ARTICLE 9

Shipping and Air Transport

Paragraph 1 states the general rule that a resident of a Contracting State shall be exempt from tax by the other State on income derived from the operation of ships or aircraft in international traffic. "International traffic" is defined in Article 3 (General Definitions). This Article takes precedence over Article 8 (Business Profits). Thus, the exemption applies even if the income is attributable to a permanent establishment in the other State.

Paragraph 2 defines the scope of income eligible for the exemption. Income from the operation of ships or aircraft in international traffic is defined to include income from the rental on a full basis (i.e., fully staffed and equipped) of ships or aircraft used in international traffic. The treatment of rentals on a bareboat basis distinguishes between ships and aircraft. Income from the rental on a bareboat basis of aircraft operated in international traffic is considered income from the international operation of aircraft. Income from the rental of ships on a bareboat basis is considered income from the international operation of ships, provided that the ship is operated in international traffic and that the lessee is not a resident of, or a permanent establishment in, the other Contracting State. Thus, for example, a U.S. lessor of a ship operated between the United States and Indonesia will not qualify for exemption from Indonesian tax on the rental income from that lease if the lessee is an Indonesian company or the Indonesian permanent establishment of a U.S. company. In such cases, the rental payment is a deductible expense for purposes of Indonesian corporate tax, and Indonesia was not willing to forgo tax on the recipient of the income. Such payments will be treated as royalties subject to the provisions of Article 13 (Royalties).

Income derived from the use or maintenance of containers and related equipment for the transport of the containers is included in the definition of income from international traffic if the containers are used in international traffic and the income is incidental to income described in paragraph 1, i.e., if the resident deriving the income is itself engaged in international shipping or aircraft operations and the container leasing activity is relatively minor in relation to those operations. For the treatment of other container leasing operations, see the discussion of Article 13 (Royalties).

Paragraph 3 provides that, notwithstanding Article 14 (Capital Gains), gains derived by a resident of one of the Contracting States from the disposition of ships or aircraft operated in international traffic and of containers used in international traffic are taxable only in that State.

The Protocol confirms that the Convention has no effect with respect to legal claims concerning the taxation of income from international shipping and air transport derived in years prior to the entry into force of the Convention. A taxpayer may pursue any legal remedies available with respect to claims affecting prior years. As noted, this is simply a clarification of existing legal rights.