Part I. Rulings — Internal Revenue Bulletin 2008-12

Section 872.—Gross Income

A revenue ruling is provided to assist a foreign corporation engaged in the international operation of ships or aircraft, and its shareholders, in determining whether the foreign corporation is organized in a country that grants an “equivalent exemption” from tax for purposes of section 883(a) and (c) of the Internal Revenue Code (Code). This revenue ruling is also intended to assist a nonresident alien individual engaged in the international operation of ships or aircraft in determining whether a country grants an equivalent exemption from tax for purposes of section 872(b) of the Code. See Rev. Rul. 2008-17, page 626.

Section 883.—Exclusions From Gross Income

26 CFR 1.883: Exclusion of income from the interna- tional operation of ships or aircraft. (Also Section 872, 894.)

International operation of ships or aircraft; foreign corporation. This ruling assists a foreign corporation engaged in the international operation of ships or aircraft, and its shareholders, in determining whether the foreign corporation is organized in a country that grants an “equivalent exemption” from tax for purposes of section 883(a) and (c) of the Code. The ruling also assists a nonresident alien individual engaged in the international operation of ships or aircraft in determining whether a country grants an equivalent exemption for purposes of section 872(b). The ruling does not, however, provide substantive guidance under section 883. Rev. Ruls. 89–42, 97–31, and 2001–48 modified and superseded.

Rev. Rul. 2008–17

Purpose

The purpose of this revenue ruling is to assist a foreign corporation engaged in the international operation of ships or aircraft, and its shareholders, in determining whether the foreign corporation is organized in a country that grants an “equivalent exemption” from tax for purposes of section 883(a) and (c) of the Internal Revenue Code (Code). This revenue ruling is also intended to assist a nonresident alien

individual engaged in the international operation of ships or aircraft in determining whether a country grants an equivalent exemption from tax for purposes of section 872(b) of the Code. This revenue ruling provides lists of countries that may provide various forms of equivalent exemptions. This revenue ruling does not, however, provide substantive guidance under section 883 of the Code. For detailed guidance, see Treas. Reg. § 1.883–0 through § 1.883–5 (T.D. 9087, 2003–2 C.B. 781, as amended by T.D. 9218, 2005–2 C.B. 503), and Treas. Reg. § 1.883–0T through § 1.883–5T (T.D. 9332, 2007–32 I.R.B. 300).

Background

Section 883(a) of the Code generally provides that gross income derived by a foreign corporation from the international operation of ships or aircraft shall not be included in the gross income of such foreign corporation, and shall be exempt from U.S. taxation, if the country in which the corporation is organized grants an equivalent exemption to corporations organized in the United States (U.S. corporations). Section 883(c)(1) provides that the exemption provided by section 883(a) is not available if 50 percent or more of the value of the stock of the foreign corporation is owned by individuals who are not residents of a country that grants an equivalent exemption to U.S. corporations. Thus, a foreign corporation seeking to avail itself of the exemption from tax under section 883 must determine whether it is organized in a country that provides an equivalent exemption to U.S. corporations and whether its shareholders are organized in, or residents of, a country that provides an equivalent exemption to U.S. corporations. Treasury regulation § 1.883–1(c)(3) also requires a foreign corporation claiming an exemption from tax to provide the applicable authority for an equivalent exemption with its Form 1120–F ( U.S. Income Tax Return of a For- eign Corporation ).

Treasury regulation § 1.883–1(h)(1) provides that an equivalent exemption may exist if a foreign country generally

imposes no tax on income or specifically provides an exemption under domestic law for income derived from the international operation of ships or aircraft. Alternatively, a foreign country may exchange a diplomatic note, or enter into an agreement, with the United States that provides for an equivalent exemption for purposes of section 883. Treas. Reg. § 1.883–1T(h)(1) broadens the definition of equivalent exemption to include an exemption provided by income tax convention, provided the foreign corporation meets certain additional conditions set forth in § 1.883–1T(h)(3).

Table I

Part A of Table I of this revenue ruling provides a list of countries that grant an equivalent exemption as evidenced by a diplomatic note exchanged with the United States.

