This exemption applies to shipping only.

7 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.

8 Operating income is not defined.

9 The note is effective for all taxable years beginning on or after January 1, 1999, and for
all prior open taxable years.

10 Only corporations are exempt under the Brazilian and Portuguese statutes.

11 The country generally imposes no income tax.

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

13 The Spanish statute exempts only corporations.

14 See generally Rev. Rul. 87-18, 1987-1 C.B. 178 (explaining the application of Turkey’s
domestic-law exemption).

14
15 Table II is relevant for determining whether a shareholder of a foreign corporation is a
resident of a country that grants an equivalent exemption by means of an income tax
convention with the United States. Table II is also relevant for determining whether a
foreign corporation itself is eligible to claim an exemption under section 883(a) when it is
organized in a country that only provides an exemption by means of an income tax
convention.

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

17 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.

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

19 The following countries have entered into new income tax conventions or protocols with
the United States that contain new Shipping and Air Transport articles that supersede
prior income tax conventions reported in Rev. Rul. 2001-48:

Australia..................................January 1, 2004
Bangladesh.................................. .January 1, 2007
Belgium................................... January 1, 2008
Japan........................................... .January 1, 2005
Sri Lanka.................................January 1, 2004
United Kingdom........................January 1, 2004

20 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.

21 In the case of aircraft only, the registration may be in the country of residence or in any
country with a treaty providing an equivalent exemption between such country and the
country of residence.

22 Pursuant to Notice 97-40, 1997-2 C.B. 287, 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. The Shipping and Aircraft Agreement between China and the United States was
ratified on September 6, 1983. The Shipping and Aircraft Agreement is separate from
the income tax treaty with China.

15
23 The exemption applies except where the containers are used solely between places
within the other Contracting State.

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

25 Documentation or registration required for ships or aircraft of United States residents
only.

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

27 Income from the bareboat rental of aircraft used in international traffic is exempt.
Income from the bareboat rental of ships also is 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.

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

29 Each country identified in this column has entered into an income tax convention with
the United States that contains a comprehensive limitation on benefits article.
Accordingly, if a foreign corporation or shareholder of a foreign corporation intends to
rely on an equivalent exemption provided through such an income tax convention with
the United States, that person must be a resident of that country for treaty purposes and
satisfy the limitation on benefits article in that convention.

30 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.

31 In connection with the revised U.S. protocol with Sri Lanka, an exchange of notes
signed September 20, 2002, provides, “[w]ith respect to Article 8 (Shipping and Air
Transport), it is understood that Sri Lanka shall exempt from tax the profits of an
enterprise of the United States from sources within Sri Lanka from the operation in
international traffic of ships for as long as there remains in force Article 8 of the
Convention between the Government of the Democratic Socialist Republic of Sri Lanka
and the Government of the United Kingdom of Great Britain and Northern Ireland for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to
Taxes on Income and Capital Gains, signed at London on June 21, 1979; Article 8 of
the Convention Between the Government of the Polish People’s Republic and the
Government of the Democratic Socialist Republic of Sri Lanka for the Avoidance of
Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income

16
and Capital, signed at Colombo on April 25, 1980; or any provision granting the same
treatment as accorded under aforesaid provisions to a resident of a third state.”

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

33 This exemption applies if the ships or aircraft are used by the lessee in international
traffic.

34 The U.S. - U.S.S.R. income tax treaty signed June 20, 1973, continues to apply to the
New Independent States (NIS) of Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan,
Moldova, Tajikistan, Turkmenistan, and Uzbekistan. See Treasury News NB-1763.

35 This country only provides an exemption from tax through an income tax convention
with the United States. A corporation organized in this country and claiming an
exemption under section 883(a) must satisfy the additional requirements set forth in
§1.883-1T(h)(3).