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RIN ID: RIN 1545-BA07
TD ID: [TD 9087]
SUBJECT CATEGORY: Exclusions From Gross Income of Foreign Corporations
Applicability Date: These regulations are applicable to taxable years of the foreign corporation beginning 30 days or more after August 26, 2003.
DOCUMENT SUMMARY: This document contains final regulations implementing sections 883(a) and (c) that relate to income derived by foreign corporations from the international operation of ships or aircraft. The final regulations reflect changes made by the Tax Reform Act of 1986 and subsequent legislative amendments. The final regulations provide, in general, that a foreign corporation organized in a qualified foreign country and engaged in the international operation of ships or aircraft shall exclude qualified income from gross income for purposes of U.S. Federal income taxation, provided that the corporation can satisfy certain ownership and related documentation requirements. The final regulations explain when a foreign country is a qualified foreign country and what income is considered to be qualified income. The final regulations specify how a foreign corporation may satisfy the ownership and related documentation requirements. In addition, the final regulations describe the information that the foreign corporation must include on its U.S. income tax return in order to claim an exemption. All foreign corporations engaged in the international operation of ships or aircraft that claim an exemption from U.S. Federal income tax based on section 883 are affected by these regulations.
SUMMARY: Treasury Department, Internal Revenue Service,
The collections of information contained in these final regulations have been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 15451677. Responses to these collections of information are mandatory.
An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number assigned by the Office of Management and Budget.
For corporations, the estimated annual burden per respondent varies from 30 minutes to eight hours, depending on the individual circumstances of the foreign corporation, with an estimated average of one hour. For shareholders, the estimated annual burden per respondent varies from zero minutes to eight hours, depending on the individual circumstances of the shareholder or intermediary, with an estimated average of 90 minutes.
Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be sent to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:T:T:SP, Washington, DC 20224, and to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503.
Books or records relating to this collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103. Background
A notice of proposed rulemaking (REG20828086) under sections 883(a) and (c) was published in the Federal Register (65 FR 6065) on February 8, 2000 (the 2000 proposed regulations). Due to the substantial number of comments that were received on the 2000 proposed regulations, and the significant impact the regulations have on large segments of the shipping and air transport industries, the 2000 proposed regulations were withdrawn on August 2, 2002. A revised notice of proposed rulemaking (REG13631101) was published in the Federal Register (67 FR 50510) on August 2, 2002 (the proposed regulations), and provided an opportunity for additional comments. A public hearing on the proposed regulations was held on November 25, 2002. Numerous comments have been received. After consideration of all the comments, the proposed regulations are adopted as revised by this Treasury decision.
The preamble to the 2000 proposed regulations contains a detailed
explanation of the provisions in the 2000 proposed regulations, and the
preamble to the proposed regulations describes the comments received on
the 2000 proposed regulations and the consequent changes reflected in
the proposed regulations. The explanations contained in those preambles
are not repeated herein. The comments submitted to the IRS on the
proposed regulations and the consequent changes reflected in the final regulations are described herein.
Public Comments
Comments Relating to Sec. 1.8831: Exclusion of Income From the International Operation of Ships or Aircraft
For a foreign corporation to be considered a qualified foreign corporation under Sec. 1.8831(c)(3), the proposed regulations require that the corporation provide on its return a reasonable estimate of the amount of income in each category of qualified income for which an exemption is claimed to the extent such amounts are readily determinable. Commentators criticized this requirement on the ground that it could require the creation of a separate accounting system, and would necessitate the allocation of expenses to each of the specific categories of income. Commentators suggested that whether amounts are readily determinable should depend on whether records to ascertain such amounts are available in the ordinary course of business.
The IRS and Treasury believe that the suggested definition of readily determinable does not ensure that adequate records will be maintained. That term should be interpreted in accordance with Sec. 1.60122(g)(1)(i). However, the final regulations have been revised to clarify that a reasonable estimate of the gross amount of income in each category is required. Accordingly, there is no requirement that expenses be allocated to each category of income.
Section 1.8831(e) of the proposed regulations provides generally
that a corporation is considered engaged in the operation of ships or
aircraft only when it is an owner or lessee of an entire ship or
aircraft used in the carriage of passengers or cargo for hire. [[Page 51395]]
Commentators said that a shipping company utilizing less than the
entire space on several vessels also should be considered engaged in
the operation of ships or aircraft. The final regulations do not adopt
this suggestion. The IRS and Treasury believe that it is appropriate to
consider a foreign corporation to be engaged in the operation of ships
or aircraft for purposes of section 883 only when it is an owner or lessee of an entire ship or aircraft.
C. Pool, Partnership, Strategic Alliance, Joint Operating Agreement, CodeSharing Arrangement or Other Joint Venture
Section 1.8831(e)(2) generally treats a foreign corporation as engaged in the operation of ships or aircraft with respect to its participation in a pool, partnership, strategic alliance, joint operating agreement, codesharing arrangement or other joint venture. Commentators asked that these rules be made applicable to singlemember disregarded entities in addition to arrangements with multiple owners. Commentators also asked for clarification concerning whether these rules apply to tiered partnerships, such as in the case of a foreign corporation that is a partner in a partnership, whose sole activity is to be a partner in another partnership that is engaged in international shipping.
The rules have been revised to cover singlemember disregarded entities, and to clarify that they apply to tiered entities in the case of both joint venture entities and joint ventures that are not entities. An example was added to illustrate these revisions. D. Cruises to Nowhere
Section 1.8831(f)(1) excludes from the international operation of
ships or aircraft the carriage of passengers or cargo on a voyage or
flight that begins and ends in the United States, even if the voyage or
flight contains a segment extending beyond the territorial limits of
the United States, unless the passenger disembarks or the cargo is
unloaded outside the United States. Commentators renewed their
objection to this exclusion of such ``cruises to nowhere.'' The final
regulations continue to exclude cruises to nowhere because such travel
has beginning and ending points within the United States within the meaning of section 863(c)(1).
E. Determining Whether Income Is Derived From International Operation of Ships or Aircraft
Section 1.8831(f)(2) of the proposed regulations provides that whether income is derived from international operation of ships or aircraft is determined on a passenger by passenger basis and on an itemofcargo by itemofcargo basis. Commentators suggested that with respect to the carriage of passengers by ship, the determination should be made on a voyage by voyage basis. Commentators said the voyage should be treated as international if it cannot be completed because of weather or similar factors.