Part B of Table I provides a list of countries that grant an equivalent exemption to U.S. corporations by statute or decree, or by not imposing tax on income from the international operation of ships or aircraft. The Internal Revenue Service (IRS) generally has made the determinations based upon information submitted by the foreign country regarding its domestic law in effect at the time of the submission. The date of the IRS’s review of the foreign country’s law is reflected in the first column of Part B of Table I. The list of countries included in Part B of Table I is not an exhaustive list of the countries which provide an equivalent exemption under domestic law. Other countries that have not submitted the information necessary for the IRS to make a determination also may grant an equivalent exemption.

Because Part B of Table I does not reflect any changes to a country’s domestic law since the IRS’s review, a foreign corporation and its shareholders should independently verify the accuracy of the information in Part B of Table I as it relates to the relevant taxable year.

Consistent with past practice, the IRS will entertain a request from a foreign government to determine whether the domestic law of the foreign country provides an

2008–12 I.R.B. 626 March 24, 2008

CHANGES TO REV. RUL. 2001–48

In Part A of Table I, Angola, the Cape Verde Islands, Ghana, and the Bailiwick of Jersey have been added to the list of countries that have exchanged diplomatic notes with the United States.

In Part B of Table I, the British Virgin Islands, Croatia, Gibraltar, Kuwait (shipping only), Monaco, Qatar (shipping only), and Uruguay have been added to the list of countries whose domestic law has been determined to provide an equivalent exemption.

In Table II, the following countries have been added to the list of countries that provide an exemption under an income tax convention: Bangladesh and Sri Lanka. The following countries have entered into new income tax conventions or protocols with the United States that contain new shipping and air transport articles that supersede prior income tax conventions reported in Rev. Rul. 2001–48: Australia, Belgium, Japan, and the United Kingdom.

A subheading has been added under the heading Basis for Exemption to notify any foreign person, whether it is the corporation seeking an exemption from tax under section 883, or a shareholder of such corporation, that it may not treat an income tax convention as granting an equivalent exemption unless that person qualifies for benefits under the limitation on benefits article, if any, in that income tax convention. Footnote number 35 has also been added to identify those countries that provide an equivalent exemption from tax only through an income tax convention with the United States.

TO CLAIM AN EXEMPTION

Nonresident alien individuals claiming an exemption from U.S. taxation under section 872(b) of the Code must file a return on Form 1040NR ( U.S. Nonresident Alien Income Tax Return ), follow the accompanying instructions, and claim the exemption. Foreign corporations claiming an exemption under section 883 must file a return on Form 1120F ( U.S. Income Tax Return of a Foreign Corporation ), follow the accompanying instructions, and comply with the relevant reporting provisions of Treas. Reg. § 1.883–1(c)(3).

equivalent exemption for one or more categories of income that may be exempt from U.S. taxation under section 883. Accordingly, taxpayers may ask the relevant foreign government to contact the IRS for this purpose. The letter from the foreign government official should be addressed to the Associate Chief Counsel (International), Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224, Attn: CC:INTL:Br1. The letter should state the name, citation, and effective date of the statute or decree, and generally describe the application of the country’s domestic law to income derived by U.S. persons from the international operation of ships or aircraft and from calling on ports or airports in that country. For example, the letter should discuss whether the law provides an exemption for each category of income described in § 1.883–1(h)(2)(i) through (viii). A copy of the relevant statute or decree as published in an official government publication and a certified English translation of the document, if it was not published in English, should be attached to the letter.

Table II

Table II of this revenue ruling provides a list of countries that have entered into income tax conventions with the United States that include a shipping and air transport article or a gains article. Prior to the issuance of § 1.883–1T(h)(3), a foreign corporation organized in a country that only provided an exemption from tax through an income tax convention with the United States was not considered organized in a country that granted an equivalent exemption for purposes of section 883. For taxable years of foreign corporations beginning on or after June 25, 2007, § 1.883–1T(h)(3)(i) provides that if a foreign corporation is organized in a foreign country that only provides an exemption from tax for profits from the operation of ships or aircraft in international transport or international traffic under the shipping and air transport or gains article of an income tax convention with the United States, then such foreign corporation may treat the exemption from tax provided by the income tax convention as an equivalent exemption for purposes of section 883, but only if: (1) the foreign corporation meets all the conditions for claim

ing benefits with respect to such profits under the income tax convention, including the limitation on benefits article; and (2) the profits that are exempt from tax pursuant to the income tax convention also fall within a category of income described in § 1.883–1(h)(2)(i) through (viii).

