Freight tax

Gross Transportation Tax: 50% of all transportation income attributable to transport which begins or ends in the United States will be considered US source gross transportation income.

Transportation income includes bareboat, voyage and time charter hire.

US source transportation income attributable to non-liner transport or tramp trade of cargoes will be taxed at 4% without allowances or deductions for voyage or other expenses.

US source transportation income attributable to regularly scheduled liner transport of cargoes, net of applicable depreciation and other expenses, will be subject to a separate corporate and branch tax regime with a potential effective tax rate of up to 54.5%.

The US tax separately applies to any non-US company which derives US source gross transportation income (e.g., any shipowner, charterer or sub-charterer in a chartering chain). Each company subject to US tax is obliged to file a US tax return and either pay the tax due or claim an exemption from tax. Exemption is not automatic and a tax return must be filed even if an exemption agreement is known to exist. See US Tax Filing Procedures below.

If a company is not exempt from US tax, then the company must pay estimated US income taxes on a quarterly basis. If taxes are not paid until the due date of the return, penalties and interest may be imposed.

Exemption From Tax under Section 883.
A company may qualify for exemption from tax based on either Section 883 of the US tax code (“Section 883”) or a bilateral tax treaty with the United States. The information provided below is relevant only to determine a company's eligibility to claim exemption from tax under Section 883. Treaty provisions providing exemption from tax should be separately consulted.

In general, a company will be eligible to claim exemption from tax under Section 883 in respect of the gross income derived from the international operation of a ship if:

  1. it is incorporated in a foreign country that provides a reciprocal exemption from tax on such income to US corporations (a "Qualified Foreign Country"); and
  2. at least one of the following stock ownership tests is satisfied:

    • more than 50% of its stock, in terms of value, is beneficially owned (actually or constructively by "looking through" all intervening entities in the chain of ownership) by individuals ("Qualified Shareholders") 1 resident in Qualified Foreign Countries ("Qualified Shareholder Stock Ownership Test");
    • its stock is "primarily and regularly traded" on an established securities market ("Qualified Exchange") located in a Qualified Foreign Country or in the US ("Publicly-Traded Stock Ownership Test"); or
    • it is a "controlled foreign corporation" within the meaning of the US tax code ("CFC") that satisfies certain specified ownership requirements.

For these purposes, a qualified country is one which grants to US corporations a reciprocal or equivalent exemption from tax in respect of the category of shipping income for which the company is claiming exemption under Section 883.

[1 Under the Final Regulations, which became effective January 1, 2005 for calendar year taxpayers, and as used herein, the term "Qualified Shareholder" is extended to also encompass certain entities or persons that satisfy certain specified criteria, including (i) a foreign government or a political subdivision (or local authority of such country) of a Qualified Foreign Country, (ii) a publicly-traded foreign corporation that satisfies the Publicly Traded Stock Ownership Test, (iii) a not-for-profit organization organized in a Qualified Foreign Country, and (iv) an individual beneficiary of a pension fund administered in or by a Qualified Foreign Country. The IRS rejected a request to expand the categories of Qualified Shareholders in the Final Regulations to include an "international organization" as defined in Section 7701(a)(18). A foreign corporation must obtain an “ownership statement” (a statement signed under penalties of perjury containing information including the shareholder’s name, country of residence, and number of shares owned) from each shareholder and each intervening entity in the chain of ownership upon which the company relies to establish its qualification for exemption.]

IRS List of Qualified Foreign Countries.
The US Internal Revenue Service (IRS) has published in Revenue Ruling 2008-17 a list of countries that the IRS has recognized as qualified foreign countries for purposes of Section 883, classified by the basis upon which each qualifies, e.g., exchange of notes, domestic law and/or treaty. Revenue Ruling 2008-17 modifies and supersedes the earlier list of qualified foreign countries as set forth in Revenue Ruling 2001-48. However, taxpayers should conduct their own diligence to ensure that a foreign country upon which they rely for exemption remains a qualified foreign country.

Part A of Table I – Exchange of Notes
This provides a list of qualified foreign countries that provide the requisite equivalent exemption from tax to US corporations in respect of the categories of shipping income indicated based on diplomatic notes exchanged with the United States.

Part B of Table I – Domestic Law
This provides a list of qualified foreign countries for which the IRS has determined, upon examination of their domestic law, that provide the requisite equivalent exemption from tax to US corporations in respect of the categories of shipping income indicated based on statute or decree, or by not imposing tax on such income.. This determination is made on a country-by-country basis and relies upon information submitted to the IRS by the foreign country regarding the law in effect at the time of the submission. The date of the IRS’s review is reflected in the first column of Part B of Table I. Since its initial review, the IRS has not attempted to determine whether any of the foreign laws of the countries listed in Part B of Table I have been amended or repealed. Hence, Part B of Table I cannot be considered as absolute, and taxpayers should independently verify the accuracy of the information. Furthermore, the fact that a country is not on this list does not necessarily mean that it is not a qualified foreign country. It could merely mean that the country has yet to apply to the IRS for a declaration of its status.

