Article 8. SHIPPING AND AIR TRANSPORT

This Article provides the rules that govern the taxation of income from the operation of ships and aircraft in international traffic. This Article, rather than Article 6 (Business Profits), applies even if a resident of one State has a permanent establishment in the other State to which profits from the operation of ships and aircraft in international traffic are attributable.

"International traffic" is defined in subparagraph 1 f) of

Article 3 (General Definitions). Income from the operation of ships or aircraft in international traffic, when derived by a resident of either Contracting State, may be taxed only by that State, the country of residence. The other Contracting State must exempt the income from tax, even if the income arises in or is attributable to a permanent establishment in that State. The only circumstance in which the non-resident State may tax income from the operation of ships or airplanes is when the income arises from transport solely between places in that State (i.e., only when the income is not derived from operation in "international traffic" as defined in paragraph 1 f) of Article 3) .

Income from the rental of ships or planes on a full basis for use in international traffic is considered operating income and is taxable only in the country of residence. Income from the bareboat leasing of ships or planes is also exempt from tax at source if the ship or aircraft is used in international traffic by the lessee. In such a case, it does not matter whether the lessor carries on a business of operating ships or planes; the rule applies even to a leasing company. However, if the lessor is an operating company, and the income is incidental to income from such operations, the exemption from source State taxation extends also to income from the rental of ships or aircraft used in domestic traffic by the lessee. Income from the leasing or use of containers in international traffic is also exempt from tax at source under this Article, whether derived by an operating company or by a leasing company.

Paragraph 3 clarifies that the provisions of paragraphs 1 and 2 apply to income from participation in a pool, joint business, or international transportation agency. For example, if a Kazakh airline were to form a consortium with other national

airlines, the Kazakh participant's share of the income derived from U.S. sources would be covered by this Article.