A foreign corporation that relies on an income tax convention as providing an equivalent exemption with respect to a particular category of income under § 1.883–1T(h)(1)(ii) must demonstrate not only that it qualifies for benefits under the income tax convention but also that it meets the requirements of section 883. For example, a corporation that is considered a resident of a foreign country that grants an equivalent exemption because it is managed and controlled in that country will not qualify for an exemption from tax under section 883(a) unless the corporation is also organized in that country. Similarly, a foreign corporation that does not meet one of the stock ownership tests described in § 1.883–1(c)(2) may not claim an exemption from tax under section 883, even if it qualifies for benefits under the limitation on benefits article of the relevant income tax convention.

Table II summarizes the bases for claiming an exemption under each income tax convention, including whether the exemption under the shipping and air transport article is based solely on residence, or, as in the case of certain older income tax conventions, the exemption has an additional requirement of documentation or registration. Table II now also includes limitation on benefits articles as a condition for claiming benefits. Table II does not set forth other benefits relating to a shipping or an air transport business that may be provided under articles covering business profits, rentals and royalties, or other income because such benefits are not relevant for purposes of section 883(a) or (c).

Table I and Table II are intended only as a summary, and the full text of any relevant diplomatic note, foreign law, or income tax convention (including any protocol thereto, any agreement, any diplomatic note accompanying the convention, or the technical explanation of the income tax convention) should be consulted. The IRS and Treasury Department intend to update the tables periodically.

March 24, 2008 627 2008–12 I.R.B.

ruling, contact Patricia A. Bray at (202) 622–5871 (not a toll-free call).

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 89–42, Rev. Rul. 97–31, and Rev. Rul. 2001–48 are modified and superseded.

DRAFTING INFORMATION

The principal author of this revenue ruling is Patricia A. Bray of the Office of Associate Chief Counsel (International). For further information regarding this revenue

TABLE I

Countries Granting Equivalent Exemptions For

Income From The International Operation of

Ships and Aircraft

PART A — EXCHANGE OF NOTES ¹

TYPES OF SHIPPING AND AIRCRAFT INCOME EXEMPTED ²

Incidental Container Rental

Bareboat Rental

Cap ³ Gains

Full Rental (Time or Voyage Charter)

Countries And Territories

Cumulative Bulletin Or Internal Revenue Bulletin Citation

Operating Income

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 2000–2 C.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

2008–12 I.R.B. 628 March 24, 2008

TABLE I—Continued

Countries Granting Equivalent Exemptions For

Income From The International Operation of

Ships and Aircraft

PART A — EXCHANGE OF NOTES ¹

TYPES OF SHIPPING AND AIRCRAFT INCOME EXEMPTED ²

Incidental Container Rental

Bareboat Rental

Cap ³ Gains

Full Rental (Time or Voyage Charter)

Countries And Territories

Marshall

Islands

Cumulative Bulletin Or Internal Revenue Bulletin Citation

Operating Income

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 &

1989–2 C.B. 336 X X X X -

Grenadines

Saudi Arabia ⁹ 2000–1 C.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

1998–2 C.B. 528 X X X X X

Emirates

Venezuela 1988–1 C.B. 467 X X X ³ X X

PART B — DOMESTIC LAW

TYPES OF SHIPPING AND AIRCRAFT INCOME EXEMPTED ²

Incidental Container Rental

Bareboat Rental

Cap ³ Gains

Full Rental (Time or Voyage Charter)

Countries And Territories

Date Foreign Law Reviewed

Operating Income

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

March 24, 2008 629 2008–12 I.R.B.

TABLE I—Continued

Countries Granting Equivalent Exemptions For

Income From The International Operation of

Ships and Aircraft

PART B — DOMESTIC LAW—Continued

TYPES OF SHIPPING AND AIRCRAFT INCOME EXEMPTED ²

Incidental Container Rental

Bareboat Rental

Cap ³ Gains

Full Rental (Time or Voyage Charter)

