IRS Revenue Ruling
1997-31

Code Secs. 872, 883

Status: Modified & Superseded by 2001-42, Modified & Superseded by
2001-48


<<FULL TEXT>>

(Also Sections 883; 1.883-1; 894.

International operation of ships and aircraft; income exempt from tax.
Those countries that currently provide exemptions from tax to U.S. persons
for income from the international operation of ships and aircraft through
income tax conventions, diplomatic notes, or the country's domestic law
are listed. Rev. Rul. 89-42 supplemented.


REV. RUL. 97-31

PURPOSE

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

A foreign country may grant an equivalent exemption from tax through an
income tax convention or exchange of diplomatic notes, by not imposing a
tax, or by a decree or specific statutory exemption if a tax is generally
imposed. The following Table includes a current list of such countries and
summarizes the types of income that qualify for exemption.

Part I of the Table summarizes equivalent exemptions under shipping and
aircraft articles and capital gains articles of income tax conventions to
which the United States is a party. Part I includes a summary of the
requirements for the exemption, such as whether the exemption is based
solely on residence or has an additional requirement of documentation or
registration. Part I generally does not set forth other benefits that may
be provided under articles covering business profits, rentals and
royalties, and other income.

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

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

This determination is made on a country by country basis and relies
upon information submitted to the Internal Revenue Service by the foreign
country regarding the foreign law in effect at the time of the submission.
The date of the Service's review is reflected in the first column of Part
III of the Table. Since its initial review, the Service has not attempted
to determine whether any of the foreign laws of the countries listed in
Part III have been amended or repealed. Therefore, taxpayers should
independently verify the accuracy of the information in Part III of the
Table at such time that a determination is relevant.

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

The Table is intended only as a summary. The full text of any relevant
income tax convention, diplomatic note, or foreign law should be
consulted. It may be necessary to consult the technical explanation of an
income tax convention, a protocol, or a diplomatic note accompanying a
convention to determine the items of income exempted. Income tax
conventions and diplomatic notes are published in the Cumulative Bulletin.
The Table will be updated periodically.


CHANGES TO REV. RUL. 89-42

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

In Part II, new diplomatic notes have been exchanged with Chile, Hong
Kong, India, Isle of Man, Japan, Luxembourg, Malaysia, Malta, Marshall
Islands, Norway, Pakistan, Peru, and St. Vincent and the Grenadines. After
the publication of Rev. Rul. 89-42, Mexico entered into a diplomatic note
with the United States effective retroactively to January 1, 1987. <<1>>
This note, however, terminated on January 1, 1994, the general effective
date of the new U.S.-Mexico Income Tax Convention. In addition, the
Russian Federation entered into a diplomatic note effective retroactivity
to January 1, 1991. <<2>> This note also terminated on January 1, 1994,
the general effective date of the New U.S.-Russian Federation Income Tax
Convention. Although a diplomatic not was signed with Boliva, that note
has never entered into force. Therefore Boliva has been removed from the
list.

----------
1/ This note is published at 1990-2 C.B. 322.
2/ This note is published at 1996-36 I.R.B. 6.


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

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

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


EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 89-42 is supplemented.


DRAFTING INFORMATION

The principal author of this revenue ruling is Patricia C. Bray of the
Office of Associate Chief Counsel (International). For information
regarding this revenue ruling contact Ms. Bray on (202) 622-3880 (not a
toll-free call).


TABLE

Countries Currently Granting Equivalent Exemptions for Income From the
International Operation of Ships and Aircraft