The final regulations do not adopt the suggestion that income be determined on a voyage by voyage basis. The regulations have been revised, however, to exempt income from the sale of a ticket for international carriage of a passenger when the passenger does not begin or complete an international journey because of unanticipated circumstances. For example, if a passenger does not leave on an international flight because of a change in plans, or is unable to complete an international voyage because of illness, any income derived from the sale of the ticket nonetheless will qualify for exemption. F. International Carriage of Cargo
Under Sec. 1.8831(e)(1), a foreign corporation is considered engaged in the operation of ships or aircraft only if the ship or aircraft is used in the carriage of passengers or cargo for hire. Commentators pointed out that the regulations do not define the term for hire. They expressed concern that requiring the carriage of cargo for hire might be interpreted to exclude income derived by a vessel owner or operator who charters a vessel to a lessee, if the lessee uses it to transport the lessee's own cargo or repositions the vessel without cargo on board for its next voyage. Commentators suggested that the term for hire be defined to include carriage of proprietary goods and an empty backhaul voyage, or that it be deleted from the regulations.
Section 1.8831(f)(2)(iv) of the final regulations provides that if
a foreign corporation time, voyage, or bareboat charters out a ship or
aircraft, and the lowesttier lessee uses the ship or aircraft to carry
passengers or cargo on a fee basis, the ship or aircraft is considered
used to carry passengers or cargo for hire, regardless of whether the
ship or aircraft may be empty during a portion of the charter period
due to a backhaul voyage or flight or for purposes of repositioning. If
a foreign corporation time, voyage, or bareboat charters out a ship or
aircraft, and the lowesttier lessee uses the ship or aircraft for the
carriage of proprietary goods, including an empty backhaul voyage or
flight or repositioning related to such carriage of proprietary goods,
the ship or aircraft similarly will be treated as used to carry cargo for hire.
G. Bareboat Charter of Ships or Dry Lease of Aircraft Used in International Operation of Ships or Aircraft
When a foreign corporation bareboat charters a ship or dry leases an aircraft to a lessee, Sec. 1.8831(f)(2)(iii) of the proposed regulations requires the corporation to adopt a reasonable method for determining the amount of charter income attributable to the international operation of ships or aircraft by the lowest tier lessee. The regulations contain two ratios that may provide a reasonable method for determining the amount of qualifying charter income.
Commentators asked for clarification that business records or log books are a reasonable method for determining the amount of charter income when those records show that the vessel has been used exclusively in international transportation. Commentators also asserted that the ratios are unnecessary and suggested that they be deleted.
The IRS and Treasury believe that business records or log books
showing that a ship or aircraft has been used exclusively on voyages or
flights that begin or end in the United States (but not both) may be
sufficient to establish that the foreign corporation's entire gross
income is income from the international operation of ships or aircraft.
However, if the ship or aircraft also has been used on voyages or
flights that begin and end outside the United States, the foreign
corporation must determine the amount of the charter income that is
attributable to voyages or flights that begin or end in the United
States (but not both) to determine the amount of income potentially
within the scope of section 883. The final regulations have been
revised generally to require such a foreign corporation to determine
the amount of such income based on the total number of days of
uninterrupted travel on voyages or flights between the United States
and the farthest point or points where cargo or passengers are loaded
en route to, or discharged en route from, the United States. However,
the final regulations permit the foreign corporation to adopt an
alternative method for determining the amount of the charter income
that is attributable to the international operation of ships or
aircraft if it can establish that the alternative method more accurately reflects the amount of such income.
[[Page 51396]]
H. Activities Incidental to the International Operation of Ships or Aircraft
Section 1.8831(g) of the proposed regulations provides that certain activities of an operator of a ship or aircraft are so closely related to the primary activity of the international operation of ships or aircraft that income from those incidental activities shall be considered income from the international operation of ships or aircraft, and thus eligible for exemption.
Section 1.8831(g)(1)(x) of the proposed regulations treats certain container rental activities in the United States as incidental to the international operation of ships or aircraft. The regulations limit incidental treatment to the rental of containers for use in the United States for a period not exceeding five days beyond the original delivery date to the consignee as stated on the bill of lading, and also impose other limitations on incidental treatment.
Commentators stated that ocean carriers provide containers to their customers as an integral part of international shipping, but do not ``rent'' containers or provide them for ``temporary warehousing'' of cargo. Commentators also noted that deliveries can be delayed beyond five days for many reasons that clearly do not involve warehousing, such as congestion at port facilities. Commentators said it would be difficult and unrealistic to allocate a portion of the shipping charges to the use of containers.
For these reasons, the reference to container rental as an incidental activity has been modified. The ``five day'' rule has been eliminated and replaced with a more flexible rule under which the provision of containers or other related equipment by the foreign corporation in connection with the international carriage of cargo for use by its customers, including shortterm use within the United States immediately preceding or following the international carriage of cargo, is considered an incidental activity. The regulations presume that a container is used in connection with the international carriage of cargo if it is used for a period of five days or less immediately preceding or following the international carriage of cargo. Beyond this fiveday period, whether a container is being used in connection with the international carriage of cargo, or for some other purpose such as warehousing of cargo, will depend on the facts and circumstances. The regulations make clear that the use of containers for any such other purpose will be considered to give rise to income that is not incidental to the international operation of ships or aircraft. Hotel Accommodations
Arranging for one night in a hotel within the United States before
or after a cruise is considered incidental to the international
operation of ships under Sec. 1.8831(g)(1)(vii) of the proposed
regulations. Commentators suggested that the exception also should
apply to onenight hotel accommodations arranged by airlines. Commentators said that airlines occasionally provide such
accommodations to passengers on tour packages for the same reasons that
cruise companies provide accommodations. The final regulations do not
adopt this suggestion. The IRS and Treasury believe that different
rules are appropriate in light of operational differences between the airline and cruise industries.
Section 1.8831(g)(1)(v) treats the inland transportation of cargo by a related or unrelated corporation as incidental. Commentators suggested that inland transportation of cargo by the foreign corporation itself (after the cargo has passed through Customs) also should be treated as incidental. The final regulations do not adopt this suggestion. The IRS and Treasury are concerned that an exemption would permit foreign corporations engaged in international transportation to compete unfairly with other corporations engaged in the inland transportation of cargo.
Under the proposed regulations, inland transportation by another corporation must be documented by a through bill of lading, airway bill, or similar document. Commentators asked whether the term similar document can include any document showing an inland leg to international transportation, such as a seaway bill or cargo receipt. The IRS and Treasury believe that similar document may be construed broadly to include any appropriate document.