Countries And Territories

Date Foreign Law Reviewed

Operating Income

Kuwait ⁶ APRIL 2007 X X X X -

Monaco JAN 2005 X X X X X

Netherlands OCT 1988 X X X ³ X -

Netherlands Antilles MAY 1988 X X X X X

Peru ⁵ SEPT 1995 X X X X X

Portugal ¹⁰ Ships JUNE 1989 X X X - -

Aircraft FEB 1989 X X X - -

Qatar Ships ⁶ JAN 1993 X ⁸ X - - -

Aircraft ⁵ AUG 1994 X ⁸ - - - -

Spain ¹³ DEC 1988 X X - X -

Surinam NOV 1999 X X X X X

Turkey ¹⁴ JAN 1987 X - - X -

Turks & Caicos ¹¹ FEB 1990 X X X X X

Uruguay JAN 2007 X ⁸ - - - -

U.S. Virgin Islands OCT 1988 X X X X X

Vanuatu MAY 1987 X X X X X

TABLE II

Countries Granting Exemptions from Tax by Income Tax Convention ¹⁵

BASIS FOR EXEMPTION TYPES OF SHIPPING AND AIRCRAFT INCOME EXEMPTED ²

Operating Income

Incidental Container Rental

Bare-Boat Rental

Cap Gains

Countries And Territories

Residence Based No Flag

Residence & Flag Reciprocal

LOB ²⁹

Article

Full Rental (Time or Voyage Charter)

Australia ^19/35 X - X X X ¹⁶ X ³ X X

Austria ³⁵ X - X X X ²⁰ X ²⁰ X X

Bangladesh ^19/35 X - X X X ²⁰ X ²⁰ X X

Barbados X - X X X ²⁰ X ²⁰ X X

Belgium ¹⁹ X - X X X X ²⁰ X X

Canada ³⁵ X - X X X X X X

China ^22/35 (People’s

Republic)

X - X X X ²⁰ X ²⁰ X X

2008–12 I.R.B. 630 March 24, 2008

TABLE II—Continued

Countries Granting Exemptions from Tax by Income Tax Convention ¹⁵

BASIS FOR EXEMPTION TYPES OF SHIPPING AND AIRCRAFT INCOME EXEMPTED ²

Operating Income

Incidental Container Rental

Cap Gains

Bare-Boat Rental

Countries And Territories

Residence Based No Flag

Residence & Flag Reciprocal

LOB ²⁹

Article

Full Rental (Time or Voyage Charter)

Cyprus X - X X X ²⁰ X ²⁰ X X

Czech Republic ³⁵ X - X X X X ³ X X

Denmark X - X X X X ²⁰ X X

Egypt X - - X X ³ X ³ X -

Estonia ³⁵ X - X X X X ³ X X

Finland X - X X X ³ X ³ X X

France ³⁵ X - X X X X ²⁰ X X

Germany ^24/35 X - X X X - X X

Greece - X - X ⁸ - - - -

Hungary ³⁵ X - - X X ³ X ³ X X

Iceland ³⁵ - X ²⁵ - X X ³ X ³ X X

India X - X X X ³ X ³ X X

Indonesia ³⁵ X - X X X X ²⁷ X X

Ireland ³⁵ X - X X X X ²⁰ X X

Israel X - X X X ³ X ³ X X

Italy ^28/29/35 - X ²⁵ X X X ³⁰ X ³ X X

Jamaica ³⁵ X - X X X ²⁰ X ²⁰ X X

Japan ^28/19 X - X X X ³ X X X

Kazakhstan ³⁵ X - X X X X ²⁰ X X

Korea ³⁵ X - - X X ³² - X -

Latvia ³⁵ X - X X X X ¹⁷ X X

Lithuania ³⁵ X - X X X X ¹⁷ X X

Luxembourg X - X X X X ²⁰ X X

Mexico ³⁵ X - X X X X ²³ X X

Morocco ³⁵ - X ²¹ - X ⁸ - - - X

Netherlands X - X X X ³ X ³ - X

New Zealand ³⁵ X - X X X X ³ X X

Norway ²⁸ X - - X X ³² X ³ X X

Pakistan ⁵ - X - X ⁸ - - - -

Philippines ^6/35 X - - - - - - X

Poland ³⁵ - X ²⁵ - X X ³ X ³ X X

Portugal ³⁵ X - X X X X ³ - X

Romania ³⁵ - X - X X ³ X ³ X X

March 24, 2008 631 2008–12 I.R.B.