Basis for Exemption TYPES OF SHIPPING AND AIRCRAFT INCOME EXEMPTED <2>

TYPES OF SHIPPING AND
Basis for Exemption AIRCRAFT INCOME EXEMPTED <2>
------------------- -----------------------------------
Resi- Resi- Resi- Full
dence dence dence Rental
Countries Based & Flag & Flag Opera- (Time or Bare- Con- Cap-
and No Reci- Uni- ting voyage Boat tainer ital
Territories Flag procal lateral Income charter) Rental Rental Gains
----------- ----- ------ ------- ------ -------- ------ ------ -----
PART I TREATIES <1>
Australia X X X <4> X <27> X <27> X <5>
Austria X X <3> --- --- --- ---
Barbados X X X <15> X <15> X X
Belgium X <7> X X <5> X <5> X <5> X <5>
Canada X X X X X X
China <29>
(Peoples
Republic) X X X <15> X <15> X X
Cyprus X X X <15> X <15> X X
Czech Republic X X X X <5> X X
Denmark X X <3> --- --- --- ---
Egypt X X X <5> X <5> X <5> ---
Finland <22> X X X <5> X <5> X <28> X
France X X X X <15> X <5> X <5>
Germany <22/24> X X X --- X X
Greece X X <3> --- --- --- --
Hungary X X X <5> X <5> X X
Iceland X <8> X X <5> X <5> X <5> X
India <22> X X X <5> X <5> X X <5/
9>
Indonesia <22> X X X X <10> X <5> X
Ireland X X <3> --- --- --- ---
Israel X X X <5> X <5> X <5> X <5>
Italy <11> X <8> X X <21> X <5> X X <5>
Jamaica X X X <15> X <15> X X <5>
Japan <11> X <12> X X <5> X <5> X <5> X <5>
Kazakhstan X X X X <15> X X
Korea X X X <13> --- X <5> ---
Luxembourg X X <3> --- --- --- ---
Mexico <22> X X X X <28> X X
Morocco X <7> X <3> --- --- --- X <5>
Netherlands <22> X X X <5> X <5> --- X
New Zealand X X X X <5> X <5> X <6>
Norway <11> X X X <13> X <5> X <5> X
Pakistan <14> X X <3> --- --- --- ---
Philippines <16> X --- --- --- --- X <5>
Poland X <8> X X <5> X <5> X <5> X
Portugal <22> X X X X <5> --- X
Romania X X X <5> X <5> X <5> X
Russian <22>
Federation X X X X <15> X X
Slovak
Republic <22> X X X X <5> X X
Spain <22> X X X X <5> X X
Sweden <22> X X X X <5> X X
Switzerland X X <3> --- --- --- ---
Trinidad &
Tobago X <8> X X <5> X <5> --- X
Tunisia <22> X X X <15> X <15> X <5> X
USSR <25> X X <3> --- --- --- X <5>
U.K. X <8> X X X <5> X X <5>


TYPES OF SHIPPING AND
Cumulative Bulletin Citation AIRCRAFT INCOME EXEMPTED <2>
---------------------------- --------------------------------------
Full Inci-
Rental dental Inci-
Countries Operat- (Time or Bare- Con- dental
and ing voyage Boat tainer Capital
Territories Income charter) Rental Rental Gains
----------- ------- -------- ------ ------ -------
PART II EXCHANGE OF NOTES <23>
Argentina 1988-1 C.B. 456 X X X X X
Bahamas 1988-1 C.B. 458 X X X X ---
Belgium 1988-1 C.B. 459 X X --- X ---
Chile <14> 1991-1 C.B. 304 X X X <5> 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 <14> 1988-1 C.B. 463 X X X X X
Fiji 1996-40 I.R.B. 8 X X X X X
Finland 1989-2 C.B. 334 X X X X ---
Greece 1988-2 C.B. 366 X X X X ---
Hong Hong <16/31> 1995-1 C.B. 228 X X X X X
India 1990-2 C.B. 316 X X X <5> X X
Isle of Man <16> 1990-2 C.B. 317 X X X X X
Japan 1990-2 C.B. 318 X X X X ---
Jordan 1996-50 I.R.B. 8 X X X X ---
Liberia 1988-1 C.B. 463 X X X X X
Luxembourg 1996-28 I.R.B. 36 X X X X ---
Malaysia 1990-2 C.B. 319 X X X <5> X X
Malta 1997-17 I.R.B. 5 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 <16> 1991-1 C.B. 305 X <3> --- --- --- ---
Panama 1988-2 C.B. 366 X X X X ---
Peru <16> 1989-2 C.B. 335 X X X <5> X ---
St. Vincent &
Grenadines 1989-2 C.B. 336 X X X X ---
Singapore 1990-2 C.B. 323 X X --- <30> X ---
Sweden 1988-1 C.B. 466 X X X <5> X ---
Taiwan 1989-2 C.B. 337 X X X X ---
Venezuela 1988-1 C.B. 467 X X X <5> X X