Commentators stated that some unincorporated entities provide inland transportation, and asked that such entities be included in the regulations. Accordingly, the final regulations have been revised to permit any unrelated person (whether incorporated or not) to provide inland transportation of cargo. The final regulations also provide that the rules of section 267(b) shall apply for purposes of determining whether persons are related.
Section 1.8831(g)(1)(vi) treats the sale or issuance by a foreign corporation of interline or codesharing tickets for the inland transportation of passengers by air as an incidental activity. Commentators suggested that the inland segment of an international journey also should be treated as incidental when provided by the foreign airline itself through the sale or issuance of an intraline ticket. The final regulations extend incidental treatment to the sale or issuance of intraline tickets. The final regulations also impose a maximum 12hour scheduled interval between the international and inland segments of any flight involving intraline tickets.
Land tour packages are excluded from incidental activities under Sec. 1.8831(g)(2)(i). Commentators contend that singleday shore excursions are not the same as land tour packages and should qualify as an incidental activity. The final regulations do not adopt this suggestion because the two activities are similar in nature. Shortterm Use
Ships normally engaged in international cruises may occasionally be used for other purposes, such as cruises to nowhere. Commentators asked that such shortterm use be treated as an incidental activity. The final regulations do not adopt this suggestion because domestic use of a vessel does not qualify as the international operation of ships or aircraft.
Section 1.8831(g)(1) treats as incidental the sale of tickets by an airline for international transportation on another airline, and the sale of tickets by a ship operator on behalf of another ship operator. Section 1.8831(g)(2)(iii), however, excludes from incidental income the sale of airline tickets by a cruise company. Commentators objected to this exclusion. This exclusion is retained in the final regulations. Cruise companies that sell airline tickets are acting in a capacity comparable to travel agents, and would have an unfair competitive advantage if their income from this activity were exempt.
The proposed regulations, in Sec. 1.8831(g)(3), reserve on the
treatment of ground services, maintenance and catering, as well as
other services not mentioned as included among incidental activities. In the absence of a
[[Page 51397]]
clear international norm or standard regarding the appropriate
treatment of such services, the IRS and Treasury solicited comments on
an appropriate rule. Commentators generally suggested that activities
be treated as incidental unless they rise to the level of a separate,
nonshipping business. The final regulations continue to reserve on this
issue, pending further consideration by the IRS and Treasury.
I. Determining Equivalent Exemptions for Each Category of Income
Section 1.8831(h)(2) of the proposed regulations provides that if an exemption is unavailable in a foreign country for one of the eight enumerated categories of income, the foreign country is not considered to grant an equivalent exemption with respect to that category of income. Paragraph (h)(2)(vi) of this section treats incidental income, other than incidental bareboat charter or dry lease income and incidental containerrelated income, as one category of income.
Commentators suggested that an equivalent exemption be determined on an itemofincome basis rather than by category of income. Commentators objected to the requirement that a foreign country exempt all items of income within a category of income to be treated as granting an equivalent exemption. The examples provided by commentators indicated that this concern arose primarily in the context of the residual category of incidental income described in paragraph (h)(2)(vi).
The final regulations retain the requirement that a foreign country exempt all items of income within a category of income, but provide an exception for incidental income described in paragraph (h)(2)(vi). The final regulations permit an exemption of any type of incidental income that qualifies under paragraph (g)(1) if a foreign country grants an equivalent exemption with respect to that type of income. For example, if a foreign country grants an equivalent exemption for the sale of airline tickets on behalf of another corporation engaged in international operation of aircraft, as provided in paragraph (g)(1)(iii), but does not provide an equivalent exemption for the inland transportation of cargo, as provided in paragraph (g)(1)(v), the foreign country is nonetheless considered to grant an equivalent exemption for the sale of airline tickets.
Commentators also pointed out that some income items may be described in more than one category of income, and asked which category would apply for purposes of determining whether the foreign country provides an equivalent exemption. The IRS and Treasury believe that the taxpayer can select any applicable category of income that provides an exemption.
Section 1.8831(h)(3)(i) of the proposed regulations provides that if a taxpayer is eligible to exempt income under both an applicable income tax convention and section 883, the taxpayer may claim an exemption under both the applicable income tax convention and section 883 with respect to such category of income. Such an election must be made with respect to all income of the foreign corporation from the international operation of ships or aircraft, and cannot be made separately with respect to different categories of income.
Commentators requested clarification concerning the election to claim an exemption under both the applicable income tax convention and section 883 when the benefits under the two exemptions are not co extensive with respect to any category of income.
The final regulations have been clarified to provide that if a corporation chooses to claim an exemption under an income tax convention, it may simultaneously claim an exemption under section 883 with respect to any category of income listed in paragraphs (h)(2)(i) through (v), (vii), and (viii) of Sec. 1.8831 and to any type of income described in paragraph (h)(2)(vi) of Sec. 1.8831, but only to the extent that such income also is exempt under the income tax convention.
Under Sec. 1.8831(h)(3)(i), a corporation organized in a foreign country that provides an exemption only through an income tax convention is not permitted to claim an exemption under section 883, with one exception. Paragraph (h)(3)(ii) permits such corporation to claim an exemption under section 883 if the foreign corporation participates in a joint venture described in paragraph (e)(2) that is not treated as fiscally transparent with respect to the category of income derived from the joint venture under the income tax laws of the jurisdiction where the foreign corporation is organized, and treaty benefits would be available but for this reason.
Commentators suggested that the exception in Sec. 1.883 1(h)(3)(ii) should apply to singleowner disregarded entities in addition to transparent joint ventures. This suggestion was not adopted. The IRS and Treasury believe that the policy justification for relief in the joint venture context is not present in the context of a wholly owned entity.
Section 1.8831(h)(3)(iii) of the proposed regulations clarifies
that definitions provided in these regulations do not give meaning or
provide guidance regarding similar terms in U.S. income tax conventions
or the scope of any treaty exemption. Commentators stated that
definitions in the regulations and income tax conventions should have
the same scope and be interpreted in the same way. The IRS and Treasury
continue to believe that terms used in the proposed regulations should
not be used to interpret terms and concepts in U.S. income tax
conventions except to the extent that a treaty that entered into force
after August 26, 2003 or its legislative history explicitly refers to section 883 and guidance thereunder for its meaning.
Comments Relating to Sec. 1.8832: Treatment of Publiclytraded Corporations
A. Closelyheld Classes of Stock not Treated as Meeting Trading Requirements
Section 1.8832(d)(3)(i) of the proposed regulations disqualifies a class of stock from being relied on to satisfy the publicly traded test if, at any time during the taxable year, one or more 5percent shareholders of that class of stock (determined without regard to the attribution rules in Sec. 1.8834) owns, in the aggregate, 50 percent or more of the total vote and value of that class of stock (closely held rule).
