Article 8 - SHIPPING AND AIR — U.S. Income Tax Treaty

This Article provides rules governing the taxation of profits from the operation of ships and aircraft in international traffic. The term "international traffic" is defined in subparagraph 1(d) of Article 3 (General definitions). It is understood, based on the provisions of paragraph 2 of Article 1 (Personal scope), that any benefits to which a resident of one of the States is entitled by virtue of the exchange of notes between the United States and Sweden (effective on January 1, 1987) under the authority of Code section 883 (if any), will continue to be available regardless of any provisions to the contrary in the Convention.

Paragraph 1 provides that profits of an enterprise of a Contracting State from the operation of ships or aircraft in international traffic shall be taxable only in that 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


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Contracting State under this paragraph remain exempt even if the enterprise has a permanent establishment in that other Contracting State.

Paragraph 2 deals with certain income from the rental of ships or aircraft in international traffic. As indicated in paragraph 5 of the OECD Commentaries to Article 8, income of an enterprise of a Contracting State from the rental of ships or aircraft on a full basis (i.e ., with crew) is considered to be income from the operation of ships and aircraft and is, therefore, exempt from tax in the other Contracting State under paragraph 1. Paragraph 2 extends the exemption under the Article to certain income from the bare-boat leasing of ships and aircraft. Unlike certain other U.S. treaties, however, income from bareboat rentals of ships or aircraft is included within the definition of profits from the operation of ships or aircraft in international traffic in the Convention only to the extent that the rental profits are incidental to profits from the operation of ships and aircraft. Thus, an enterprise that is not in the business of operating ships or aircraft in international traffic and that derives income from renting ships or aircraft would not be able to claim the benefits of Article 8. Income from the non-incidental leasing of ships or aircraft, even if the ships or aircraft are used in international traffic, is treated as business profits. Such non-incidental rental income consequently is taxable in the source State only if it is attributable to a permanent establishment which the lessor has in the source State. It is understood that if, for example, a bank is a resident of one of the States and has a permanent establishment in the other State, and that bank leases an aircraft to an airline in the other State, the rental income will not be attributable to the permanent establishment if the permanent establishment was not involved in negotiating or concluding the lease agreement. The rental income consequently will not be subject to tax by that other State. Similarly, if the activities of the bank in that other State are not sufficient to rise to the level of a permanent establishment, the lease income will not be taxable in that other State.

Paragraph 3 provides that the profits of an enterprise of a Contracting State from the use, maintenance, or rental of containers (including eguipment for their transport) which are used for the transport of goods in international traffic will be exempt from tax in the other Contracting State. This result obtains regardless of whether the recipient of the income is engaged in the operation of ships or aircraft in international traffic, and regardless of whether the enterprise has a permanent establishment in the other Contracting State. The shipping and air transport provisions of the prior treaty do not deal with income from the use, maintenance or rental of containers. Such income, therefore, is treated under that Convention as business profits.


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Paragraph 4 clarifies that paragraphs 1 and 3 apply equally to profits from an enterprise of a Contracting State from participation in a pool, joint business or international operating agency. Profits derived by the air transport consortium Scandinavian Airlines System (SAS) are covered by paragraphs 1 and 3, but only to the extent that the SAS profits correspond to the participation held in that consortium by AB Aerotransport (ABA), the Swedish partner of SAS. SAS is an entity in the nature of a partnership which was created jointly by the legislatures of Sweden, Norway and Denmark. The exemption applies to the income of the consortium in its entirety because, in addition to the present Convention, the United States income tax conventions with Norway and Denmark provide similar exemptions to residents of those States.

In addition, notes exchanged at the signing of the convention provide that all income earned by SANA Inc. (Scandinavian Airlines of North America Inc., a New York corporation) from the operation in international traffic of aircraft would be treated as income of SAS, the consortium whose constituent corporate members own the stock of SANA Inc. SANA Inc. was created and is operated as an entity apart from SAS to satisfy U.S. regulations regarding foreign airlines, which SAS as a consortium could not meet. SANA Inc. is a conduit for SAS with regard to receipts and its expenses are guaranteed by SAS. Therefore the income of SANA Inc. will be taxed no differently under the Convention than if it were earned directly by SAS.

The taxation of gains from the alienation of ships, aircraft or containers is dealt with in paragraph 4 of Article 13 (Gains) .

This Article is subject to the saving clause of paragraph 4 of Article 1 (Personal scope). The United States, therefore, may, subject to the special foreign tax credit rules of paragraph 3 of Article 23 (Relief from double taxation), tax the shipping or air transport profits of a resident of Sweden if that Swedish resident is a citizen of the United States.

As with any benefit of the Convention, an enterprise claiming the benefit of this Article must be entitled to the benefit under the provisions of Article 17 (Limitation on benefits).