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. "International traffic" is defined in subparagraph 1 g) of Article 3 (General Definitions). Such income, when derived by a resident of either Contracting State, may be taxed only by that State, the country of residence. If the other Contracting State is the country where the income arises, it must exempt the income from tax, even if it is attributable to a permanent establishment in that State.

Income from the rental of ships or planes on a full basis for use in international traffic is considered operating income and is covered under paragraph 1. Income from the bareboat leasing of ships or planes is also exempt from tax at source if the ships or aircraft are 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 same rule applies to a leasing company. However, if the lessor is an operating company, and the income is incidental to income from such operations, the exemption 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. Gain from the alienation of containers and related equipment that are used in international traffic are exempt if such gain is incidental to income from the use or rental of such equipment. Further, gain from the alienation of ships or aircraft operated in international traffic is exempt from tax at source if such gain is incidental to income from the operation by the resident of ships or aircraft in international traffic.

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 Ukrainian airline were to form a consortium with other national airlines, the Ukrainian participant's share of the income derived from U.S. sources would be covered by this Article.