Commentators pointed out that a company could lose its exemption if a nonqualified shareholder held a sufficiently large block of stock for one day. Commentators suggested requiring a longer period of ownership by nonqualified shareholders before disqualifying a class of stock from being relied on to satisfy the publicly traded test.
This suggestion has been adopted. The final regulations provide
that a class of stock will be disqualified if one or more 5percent
shareholders of that class of stock owns, in the aggregate, 50 percent
or more of the total vote and value of that class of stock for more
than half the number of days during the corporation's taxable year. In
this way, the closelyheld rule matches the exception provided in Sec. 1.8832(d)(3)(ii)
[[Page 51398]]
which permits a foreign corporation to establish that qualified
shareholders own sufficient shares in the closelyheld block of stock
to preclude nonqualified shareholders from owning 50 percent or more of
the total value of the class of stock for more than half the number of days during the taxable year.
To demonstrate that a class of stock is not closelyheld for purposes of Sec. 1.8832(d)(3)(i), a foreign corporation whose stock is traded on an established securities market in the United States may rely on current Schedule 13G filings with the Securities and Exchange Commission to identify its 5percent shareholders in each class of stock relied upon to meet the regularly traded test, without having to make any independent investigation to determine the identity of the 5 percent shareholders. Sec. 1.8834(d)(3)(viii). Commentators suggested that a foreign corporation also be permitted to rely on current Schedule 13D filings with the Securities and Exchange Commission to identify 5percent shareholders for purposes of meeting the exception contained in Sec. 1.8832(d)(3)(ii). The final regulations adopt this suggestion.
Under Sec. 1.8832(d)(3)(iii)(B) of the proposed regulations, an investment company registered under the Investment Company Act of 1940 will not be treated as a 5percent shareholder if no person owns both 5 percent or more of the value of the outstanding interests in the investment company and 5 percent or more of the value of the shares of the class of stock of the foreign corporation. Commentators suggested that this exception be extended to foreign mutual funds, other investment companies not registered under the Investment Company Act of 1940, and financial institutions with customer or nominee accounts. Commentators also pointed out that it would be difficult for a shipping company to determine the identity of 5percent owners of a mutual fund because most mutual fund shares are held in street name.
The final regulations eliminate the provision that treats an
investment company registered under the Investment Company Act of 1940
as a 5percent shareholder if a person owns both 5 percent or more of
the value of the outstanding interests in the investment company and 5
percent or more of the value of the shares of the class of stock of the
foreign corporation. Instead, the final regulations provide that such
an investment company shall not be treated as a 5percent shareholder
for purposes of these regulations. The final regulations do not expand
the mutual fund exception to include other types of investment vehicles or financial institutions.
Comments Relating to Sec. 1.8833: Treatment of Controlled Foreign Corporations
Section 883(c)(2) provides that the stock ownership test of section 883(c)(1) shall not apply to controlled foreign corporations (CFCs). Under the proposed regulations, a CFC is considered to satisfy the CFC exception of section 883(c)(1) if it meets the requirements of Sec. 1.8833. One such requirement is the income inclusion test of Sec. 1.8833(b). This test requires that more than 50 percent of the subpart F income derived by the CFC from the international operation of ships or aircraft be includible in the gross income of one or more U.S. citizens, individual residents of the United States, or domestic corporations.
Commentators restated their objection to the income inclusion test. They argued that the test is too restrictive because it could deny qualified foreign corporation status to CFCs legitimately owned and controlled by U.S. shareholders.
The IRS and Treasury continue to believe that the income inclusion rule contained in the proposed regulations is supported by the legislative history to section 883(c). The Conference report accompanying the legislation that added the CFC exception provides with respect to the exception that ``corporations are not considered residents of countries that exempt U.S. persons unless 50 percent or more of the ultimate individual owners are U.S. shareholders of controlled foreign corporations''. H.R. Conf. Rep. No. 99841, 99th Cong., 2d Sess. 598 (1986), reprinted in 19863 C.B. vol. 4, at 598 (1986). The intent of the CFC exception, therefore, is for the general ownership requirement of section 883(c)(1) to apply unless the foreign corporation is a CFC and 50 percent or more of the subpart F income of that corporation derived from the international operation of ships or aircraft is includible by U.S. citizens, individual residents, or domestic corporations.
Commentators stated that if the income inclusion test is retained, the regulations should provide that income derived by U.S. taxexempt organizations holding shares in CFCs should be counted toward satisfying the income inclusion test even though the income is not taxed.
The final regulations do not adopt this suggestion. A U.S. tax
exempt organization is not in substance different from a U.S. person
that is not required to include in its gross income the subpart F income of a CFC.
Comments Relating to Sec. 1.8834: Qualified Shareholder Stock Ownership Test
A foreign corporation satisfies the stock ownership test of Sec. 1.8831(c)(2) if more than 50 percent of the value of its outstanding shares is owned, or treated as owned through attribution, for at least half of the number of days in the foreign corporation's taxable year by one or more qualified shareholders. Section 1.8834(b)(1)(i)(A) of the proposed regulations treats an individual resident in a qualified foreign country as a qualified shareholder, but excludes individuals described in Sec. 1.8834(b)(1)(i)(E) and (F). Commentators stated that the exclusion of pension fund beneficiaries described in paragraph (b)(1)(i)(E) could be interpreted to prevent the qualification of an individual under paragraph (b)(1)(i)(A). For example, if an individual held stock directly in a shipping company and also was the beneficiary of a pension fund holding stock in the same company, commentators believe that the individual might not qualify under paragraph (b)(1)(i)(A) with respect to the individual's direct ownership. The final regulations clarify that an individual can be a qualified shareholder under paragraph (b)(1)(i)(A) and also be a qualified shareholder under paragraph (b)(1)(i)(E) with respect to a category of income for which a foreign corporation is seeking an exemption.
Under Sec. 1.8834(b)(1)(i)(D) of the proposed regulations, a not forprofit organization described in Sec. 1.8834(b)(4) is treated as a qualified shareholder. Section 1.8834(b)(4)(iii)(A) requires a not forprofit organization to expend more than 50 percent of its annual support on behalf of individuals described in Sec. 1.883
Commentators suggested that the category of recipients eligible for support be expanded to include other notforprofit organizations. This suggestion has been adopted in part. The final regulations provide that a notforprofit organization may be a qualified shareholder if it expends more than 50 percent of its annual support on behalf of U.S. organizations that have received determination letters under section 501(c)(3) and on behalf of individuals described in Sec. 1.883 4(b)(1)(i)(A).
