ARTICLE 8

Shipping and Air Transport

This Article provides the rules which govern the taxation of profits from the operation of ships and aircraft in international traffic. The term "international traffic" is defined in paragraph 1(j) of Article 3 (General Definitions) to mean any transport by ship or aircraft operated by an enterprise of a Contracting State, except when the ship or aircraft is operated solely between places within the other Contracting State.

Paragraph 1 provides that profits derived by an enterprise of a Contracting State from the operation in international traffic of ships or aircraft shall be taxable only in that Contracting State. By virtue of paragraph 6 of Article 7 (Business Profits), profits of an enterprise of a Contracting State that are exempt in the other Contracting State under this paragraph remain exempt even if the enterprise has a permanent establishment in that other Contracting State.

Paragraph 2 defines profits from the operation of ships or aircraft in international traffic as profits derived by an enterprise described in paragraph 1 from the transportation by sea or air

respectively of passengers, mail, livestock or goods carried on by the owners or lessees or charterers of ships or aircraft. Such transportation includes the sale of tickets for such transportation on behalf of other enterprises, other activity directly connected with such transportation, and rental of ships or aircraft incidental to any activity directly connected with such transportation. Thus, income of an enterprise from the rental of ships or aircraft constitutes profits from the operation of ships or aircraft in international traffic only if it is incidental to the operation by the enterprise of ships or aircraft in international traffic. For example, under the Convention only bareboat leasing that is incidental to the operation by the enterprise of ships in international traffic is within the scope of Article 8. This provision is narrower than the provision in the U.S. Model, which covers not only rental profits that are incidental to transportation activities of the lessor but also any rental profits derived from the operation of ships or aircraft in international traffic by the lessee.

Paragraph 3 provides that the profits of an enterprise of a Contracting State described in paragraph 1 from the use, maintenance or rental of containers (including equipment for their transport) which are used for the transport of goods in international traffic will be exempt from tax in the other Contracting State. Thus, in order to qualify for the exemption, the recipient of the income must be engaged in the operation of ships or aircraft in international traffic and the container or related equipment must be used for the transport of goods in international traffic. The comparable provision in the U.S. Model (Article 8, paragraph 3) is not limited to situations in which the lessor is engaged in the operation of ships or aircraft in international traffic.

Paragraph 4 clarifies that the provisions of the preceding paragraphs apply equally to profits derived by an enterprise of a Contracting State from participation in a pool, joint business or international operating agency. As with any benefit of the Convention, the enterprise claiming the benefit must be entitled to the benefit under the provisions of Article 24 (Limitation on Benefits).

Paragraph 5 provides that interest on funds connected with the operation of ships or aircraft in international traffic are considered profits derived from the operation of ships or aircraft and that the provisions of Article 11 (Interest) will not apply in relation to such interest. This provision, which is not included in the U.S. Model, provides an exemption from tax in the source State for interest income derived from the working capital of the enterprise needed for the operation of ships or aircraft in international traffic.

Paragraph 6 provides that gains derived by an enterprise of a Contracting State described in paragraph 1 from the alienation of ships, aircraft and containers are taxable only in that State if the ships, aircraft and containers are owned and operated by the enterprise and the income from them is taxable only in that State. This provision is narrower than the comparable provision in the U.S. Model (paragraph 4 of Article 13 (Gains)) because the U.S. Model covers all gains from the alienation of ships, aircraft, or containers operated in international traffic.

This Article is subject to the saving clause of paragraph 3 of Article 1 of the Convention. The United States, therefore, may tax the shipping or air transport profits of a resident of India if that Indian resident is a citizen of the United States.