Table II - Income Tax Conventions (e.g. Treaties)
This provides a list of qualified foreign countries that grant an exemption under the shipping and aircraft article or capital gains article of a bilateral income tax treaty with the United States. This table is provided to assist a company organised in one of the countries listed in Table I in determining whether it also meets the more than 50% individual beneficial ownership threshold of Section 883(c)(1) referred to above. N.B: Table II is not relevant in determining whether a company itself is eligible to claim an exemption under the terms of an applicable treaty. As mentioned above, the company must consult the terms of the treaty to make this determination.

These Tables are intended as a summary only. The full text of any relevant income tax treaty (inclusive of relevant technical explanations and protocols), diplomatic exchange of notes or foreign domestic law should be consulted to verify the nature and scope of the equivalent exemption provided.

Table I 

Countries Currently Granting Equivalent Exemptions For Income 
From The International Operation of Ships and Aircraft
 

 Part A – Exchange of Notes1 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
Capital
Gains 3
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 -
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
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 Capital Gains 3
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 Apr. 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     June 1989
Aircraft   Feb. 1989
X
X
X
X
X
X
-
-
-
-
Qatar Ships 6    Jan.  1993
Aircraft 5  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 - - - -
US Virgin Islands Oct. 1988 X X X X X
Vanuatu May 1987 X X X X X

Table II

Countries Granting Exemptions from Tax by Income Tax Convention  15    

Basis for Exemptions Types of Shipping and Aircraft Income Exempted 2              
Countries and Territories Residence Based No Flag Residence & Flag Reciprocal LOB 29
Article
Operating Income Full Rental (Time or voyage charter) Bareboat Rental Incidental
Container Rental
Capital 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 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 19/28 X - X X X 3 X X X
Kazakhstan 35 X - X X X X 20 X X
Korea; Rep. of 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

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).
  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.
  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 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).

Remarks

Members are reminded that the US tax on US source transportation income separately applies to each shipowner and charterer (inclusive of each sub-charterer in a chartering chain) of a vessel engaging in any form of trade to or from ports in the United States and applies equally to single voyages as it does to regular liner trades. BIMCO wishes to emphasise to its Members that even if a foreign corporation owes no tax in the US, it MUST file a tax return in order to obtain an exemption. There is no automatic recognition of tax exemption under Section 883 or under bilateral treaties with the US.

US Tax Filing Procedures 

The US tax authorities maintain that a foreign company is only entitled to claim Section 883 or treaty exemptions if it files US tax return Form 1120F, 'US Income Tax Return of a Foreign Corporation'. A company that has not previously filed US income tax returns must file Form SS-4 with the IRS to obtain a tax identification number (TIN). US tax returns need only be filed for years during which companies have derived US source income (i.e., years during which a company traded a vessel(s) to US ports).

A shipowner or charterer has until the 15th day of the 3rd month (in the case of engaging in the liner trade through a US office or fixed place of business) and until the 15th day of the 6th month (in the case of engaging in the non-liner or tramp trades) after the end of its tax year to file a tax return on Form 1120F. A company can request a six month extension of the filing deadline by filing an application for extension on Form 7004. However, it should be noted that filing an application for extension does not extend the time for payment of any tax due. 

U.S. Tax Reform Act 1986 Clause 

As the US tax is levied on transportation income (i.e. it is not restricted to voyage revenues, but also applies to time charter and bareboat charter hire), the US Tax Reform 1986 Clause is recommended for use with voyage chartering as well as time and bareboat chartering.

U.S. Tax Reform 1986 Clause
Any U.S. Gross Transportation Tax as enacted by the United States Public Law 99-514, (also referred to as The U.S. Tax Reform Act of 1986), including later changes or amendments, levied on income attributable to transportation under this charter party which begins or ends in the United States, and which income under the laws of the United States is treated as U.S. source transportation gross income, shall be reimbursed by the Charterers.

Tax liability in the first instance rests with the taxpayer, be it the actual owner, bareboat charterer, or the time charterers, because they are the parties which have to file the tax return and thereby pay the tax in the first instance. As soon as the actual tax estimates have been calculated by the tax authorities, the taxpayer can seek reimbursement from the charterers.

It should be noted that the taxpayer should not be responsible for any other income than the actual income received under his own contract regardless of whether such tax will be applied to the various charterers in a chartering line.

One point which should be noted in connection with the use of the Clause is that owing to the fact that the Clause does not expressly put on companies in a chain of transactions any requirements to claim the exemption they may be entitled to, the charterers may end up having to pay the tax which they should not otherwise have paid if the owning company had claimed the exemption it was entitled to. Accordingly, it is recommended that in connection with the use of the Clause that it also be clearly stipulated that the owners are required to claim the exemption they may be entitled to.

Furthermore, attention is drawn to the fact that when chartering has been made on bareboat basis, where the Owner has no control over the vessel's trading pattern, the Owners should be notified of voyages undertaken to and from the U.S. during a taxable year, so that the Owners can complete their tax estimate accordingly. It is therefore recommended to insert in the bareboat charter a clause to that effect which may, for instance, read as follows:

The Charterers shall, within 45 days of the completion of any port call by the vessel involving the carriage of cargo to or from a United States port provide the Owners with a report for each voyage on which U.S. cargo is carried stating (a) the port and date of commencement of the voyage and (b) the port and date of conclusion of the voyage.

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