Commentators asked that the list of qualified shareholders in Sec. 1.8834(b)(1)(i) be expanded to include international organizations as defined in section 7701(a)(18), and pension funds established for employees of such organizations. The final regulations do not adopt this suggestion. Under section 883(c)(1) and Sec. 1.8834(a), a foreign corporation satisfies the stock ownership test if more than 50 percent of the value of its outstanding shares is owned by qualified shareholders who are residents of qualified foreign countries. The remaining shares of the foreign corporation can be owned by nonqualified shareholders, including international organizations.
Section 1.8834(b)(1)(ii) of the proposed regulations provides that a shareholder is a qualified shareholder only if the shareholder does not own its interest in the foreign corporation through bearer shares, either directly or by applying the attribution rules of Sec. 1.883 4(c). Commentators renewed their objection to this rule. The final regulations retain this provision due to the difficulty of reliably demonstrating the true ownership of bearer shares.
Section 1.8834(b)(1)(iii) of the proposed regulations provides that a shareholder is a qualified shareholder only if the shareholder provides to the foreign corporation the documentation required in Sec. 1.8834(d), and the foreign corporation meets the reporting requirements of Sec. 1.8834(e) with respect to such shareholder. Commentators argued that the required reporting requirements are burdensome, and suggested that taxpayers have the option of submitting a sworn statement with their return stating that qualified individuals own the corporation and that supporting documentation has been deposited with a qualified tax practitioner in the United States. The final regulations do not adopt this suggestion. The IRS and Treasury continue to believe that this information is necessary for proper administration of section 883 and that the provision of this information with the foreign corporation's tax return is not unduly burdensome.
It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It is hereby certified that the collection of information in these regulations will not have a significant economic impact on a substantial number of U.S. small entities. This certification is based upon the fact that these regulations apply to foreign corporations and impose only a limited collection of information burden on shareholders of such corporations, which in some cases may include U.S. small entities. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.
The principal author of these final regulations is David L. Lundy
of the Office of Associate Chief Counsel (International). However,
other personnel from the IRS and Treasury Department participated in their development.
List of Subjects
Income taxes, Reporting and recordkeeping requirements. 26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602 are amended as follows: PART 1INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding entries in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.8831 is also issued under 26 U.S.C. 883.
Section 1.8832 is also issued under 26 U.S.C. 883.
Section 1.8833 is also issued under 26 U.S.C. 883.
Section 1.8834 is also issued under 26 U.S.C. 883.
Section 1.8835 is also issued under 26 U.S.C. 883. * * * Par. 2. Section 1.8830 is added to read as follows:
This section lists the major paragraphs contained in Sec. Sec. 1.8831 through 1.8835.
Sec. 1.8831 Exclusion of income from the international operation of ships or aircraft.
(a) General rule.
(b) Qualified income.
(c) Qualified foreign corporation.
(1) General rule.
(2) Stock ownership test.
(3) Substantiation and reporting requirements.
(i) General rule.
(ii) Further documentation.
(4) Commissioner's discretion to cure defects in documentation. (d) Qualified foreign country.
(e) Operation of ships or aircraft.
(1) General rule.
(2) Pool, partnership, strategic alliance, joint operating agreement, codesharing arrangement or other joint venture.
(3) Activities not considered operation of ships or aircraft. (4) Examples.
(5) Definitions.
(i) Bareboat charter.
(ii) Codesharing arrangement.
(iii) Dry lease.
(iv) Entity.
(v) Fiscally transparent entity under the income tax laws of the United States.
(vi) Full charter.
(vii) Nonvessel operating common carrier.
(viii) Space or slot charter.
(ix) Time charter.
(x) Voyage charter.
(xi) Wet lease.
(f) International operation of ships or aircraft.
(1) General rule.
(2) Determining whether income is derived from international operation of ships or aircraft.
(i) International carriage of passengers.
(A) General rule.
(B) Round trip travel on ships.
(ii) International carriage of cargo.
(iii) Bareboat charter of ships or dry lease of aircraft used in international operation of ships or aircraft.
(iv) Charter of ships or aircraft for hire.
(g) Activities incidental to the international operation of ships or aircraft.
(1) General rule.
(2) Activities not considered incidental to the international operation of ships or aircraft.
(3) Services.
(i) Ground services, maintenance, and catering.
(ii) Other services.
(4) Activities involved in a pool, partnership, strategic
alliance, joint operating agreement, codesharing arrangement or other joint venture.
(h) Equivalent exemption.
(1) General rule.
(2) Determining equivalent exemptions for each category of income.
(3) Special rules with respect to income tax conventions. (i) General rule.
(ii) Participation in certain joint ventures.
(iii) Independent interpretation of income tax conventions.
(4) Exemptions not qualifying as equivalent exemptions. (i) General rule.
(ii) Reduced tax rate or time limited exemption.
(iii) Inbound or outbound freight tax.
(iv) Exemptions for limited types of cargo.
[[Page 51400]]
(v) Territorial tax systems.
(vi) Countries that tax on a residence basis.
(vii) Exemptions within categories of income.
(i) Treatment of possessions.
(j) Expenses related to qualified income.
Sec. 1.8832 Treatment of publiclytraded corporations.
(a) General rule.
(b) Established securities market.
(1) General rule.
(2) Exchanges with multiple tiers.
(3) Computation of dollar value of stock traded.
(4) Overthecounter market.
(5) Discretion to determine that an exchange does not qualify as an established securities market.
(c) Primarily traded.
(d) Regularly traded.
(1) General rule.
(2) Classes of stock traded on a domestic established securities market treated as meeting trading requirements.
(3) Closelyheld classes of stock not treated as meeting trading requirements.
(i) General rule.
(ii) Exception.
(iii) Fivepercent shareholders.
(A) Related persons.
(B) Investment companies.
(4) Antiabuse rule.
(5) Example.
(e) Substantiation that a foreign corporation is publicly traded.
(1) General rule.
(2) Availability and retention of documents for inspection. (f) Reporting requirements.
Sec. 1.8833 Treatment of controlled foreign corporations. (a) General rule.
(b) Income inclusion test.
(1) General rule.
(2) Examples.
(c) Substantiation of CFC stock ownership.
(1) General rule.
(2) Documentation from certain United States shareholders. (i) General rule.
(ii) Availability and retention of documents for inspection. (d) Reporting requirements.
Sec. 1.8834 Qualified shareholder stock ownership test.