TABLE II—Continued

Countries Granting Exemptions from Tax by Income Tax Convention ¹⁵

BASIS FOR EXEMPTION TYPES OF SHIPPING AND AIRCRAFT INCOME EXEMPTED ²

Operating Income

Incidental Container Rental

Cap Gains

Bare-Boat Rental

Countries And Territories

Residence Based No Flag

Residence & Flag Reciprocal

LOB ²⁹

Article

Full Rental (Time or Voyage Charter)

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 X X X ³ X X

X ⁶ - 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.

2008–12 I.R.B. 632 March 24, 2008

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).

tax consequences of such payments where the foreign insurer is eligible for a waiver of the excise tax by income tax treaty but the foreign reinsurer is not. There are two types of insurance excise tax waivers provided by treaty. The ruling addresses both types of waivers. Rev. Rul. 58–612 clarified and amplified.

Rev. Rul. 2008–15

ISSUES

Whether the reinsurance excise tax imposed by section 4371(3) of the Internal Revenue Code (Code) on policies of reinsurance covering contracts taxable under

Section 894.—Income Affected by Treaty

Section 4371.—Imposition of Tax

An announcement describes a voluntary compliance initiative by the Internal Revenue Service (IRS) regarding the foreign insurance excise tax. See Announcement 2008-18, page 667.

(Also: 4372, 4373, and 4374.)

Insurance premiums; excise tax con- sequences. This ruling describes the insurance excise tax consequences (under section 4371 of the Code) of insurance premiums paid by one foreign insurer (foreign insurer) to another (foreign reinsurer). In particular, the ruling addresses the excise

March 24, 2008 633 2008–12 I.R.B.

- The United States excise tax on insurance policies issued by foreign insurers shall not be imposed on insurance or reinsurance policies, the premiums on which are the receipts of a business of insurance carried on by an enterprise of Country Z. However, if such policies are entered into as part of a conduit arrangement, the United States may impose excise tax on those policies, unless the premiums in respect of those policies are, or are part of, the income of a permanent establishment that the enterprise of Country Z has in the United States.

The term “conduit arrangement” is defined to mean a transaction or series of transactions:

which is structured in such a way that a resident of a Contracting State entitled to the benefits of this Convention receives an item of income arising in the other Contracting State but that resident pays, directly or indirectly, all or substantially all of that income (at any time or in any form) to another person who is not a resident of either Contracting State and who, if it received that item of income direct from the other Contracting State, would not be entitled under a convention for the avoidance of double taxation between the state in which that other person is resident and the Contracting State in which the income arises, or otherwise, to benefits with respect to that item of income which are equivalent to, or more favourable than, those available under this Convention to a resident of a Contracting State; and which has as its main purpose, or one of its main purposes, obtaining such increased benefits as are available under this Convention. It is assumed for purposes of this revenue ruling that Foreign Insurer has not entered into such policies with U.S. Corporation as part of a conduit arrangement.

LAW AND ANALYSIS

Section 4371 of the Code imposes an excise tax on each policy of insurance, indemnity bond, annuity contract, or policy of reinsurance issued by any foreign insurer or reinsurer.

paragraph (1), (2) or (3) of section 4371 applies to reinsurance premiums paid by one foreign insurer or reinsurer to another.

Whether the insurance excise taxes imposed by section 4371 apply to the extent that a foreign insurer or reinsurer that would otherwise be entitled under an income tax treaty to an exemption from the excise taxes imposed by paragraphs (1), (2) or (3) of section 4371 reinsures the risks covered by such contracts with a foreign reinsurer that is not entitled to an exemption from such excise taxes under an income tax treaty (a nonqualified foreign reinsurer).

FACTS

Situation 1

Foreign Insurer, a foreign corporation incorporated in Country X, issues policies of casualty insurance to U.S. Corporation, a domestic corporation, with respect to hazards, risks, losses, or liabilities wholly or partly within the United States. Foreign Insurer is not engaged in a trade or business in the United States. Country X does not have an income tax treaty with the United States.

Foreign Insurer enters into a reinsurance agreement with Foreign Reinsurer, a foreign corporation incorporated in Country Y, whereby Foreign Reinsurer agrees to indemnify Foreign Insurer against all or part of the loss that Foreign Insurer may sustain under the policies it has issued to U.S. Corporation. Foreign Reinsurer is not engaged in a trade or business in the United States. Country Y has an income tax treaty with the United States that does not exempt insurance premiums from the excise taxes imposed by section 4371.

