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Friday, April 20, 2018

NEW PROPOSED US TAX REGULATIONS UNDER SECTION 883

Further to our article in Weekly NEWS No. 06/2000 dated 11 February, we would like to point out that the regulations target those foreign companies engaged in lightering service in the US Gulf (both the companies that hire vessels to lighter the cargo from the high seas to a US port and the operators of such vessels) by saying that the income earned from these lightering activities does not constitute the "international" operation of a vessel (the pre-requisite to eligibility to exemption under Section 883) because the vessels, in general, never touch a foreign port in the course of their lightering operations.

The new regulations do not, of course, apply to US lightering companies, but they do affect the owners of any foreign-flagged vessels they may time charter.

While the regulations clearly declare that the time charter hire of a vessel used in the lightering trade is not derived from "international" operations and hence falls outside the exemption, the regulations provide categories of "incidental" activities so closely related to the international operation of a vessel that they are swept into the exemption. Lightering is not identified as being either within or without the "incidental" categories. However, if the lightering vessel was chartered on a spot basis on occasion but was otherwise traded internationally it is thought the spot income could fall within the scope of the exemption as "incidental" to the vessel's overall international operations.

It is unclear the extent to which the regulations' exclusion of lightering from the definition of international shipping will carry over and be applicable to the interpretation of a US tax treaty shipping exemption provision. The IRS will obviously argue that it is applicable(although this is a point which requires further research) but even if this is so, if the foreign owner is eligible to claim the benefits of a tax treaty(which the owner can choose if more favourable), the treaty may provide through other provisions(i.e. the lack of any permanent establishment) the benefits of an exemption that is unavailable under section 883.

 The above article cannot be relied upon as legal advice and those affected are urged to consult their lawyers. Legal assistance may also be obtained from Derick W. Betts, Jr.of Seward & Kissel, 1 Battery Park Plaza, New York, New York 10004 (Tel: 212 574 1662; Fax: 212 480 8421; Betts@Sewkis.com or Peter E. Pront also of Seward & Kissel (Tel: 212 574 1221; Pront@Sewkis.com . For general information, Seward & Kissel’s website is: www.sewkis.com