(a) General rule.
(b) Qualified shareholder.
(1) General rule.
(2) Residence of individual shareholders.
(i) General rule.
(ii) Tax home.
(3) Certain income tax convention restrictions applied to shareholders.
(4) Notforprofit organizations.
(5) Pension funds.
(i) Pension fund defined.
(ii) Government pension funds.
(iii) Nongovernment pension funds.
(iv) Beneficiary of a pension fund.
(c) Rules for determining constructive ownership.
(1) General rules for attribution.
(2) Partnerships.
(i) General rule.
(ii) Partners resident in the same country.
(iii) Examples.
(3) Trusts and estates.
(i) Beneficiaries.
(ii) Grantor trusts.
(4) Corporations that issue stock.
(5) Taxable nonstock corporations.
(6) Mutual insurance companies and similar entities.
(7) Computation of beneficial interests in nongovernment pension funds.
(d) Substantiation of stock ownership.
(1) General rule.
(2) Application of general rule.
(i) Ownership statements.
(ii) Threeyear period of validity.
(3) Special rules.
(i) Substantiating residence of certain shareholders.
(ii) Special rule for registered shareholders owning less than one percent of widelyheld corporations.
(iii) Special rule for beneficiaries of pension funds.
(A) Government pension fund.
(B) Nongovernment pension fund.
(iv) Special rule for stock owned by publiclytraded
corporations.
(v) Special rule for notforprofit organizations.
(vi) Special rule for a foreign airline covered by an air services agreement.
(vii) Special rule for taxable nonstock corporations.
(viii) Special rule for closelyheld corporations traded in the United States.
(4) Ownership statements from shareholders.
(i) Ownership statements from individuals.
(ii) Ownership statements from foreign governments.
(iii) Ownership statements from publiclytraded corporate shareholders.
(iv) Ownership statements from notforprofit organizations. (v) Ownership statements from intermediaries.
(A) General rule.
(B) Ownership statements from widelyheld intermediaries with
registered shareholders owning less than one percent of such widely held intermediary.
(C) Ownership statements from pension funds.
(1) Ownership statements from government pension funds.
(2) Ownership statements from nongovernment pension funds. (3) Time for making determinations.
(D) Ownership statements from taxable nonstock corporations.
(5) Availability and retention of documents for inspection. (e) Reporting requirements.
Sec. 1.8835 Effective dates.
(a) General rule.
(b) Election for retroactive application.
(c) Transitional information reporting rule.
Par. 3. Sec. 1.8831 is revised to read as follows:
Sec. 1.8831 Exclusion of income from the international operation of ships or aircraft.
(a) General rule. Qualified income derived by a qualified foreign
corporation from its international operation of ships or aircraft is
excluded from gross income and exempt from United States Federal income
tax. Paragraph (b) of this section defines the term qualified income.
Paragraph (c) of this section defines the term qualified foreign
corporation. Paragraph (f) of this section defines the term international operation of ships or aircraft.
(b) Qualified income. Qualified income is income derived from the international operation of ships or aircraft that
(1) Is properly includible in any of the income categories described in paragraph (h)(2) of this section; and
(2) Is the subject of an equivalent exemption, as defined in
paragraph (h) of this section, granted by the qualified foreign
country, as defined in paragraph (d) of this section, in which the
foreign corporation seeking qualified foreign corporation status is organized.
(c) Qualified foreign corporation(1) General rule. A qualified
foreign corporation is a corporation that is organized in a qualified
foreign country and considered engaged in the international operation
of ships or aircraft. The term corporation is defined in section
7701(a)(3) and the regulations thereunder. Paragraph (d) of this
section defines the term qualified foreign country. Paragraph (e) of
this section defines the term operation of ships or aircraft, and
paragraph (f) of this section defines the term international operation
of ships or aircraft. To be a qualified foreign corporation, the
corporation must satisfy the stock ownership test of paragraph (c)(2)
of this section and satisfy the substantiation and reporting
requirements described in paragraph (c)(3) of this section. A
corporation may be a qualified foreign corporation with respect to one
category of qualified income but not with respect to another such
category. See paragraph (h)(2) of this section for a discussion of the categories of qualified income.
(2) Stock ownership test. To be a qualified foreign corporation, a
foreign corporation must satisfy the publiclytraded test of Sec.
1.8832(a), the CFC stock ownership test of Sec. 1.8833(a), or the
qualified shareholder stock ownership test of Sec. 1.8834(a).
(3) Substantiation and reporting requirements(i) General rule. To
be a qualified foreign corporation, a foreign corporation must include
the following information in its Form 1120F, ``U.S. Income Tax Return of a Foreign Corporation,'' in the manner prescribed
[[Page 51401]]
by such form and its accompanying instructions
(A) The corporation's name and address (including mailing code);
(B) The corporation's U.S. taxpayer identification number;
(C) The foreign country in which the corporation is organized;
(D) The applicable authority for an equivalent exemption, for
example, citation of a statute in the country where the corporation is
organized, a diplomatic note between the United States and such
country, (for further guidance, see Rev. Rul. 200148 (20012 C.B. 324)
(see Sec. 601.601(d)(2) of this chapter)), or, in the case of a
corporation described in paragraph (h)(3)(ii) of this section, an
income tax convention between the United States and such country;
(E) The category or categories of qualified income for which an exemption is being claimed;
(F) A reasonable estimate of the gross amount of income in each
category of qualified income for which the exemption is claimed, to the extent such amounts are readily determinable;
(G) Any other information required under Sec. 1.8832(f), 1.883 3(d), or 1.8834(e), as applicable; and
(H) Any other relevant information specified by the Form 1120F and its accompanying instructions.
(ii) Further documentation. If the Commissioner requests in writing
that the foreign corporation document or substantiate representations
made under paragraph (c)(3)(i) of this section, or under Sec. 1.883
2(f), 1.8833(d) or 1.8834(e), the foreign corporation must provide
the documentation or substantiation within 60 days following the
written request. If the foreign corporation does not provide the
documentation and substantiation requested within the 60day period,
but demonstrates that the failure was due to reasonable cause and not
willful neglect, the Commissioner may grant the foreign corporation a
30day extension to provide the documentation or substantiation.
Whether a failure to obtain the documentation or substantiation in a
timely manner was due to reasonable cause and not willful neglect shall
be determined by the Commissioner after considering all the facts and circumstances.
(4) Commissioner's discretion to cure defects in documentation. The
Commissioner retains the discretion to cure any defects in the
documentation where the Commissioner is satisfied that the foreign
corporation would otherwise be a qualified foreign corporation.