Situation 2

Foreign Reinsurer A, a foreign corporation incorporated in Country W, issues policies of reinsurance to Domestic Insurer, a U.S. corporation, that cover casualty insurance contracts issued to or for, or in the name of, an insured as defined in section 4372(d). Foreign Reinsurer A enters into a reinsurance agreement with Foreign Reinsurer B, incorporated in Country Y, whereby Foreign Reinsurer B agrees to indemnify Foreign Reinsurer A against all or part of the loss that Foreign Reinsurer

A may sustain under the policies it has issued to Domestic Insurer. Country W and Country Y have income tax treaties with the United States that do not exempt insurance premiums from the excise taxes imposed by section 4371.

Situation 3

The facts are the same as in Situation 1, except that there is an income tax treaty in force between the United States and Country X (the “U.S.-X Treaty”). Foreign Insurer is a resident of Country X for purposes of the U.S.-X Treaty and satisfies the requirements of the limitation on benefits article in that treaty. Article 2 of the U.S.-X Treaty provides, in pertinent part:

The existing taxes to which this Convention shall apply are:

In the case of the United States:

- the Federal excise taxes imposed on insurance premiums paid to foreign insurers...

The Convention shall, however, apply to the Federal excise taxes imposed on insurance premiums paid to foreign insurers only to the extent that the risks covered by such premiums are not reinsured with a person not entitled to the benefits of this or any other convention which provides exemption from these taxes....

Situation 4

The facts are the same as in Situation 1, except that Foreign Insurer is a resident of Country Z and there is an income tax treaty in force between the United States and Country Z (the “U.S.-Z Treaty”) that contains a comprehensive limitation on benefits article. Foreign Insurer satisfies the requirements of the limitation on benefits article in that treaty. Article 2 of the U.S.-Z Treaty provides, in pertinent part:

The existing taxes to which this Convention shall apply are:

In the case of the United States:

- the Federal excise taxes imposed on insurance policies issued by foreign insurers...

The Business Profits article of the Country Z treaty provides in pertinent part:

2008–12 I.R.B. 634 March 24, 2008

Situation 1

In Situation 1, the premiums paid by U.S. Corporation on the policies of casualty insurance issued by Foreign Insurer are subject to the four-percent excise tax imposed by section 4371(1), because the policies were issued by Foreign Insurer, a foreign corporation, to U.S. Corporation, an “insured” for purposes of section 4372(d). In addition, premiums paid by Foreign Insurer on the policies of reinsurance issued by Foreign Reinsurer with respect to the foregoing insurance policies are subject to the one-percent excise tax imposed by section 4371(3) because section 4371(3) imposes an excise tax on reinsurance policies issued by a foreign reinsurer with respect to risks covered by contracts described in section 4371(1).

Situation 2

In Situation 2, the reinsurance premiums paid by Domestic Insurer to Foreign Reinsurer A covering casualty insurance contracts issued by Domestic Insurer are subject to the one-percent excise tax imposed by section 4371(3), because the policies of reinsurance cover contracts described in section 4371(1). The premiums paid by Foreign Reinsurer A to Foreign Reinsurer B are also subject to the one-percent excise tax imposed by section 4371(3) based on the same analysis.

Situation 3

In Situation 3, the premiums paid by U.S. Corporation on the policies of casualty insurance issued by Foreign Insurer would generally be exempt from the section 4371(1) excise tax under the U.S.-X Treaty. However, the U.S.-X Treaty also provides that such premiums are not exempt to the extent that the risks covered by such premiums are reinsured with a foreign reinsurer not entitled to the benefits of a treaty that provides an exemption from insurance excise taxes. Therefore, because the risks are reinsured with Foreign Reinsurer, who is not entitled to the benefits of a treaty that provides an exemption from insurance excise taxes, the insurance premiums received by Foreign Insurer from U.S. Corporation are subject to the four-percent excise tax as of the date the reinsurance premiums are paid by Foreign Insurer to Foreign Reinsurer. In addition, premiums

Section 4371(1) imposes such excise tax at the rate of 4 cents on each dollar, or fractional part thereof, of the premium paid on the policy of casualty insurance or the indemnity bond, if issued to or for, or in the name of, an insured as defined in section 4372(d).

Section 4371(2) imposes such excise tax at the rate of 1 cent on each dollar, or fractional part thereof, of the premium paid on the policy of life, sickness, or accident insurance, or annuity contract.