TYPES OF SHIPPING AND
AIRCRAFT INCOME EXEMPTED <2>
----------------------------------------
Full Inci-
Date Rental dental Inci-
Countries Foreign Operat- (Time or Bare- Con- dental
and Law ing voyage Boat tainer Capital
Territories Reviewed Income charter) Rental Rental Gains
----------- -------- -------- -------- ------ ------- -------
PART III DOMESTIC LAW
Antigua &
Barbuda <16> NOV 1991 X X X X X
Barbados OCT 1989 X X X X X
Bermuda NOV 1988 X X X X X
Brazil <18> DEC 1988 X X X <5> X ---
Bulgaria --- 1989 X X X X X
Cayman Islands <26> JAN 1987 X X X X X
Chile <16> OCT 1988 X X X X X
Ecuador <16/17> DEC 1989 X X X <5> X X
Israel FEB 1991 X X X X X
Netherlands OCT 1988 X X X <5> X ---
Netherlands
Antilles MAY 1988 X X X X X
Portugal <14>
ships JUNE 1989 X X --- X ---
aircraft FEB 1989
Qatar <14> AUG 1994 X <3> --- --- --- ---
Spain <19> DEC 1988 X X --- X ---
Turkey <20> JAN 1987 X --- --- X ---
Turks &
Caicos <26> FEB 1990 X X X X X
U.S. Virgin
Islands OCT 1988 X X X X X
Vanuatu MAY 1987 X X X X X

----------
1/ A reciprocal exemption based on treaty relief is limited to the
circumstances in which the treaty itself would be available. In such cases
the exemption is based on section 894 and the treaty itself, rather than
on section 872(b) or section 883.

2/ Unless otherwise footnoted, an X indicates full exemption whether or
not there is a permanent establishment.

3/ Operating income is not defined.

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

5/ The U.S. tax exemption is available only if the income is incidental
to operating income.

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

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

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

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

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

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

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

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

14/ This exemption applies to aircraft only.

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

16/ This exemption applies to shipping only.

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

18/ Brazilian and Portuguese laws exempt only companies.

19/ The Spanish statute exempts only corporations.

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

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

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

Czech Republic January 1, 1993
Finland January 1, 1991
France January 1, 1996
Germany January 1, 1990
India January 1, 1991
Indonesia January 1, 1990
Israel January 1, 1995
Kazakhstan January 1, 1996
Mexico January 1, 1994
Netherlands January 1, 1994
Portugal January 1, 1996
Russian Federation January 1, 1994
Slovak Republic January 1, 1993
Spain January 1, 1991
Sweden January 1, 1996
Tunisia January 1, 1990


23/ Notes signed prior to the Technical and Miscellaneous Revenue Act
of 1988, will be interpreted in accordance with Technical Corrections.

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

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

26/ The country generally imposes no income tax.

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

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

29/ Pursuant to Notice 97-40, 1997-28 I.R.B. 6 dated July 14, 1997, the
treaty between the United States and the People's Republic of China
(China) will continue to apply only to China and will not apply to the
Hong Kong Special Administrative Region of the People's Republic of China.

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

31/ This diplomatic note applies to Hong Kong before July 1, 1997, and
pursuant to Notice 97-40, 1997-28 I.R.B. 6 dated July 14, 1997, to the
Hong Kong Special Administrative Region of the People's Republic of China
on or after July 1, 1997. The note does not apply with respect to the
People's Republic of China, which will continue to be treated as a
separate country for purposes of the Internal Revenue Code.

<<END RULING>>
 

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