(d) Qualified foreign country. A qualified foreign country is a
foreign country that grants to corporations organized in the United
States an equivalent exemption, as described in paragraph (h) of this
section, for the category of qualified income, as described in
paragraph (h)(2) of this section, derived by the foreign corporation
seeking qualified foreign corporation status. A foreign country may be
a qualified foreign country with respect to one category of qualified income but not with respect to another such category.
(e) Operation of ships or aircraft(1) General rule. Except as
provided in paragraph (e)(2) of this section, a foreign corporation is
considered engaged in the operation of ships or aircraft only during
the time it is an owner or lessee of one or more entire ships or
aircraft and uses such ships or aircraft in one or more of the following activities
(i) Carriage of passengers or cargo for hire;
(ii) In the case of a ship, the leasing out of the ship under a
time or voyage charter (full charter), space or slot charter, or
bareboat charter, as those terms are defined in paragraph (e)(5) of
this section, provided the ship is used to carry passengers or cargo for hire; and
(iii) In the case of aircraft, the leasing out of the aircraft
under a wet lease (full charter), space, slot, or blockseat charter,
or dry lease, as those terms are defined in paragraph (e)(5) of this
section, provided the aircraft is used to carry passengers or cargo for hire.
(2) Pool, partnership, strategic alliance, joint operating
agreement, codesharing arrangement or other joint venture. A foreign
corporation is considered engaged in the operation of ships or aircraft
within the meaning of paragraph (e)(1) of this section with respect to
its participation in a pool, partnership, strategic alliance, joint
operating agreement, codesharing arrangement or other joint venture if
it directly, or indirectly through one or more fiscally transparent
entities under the income tax laws of the United States, as defined in paragraph (e)(5)(v) of this section
(i) Owns an interest in a partnership, disregarded entity, or other
fiscally transparent entity under the income tax laws of the United
States that itself would be considered engaged in the operation of
ships or aircraft under paragraph (e)(1) of this section if it were a foreign corporation; or
(ii) Participates in a pool, strategic alliance, joint operating
agreement, codesharing arrangement, or other joint venture that is not
an entity, as defined in paragraph (e)(5)(iv) of this section,
involving one or more activities described in paragraphs (e)(1)(i) through (iii) of this section, but only if
(A) In the case of a direct interest, the foreign corporation is
otherwise engaged in the operation of ships or aircraft under paragraph (e)(1) of this section; or
(B) In the case of an indirect interest, either the foreign
corporation is otherwise engaged, or one of the fiscally transparent
entities would be considered engaged if it were a foreign corporation,
in the operation of ships or aircraft under paragraph (e)(1) of this section.
(3) Activities not considered operation of ships or aircraft.
Activities that do not constitute operation of ships or aircraft include, but are not limited to
(i) The activities of a nonvessel operating common carrier, as defined in paragraph (e)(5)(vii) of this section;
(ii) Ship or aircraft management;
(iii) Obtaining crews for ships or aircraft operated by another party;
(iv) Acting as a ship's agent;
(v) Ship or aircraft brokering;
(vi) Freight forwarding;
(vii) The activities of travel agents and tour operators;
(viii) Rental by a container leasing company of containers and related equipment; and
(ix) The activities of a concessionaire.
(4) Examples. The rules of paragraphs (e)(1) through (3) of this section are illustrated by the following examples:
Example 1. Three tiers of charters(i) Facts. A, B, and C are
foreign corporations. A purchases a ship. A and B enter into a
bareboat charter of the ship for a term of 20 years, and B, in turn,
enters into a time charter of the ship with C for a term of 5 years.
Under the time charter, B is responsible for the complete operation
of the ship, including providing the crew and maintenance. C uses
the ship during the term of the time charter to carry its customers' freight between U.S. and foreign ports. C owns no ships.
(ii) Analysis. Because A is the owner of the entire ship and
leases out the ship under a bareboat charter to B, and because the
sublessor, C, uses the ship to carry cargo for hire, A is considered
engaged in the operation of a ship under paragraph (e)(1) of this
section during the term of the time charter. B leases in the entire
ship from A and leases out the ship under a time charter to C, who
uses the ship to carry cargo for hire. Therefore, B is considered
engaged in the operation of a ship under paragraph (e)(1) of this
section during the term of the time charter. C time charters the
entire ship from B and uses the ship to carry its customers' freight
during the term of the charter. Therefore, C is also engaged in the
operation of a ship under paragraph (e)(1) of this section during the term of the time charter.
Example 2. Partnership with contributed shipping assets(i)
Facts. X, Y, and Z, each a foreign corporation, enter into a partnership, P. P is a fiscally transparent
[[Page 51402]]
entity under the income tax laws of the United States, as defined in
paragraph (e)(5)(v) of this section. Under the terms of the
partnership agreement, each partner contributes all of the ships in
its fleet to P in exchange for interests in the partnership and
shares in the P profits from the international carriage of cargo.
The partners share in the overall management of P, but each partner,
acting in its capacity as partner, continues to crew and manage all ships previously in its fleet.
(ii) Analysis. P owns the ships contributed by the partners and
uses these ships to carry cargo for hire. Therefore, if P were a
foreign corporation, it would be considered engaged in the operation
of ships within the meaning of paragraph (e)(1) of this section.
Accordingly, because P is a fiscally transparent entity under the
income tax laws of the United States, as defined in paragraph
(e)(5)(v) of this section, X, Y, and Z are each considered engaged
in the operation of ships through P, within the meaning of paragraph
(e)(2)(i) of this section, with respect to their distributive share of income from P's international carriage of cargo.
Example 3. Joint venture with chartered in ships(i) Facts.
Foreign corporation A owns a number of foreign subsidiaries involved
in various aspects of the shipping business, including S1, S2, S3,
and S4. S4 is a foreign corporation that provides cruises but does
not own any ships. S1, S2, and S3 are foreign corporations that own
cruise ships. S1, S2, S3, and S4 form joint venture JV, in which
they are all interest holders, to conduct cruises. JV is a fiscally
transparent entity under the income tax laws of the United States,
as defined in paragraph (e)(5)(v) of this section. Under the terms
of the joint venture, S1, S2, and S3 each enter into time charter
agreements with JV, pursuant to which S1, S2, and S3 retain control
of the navigation and management of the individual ships, and JV
will use the ships to carry passengers for hire. The overall management of the cruise line will be provided by S4.