Section 4371(3) imposes such excise tax at the rate of 1 cent on each dollar, or fractional part thereof, of the premium paid on the policy of reinsurance covering any of the contracts taxable under paragraph (1) or (2) of section 4371.

Section 4372(a) of the Code, for purposes of Section 4371, defines the term “foreign insurer or reinsurer” as an insurer or reinsurer who is a nonresident alien individual, or a foreign partnership, or a foreign corporation.

Section 4372(d)(1) of the Code defines the term “insured” to include a domestic corporation or partnership, or an individual resident of the United States, that is insured against, or with respect to, hazards, risks, losses, or liabilities wholly or partly within the United States. Section 4372(d)(2) defines the term “insured” to include also a foreign corporation, foreign partnership, or nonresident individual, engaged in a trade or business within the United States, that is insured against, or with respect to, hazards, risks, losses, or liabilities within the United States.

Section 4372(f) of the Code defines the term “policy of reinsurance”, for the purposes of section 4371(3), as any policy or other instrument by whatever name called whereby a contract of reinsurance is made, continued, or renewed against, or with respect to, any of the hazards, risks, losses, or liabilities covered by contracts taxable under paragraph (1) or (2) of section 4371.

Section 4373(1) of the Code provides an exemption, whereby the tax imposed by section 4371 shall not apply to any amount which is effectively connected with the conduct of a trade or business within the United States unless such amount is exempt from the application of section 882(a) of the Code pursuant to a treaty obligation of the United States.

Section 4374 of the Code provides that any tax imposed by section 4371 shall be paid, on the basis of a return, by any person who makes, signs, issues, or sells any of the documents and instruments subject to the tax, or for whose use or benefit the same are made, signed, issued or sold.

Revenue Ruling 58–612, 1958–2 C.B. 850, concluded that a policy of reinsurance issued by a foreign insurer covering any of the hazards, risks, losses or liabilities covered by contracts taxable under section 4371(1) and (2) of the Code is subject to the tax imposed on reinsurance policies by section 4371(3) of the Code, regardless of whether the primary insurer was a domestic or foreign insurer.

In United States v. Northumberland Insurance Co., Ltd., 521 F. Supp. 70 (D. N.J. 1981), the court held that the premiums ceded for a reinsurance policy issued by a foreign reinsurer are taxable if the underlying policy is issued to an “insured” as defined in section 4372(d), and there is no requirement that the reinsured qualify as an “insured” to be subject to the excise tax.

In American Bankers Insurance Com- pany of Florida v. United States, 265 F.Supp 67 (S. D. Fla. 1967) (aff’d 388 F.2d 304, 5 ^th Cir. 1968), the court held that, for purposes of determining whether the tax imposed by section 4371(3) of the Internal Revenue Code of 1954 applied to contracts of reinsurance issued by foreign insurers to reinsure policies of insurance issued by plaintiffs who were domestic insurers, the phrase “taxable under paragraph (1) or (2)” in section 4371(3) does not require actual taxation. The tax may be imposed if the policies are of the type “covered” or “described in” paragraphs (1) and (2), as such contracts are of the type capable of being taxed.

Treas. Reg. §46.4371–2(c), issued in 1970, incorporating the decision in Amer- ican Bankers Insurance Company, states that “[s]ection 4371(3) imposes a tax upon each policy of reinsurance...if issued- (1)

[b]y a nonresident alien individual, a foreign partnership, or a foreign corporation, as reinsurer ...; and (2) [t]o any person against, or with respect to, any of the hazards, risks, losses, or liabilities covered by contracts described in section 4371(1) or (2).” (Emphasis added).

March 24, 2008 635 2008–12 I.R.B.

tion regarding this revenue ruling, contact Mr. Willard Yates of the Office of the Associate Chief Counsel (International) at (202) 622–3880 (not a toll-free call).

Section 4372.—Definitions

A revenue ruling discusses whether the reinsurance excise tax imposed by section 4371(3) of the Internal Revenue Code (Code) on policies of reinsurance covering contracts taxable under paragraph (1), (2) or (3) of section 4371 applies to reinsurance premiums paid by one foreign insurer or reinsurer to another. See Rev. Rul. 2008-15, page 633.

An announcement describes a voluntary compliance initiative by the Internal Revenue Service (IRS) regarding the foreign insurance excise tax. See Announcement 2008-18, page 667.

