ARTICLE 8

Shipping and Air Transport

Paragraph 1 provides that each of the Contracting States shall exempt from tax profits derived by an enterprise of the other Contracting State from the international operation of ships or aircraft, including:

(a) profits from the rental on a full basis of ships and aircraft operated in international traffic by the lessee (provided that the lessor also engages in the international operation of ships or aircraft or in the regular leasing of ships or aircraft on a full basis), and

(b) profits from the rental of ships and aircraft on a bareboat basis and of containers and related equipment operated or used in international traffic by the lessee, provided in each case that the leasing activity is incidental to the operation of ships or aircraft in international traffic by the lessor. Rental on a full or bareboat basis refers to whether the ships or aircraft are leased fully equipped, manned and supplied.

For example, if a U.S. airline which operates internationally leases a plane on a bareboat basis to an Australian airline for use on its international routes, the rental income derived by the U.S. company is exempt from Australian tax under this Article. However, if the U.S. airline operates only within the United States, or if the leased plane is used only within Australia, the rental income is not exempt under this Article. Moreover, if a U.S. bank leases a plane on a bareboat basis to the Australian airline, either for use internationally or within Australia, that rental income is not exempt under this Article.

Income from the rental of ships, aircraft or containers which is not exempt from tax under this Article is taxable in accordance with Article 12 (Royalties). Australian law imposes tax on the net income after deducting expenses, subject to a maximum tax under Article 12 of 10 percent of the gross rental.

Paragraph 2 states that the provisions of this Article apply to the share of an enterprise of a Contracting State in the profits of a pool or joint venture, even though the other participants may be enterprises of third States not covered by this Convention. The profit shares of such third country participants are not affected by this Convention, but are taxable in accordance with internal law or under the provisions of another international agreement, if applicable.

Paragraph 3 merely clarifies that profits from the transport of goods or passengers picked up and discharged within the same Contracting State are not within the definition of international traffic and may be taxed by that State.