(ii) Analysis. S1, S2, and S3 each owns ships and time charters
those ships to JV, which uses the ships to carry passengers for
hire. Accordingly, S1, S2, and S3 are each considered engaged in the
operation of ships under paragraph (e)(1) of this section. JV leases
in entire ships by means of the time charters, and JV uses those
ships to carry passengers on cruises. Thus, JV would be engaged in
the operation of ships within the meaning of paragraph (e)(1) of
this section if it were a foreign corporation. Therefore, although
S4 does not directly own or lease in a ship, S4 also is engaged in
the operation of ships, within the meaning of paragraph (e)(2)(i) of this section, with respect to its participation in JV.
Example 4. Tiered partnerships(i) Facts. Foreign corporations
A, B, and C enter into a partnership, P1. P1 is one of several
shareholders of Poolco, a foreign limited liability company that
makes an election pursuant to Sec. 301.77013 of this chapter to be
treated as a partnership for U.S. tax purposes. P1 acquires several
ships and time charters them out to Poolco. Poolco slot or voyage
charters such ships out to third parties for use in the carriage of
cargo for hire. P1 and Poolco are fiscally transparent entities
under the income tax laws of the United States, as defined in paragraph (e)(5)(v) of this section.
(ii) Analysis. A, B, and C are considered engaged in the
operation of ships under paragraph (e)(2)(i) of this section with
respect to their direct interest in P1 and with respect to their
indirect interest in Poolco because both P1 and Poolco are fiscally
transparent entities under the income tax laws of the United States
and would be considered engaged in the operation of ships under
paragraph (e)(1) of this section if they were foreign corporations.
The result would be the same if Poolco were a singlemember disregarded entity owned solely by P1.
(5) Definitions(i) Bareboat charter. A bareboat charter is a
contract for the use of a ship or aircraft whereby the lessee is in
complete possession, control, and command of the ship or aircraft. For
example, in a bareboat charter, the lessee is responsible for the
navigation and management of the ship or aircraft, the crew, supplies,
repairs and maintenance, fees, insurance, charges, commissions and
other expenses connected with the use of the ship or aircraft. The
lessor of the ship bears none of the expense or responsibility of operation of the ship or aircraft.
(ii) Codesharing arrangement. A codesharing arrangement is an
arrangement in which one air carrier puts its identification code on
the flight of another carrier. This arrangement allows the first
carrier to hold itself out as providing service in markets where it
does not otherwise operate or where it operates infrequently. Code
sharing arrangements can range from a very limited agreement between
two carriers involving only one market to agreements involving multiple
markets and alliances between or among international carriers which
also include joint marketing, baggage handling, onestop checkin
service, sharing of frequent flyer awards, and other services. For
rules involving the sale of codesharing tickets, see paragraph (g)(1)(vi) of this section.
(iii) Dry lease. A dry lease is the bareboat charter of an aircraft.
(iv) Entity. For purposes of this paragraph (e), an entity is any
person that is treated by the United States as other than an individual
for U.S. Federal income tax purposes. The term includes disregarded entities.
(v) Fiscally transparent entity under the income tax laws of the
United States. For purposes of this paragraph (e), an entity is
fiscally transparent under the income tax laws of the United States if
the entity would be considered fiscally transparent under the income
tax laws of the United States under the principles of Sec. 1.894 1(d)(3).
(vi) Full charter. Full charter (or full rental) means a time
charter or a voyage charter of a ship or a wet lease of an aircraft but
during which the full crew and management are provided by the lessor.
(vii) Nonvessel operating common carrier. A nonvessel operating
common carrier is an entity that does not exercise control over any
part of a vessel, but holds itself out to the public as providing
transportation for hire, issues bills of lading, assumes responsibility
or is liable by law as a common carrier for safe transportation of
shipments, and arranges in its own name with other common carriers,
including those engaged in the operation of ships, for the performance of such transportation.
(viii) Space or slot charter. A space or slot charter is a contract
for use of a certain amount of space (but less than all of the space)
on a ship or aircraft, and may be on a time or voyage basis. When used
in connection with passenger aircraft this sort of charter may be referred to as the sale of block seats.
(ix) Time charter. A time charter is a contract for the use of a
ship or aircraft for a specific period of time, during which the lessor
of the ship or aircraft retains control of the navigation and
management of the ship or aircraft (i.e., the lessor continues to be
responsible for the crew, supplies, repairs and maintenance, fees and
insurance, charges, commissions and other expenses connected with the use of the ship or aircraft).
(x) Voyage charter. A voyage charter is a contract similar to a
time charter except that the ship or aircraft is chartered for a
specific voyage or flight rather than for a specific period of time.
(xi) Wet lease. A wet lease is the time or voyage charter of an aircraft.
(f) International operation of ships or aircraft(1) General rule.
The term international operation of ships or aircraft means the
operation of ships or aircraft, as defined in paragraph (e) of this
section, with respect to the carriage of passengers or cargo on voyages
or flights that begin or end in the United States, as determined under
paragraph (f)(2) of this section. The term does not include the
carriage of passengers or cargo on a voyage or flight that begins and
ends in the United States, even if the voyage or flight contains a
segment extending beyond the territorial limits of the United States,
unless the passenger disembarks or the cargo is unloaded outside the
United States. Operation of ships or aircraft beyond the territorial limits of the United States does not constitute in itself
[[Page 51403]]
international operation of ships or aircraft.
(2) Determining whether income is derived from international
operation of ships or aircraft. Whether income is derived from
international operation of ships or aircraft is determined on a
passenger by passenger basis (as provided in paragraph (f)(2)(i) of
this section) and on an itemofcargo by itemofcargo basis (as
provided in paragraph (f)(2)(ii) of this section). In the case of the
bareboat charter of a ship or the dry lease of an aircraft, whether the
charter income for a particular period is derived fro
FOR FURTHER INFORMATION CONTACT Patricia A. Bray or David L. Lundy at (202) 6223880 (not a tollfree number).
14 CFR Part 39 40 CFR Part 52 14 CFR Part 71 33 CFR Part 165 50 CFR Part 679 47 CFR Part 73 26 CFR Part 1 40 CFR Part 180 33 CFR Part 117 50 CFR Part 17 44 CFR Part 67 50 CFR Part 648 14 CFR Part 97 33 CFR Part 100 40 CFR Part 63 50 CFR Part 622 44 CFR Part 65 50 CFR Part 660 26 CFR Part 301 39 CFR Part 111 40 CFR Part 300 6 CFR Part 5 40 CFR Part 271 47 CFR Part 64 40 CFR Parts 52 and 81 50 CFR Part 665 44 CFR Part 64 10 CFR Part 50 49 CFR Part 571 47 CFR Part 76