Section 4373.—Exemptions

An announcement describes a voluntary compliance initiative by the Internal Revenue Service (IRS) regarding the foreign insurance excise tax. See Announcement 2008-18, page 667.

Section 4374.—Liability for Tax

An announcement describes a voluntary compliance initiative by the Internal Revenue Service (IRS) regarding the foreign insurance excise tax. See Announcement 2008-18, page 667.

Section 7270.—Insurance Policies

An announcement describes a voluntary compliance initiative by the Internal Revenue Service (IRS) regarding the foreign insurance excise tax. See Announcement 2008-18, page 667.

paid by Foreign Insurer to Foreign Reinsurer on the policies of reinsurance covering contracts described in section 4371(1) are subject to the one-percent excise tax imposed by section 4371(3), because Foreign Reinsurer is a resident of Country Y, which has an income tax treaty with the United States that does not exempt insurance premiums from the excise taxes imposed by section 4371.

Situation 4

In Situation 4, the insurance premiums paid by U.S. Corporation on the policies of casualty insurance issued by Foreign Insurer are exempt from the section 4371(1) excise tax after application of the U.S.-Z Treaty because Foreign Insurer satisfies the requirements of the limitation on benefits provision of the U.S.-Z Treaty and the policies were not entered into as part of a conduit arrangement. However, the premiums paid by Foreign Insurer to Foreign Reinsurer on the policies of reinsurance issued by Foreign Reinsurer are subject to the one-percent excise tax imposed by section 4371(3), because Foreign Reinsurer is a resident of Country Y, which has an income tax treaty with the United States that does not exempt insurance premiums from the excise taxes imposed by section 4371. The fact that the original insurance premiums paid by U.S. Corporation to Foreign Insurer are exempt from tax after application of the U.S.-Z Treaty does not preclude imposition of the excise tax under section 4371(3) on premiums paid by Foreign Insurer to Foreign Reinsurer. Such reinsurance premiums are paid on policies of reinsurance covering contracts described in and capable of being taxed under section 4371(1).

HOLDINGS

(1) The reinsurance excise tax imposed by section 4371(3) on policies of reinsurance covering contracts described in paragraph (1), (2) or (3) of section 4371 applies to reinsurance premiums paid by one foreign insurer or reinsurer to another foreign reinsurer, unless the second foreign reinsurer issuing the policies is itself entitled to an exemption from the excise tax under an income tax treaty with the United States.

(2) Under the terms of the U.S.-X Treaty in Situation 3, the exemption from the excise taxes imposed by section 4371 provided by the U.S.-X Treaty does not apply where a foreign insurer or reinsurer entitled to the benefits of the U.S.-X Treaty reinsures policies covering contracts described in paragraph (1), (2) or (3) of section 4371 with a foreign reinsurer not entitled to an exemption from excise tax under the U.S.-X Treaty or another income tax treaty (the nonqualified foreign reinsurer). Thus, the premiums on the underlying policies of insurance or reinsurance paid to the foreign insurer become subject to the relevant excise taxes imposed by section 4371 upon the payment of the subsequent premiums to the nonqualified foreign reinsurer. In addition, the reinsurance premiums paid by the foreign insurer or reinsurer to the nonqualified foreign reinsurer are subject to the one-percent excise tax imposed by section 4371(3) when paid. (3) In contrast, under the terms of the U.S.-Z Treaty in Situation 4, if a foreign insurer or reinsurer entitled to the benefits of the U.S.-Z Treaty reinsures policies covering contracts described in paragraph (1), (2) or (3) of section 4371 with another foreign reinsurer not entitled to an exemption from excise tax under an income tax treaty, the premiums paid on the underlying policies will not become subject to the excise taxes imposed by section 4371, unless such policies were entered into as part of a conduit arrangement, as defined in the U.S.-Z Treaty. Even if there is no conduit arrangement, however, the one-percent excise tax under section 4371(3) still applies when the foreign insurer or reinsurer pays premiums to the nonqualified foreign reinsurer.

EFFECT ON OTHER REVENUE RULING(S)

Rev. Rul. 58–612 is clarified and amplified.

DRAFTING INFORMATION

Various personnel from the Office of the Associate Chief Counsel (International) participated in the development of this revenue ruling. For further informa

2008–12 I.R.B. 636 March 24, 2008