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Thursday, January 18, 2018

New Proposed U.S. Tax Regulations Under Section 883

On February 8, 2000, the U.S. Internal Revenue Service issued its long awaited proposed regulations under Section 883 of the U.S. Internal Revenue Code (the “Regulations”).

Section 883 is the provision principally relied upon by foreign shipping companies to claim exemption from U.S. tax on U.S. source revenues derived from transporting cargo or passengers to and/or from U.S. ports. The only other basis to claim exemption from U.S. tax is an applicable U.S. income tax treaty(“Treaty”).

The Regulations make crystal clear once again that every foreign shipping company must annually file IRS Tax Return Form 1120F to claim exemption from tax whether based on Section 883 or the Treaty. The Regulations specify in detail the extensive documentary information and certifications required to be assembled by the foreign shipping company and its ultimate beneficial shareholders in support of the claim for exemption.

In general, a foreign shipping company is entitled to exemption under Section 883 with respect to an applicable category of transportation income if: (i) it is organized in a foreign country that provides a reciprocal exemption from tax on such income to U.S. shipping companies (a “qualified foreign country”), and (ii) more than 50%, in terms of value, of the foreign shipping company is beneficially owned (cutting through all intervening entities in the chain of ownership) by individuals(‘qualified shareholders”) who have their tax home for 183 days or more of any year in qualified foreign countries(“qualified shareholder stock ownership test”). In determining whether the qualified shareholder stock ownership test has been satisfied, there are special rules applicable to publicly traded foreign companies, U.S. controlled foreign corporations, foreign trusts, foreign pension plans and foreign non-for-profit organizations

The Regulations are extensive and we therefore have not yet had an opportunity to review and analyse them to determine their general impact upon the continued eligibility of a foreign shipping company to claim the benefit of the Section 883 exemption and the extent to which, if any, the Regulations(and in particular, their interpretation of the substantive scope of Section 883) might impact those foreign companies which claim exemption from tax under an applicable Treaty. However, on a preliminary review, there are certain issues addressed in the Regulations which, based on our experience in this area, are likely to adversely impact a foreign company’s continuing ability to satisfy the qualified shareholder stock ownership test and, therefore, are deserving of members’ immediate attention by:

** any bearer shares held in the chain of ownership from the foreign company claiming the exemption to the individual ultimate beneficial owners will be considered to be owned by a non-qualified shareholder;

** an individual ultimate beneficial owner will not be considered to reside in any foreign country if he is present in such jurisdiction for less than183 days; and

** an individual ultimate beneficial owner who is liable for tax on a remittance basis in a foreign country (e.g., the U.K.) will not be treated as a resident of that country.

Before the Regulations are finalized, a public hearing will be held on April 27,2000 for interested or affected parties to comment on the Regulations as proposed. Written comments must be submitted by May 8,2000.

The Regulations will only come into effect for taxable years of a foreign corporation ending 30 days or more after the date on which such Regulations are published in final form. Assuming, for example, the Regulations are published in final form on or before December 1, 2000, they would first become effective for calendar year 2000 filings.

Members wishing to acquire a copy of the Regulations, or submit tax inquiries about the Regulations and their potential impact upon their U.S. tax position, may contact Derick W. Betts, Jr.of Seward & Kissel, 1 Battery Park Plaza, New York, New York 10004(Tel: 212 574 1662; Fax: 212 480 8421; Email: Betts@Sewkis.co) or Peter E. Pront also of Seward & Kissel(Tel: 212 574 1221; Email: Pront@Sewkis.com). For general information, Seward & Kissel’s website is: www.sewkis.com