The New U'S' Tax Regulations Under Section 883 and Various Related U'S' Tax Issues for Shipowners

1
The New U.S. Tax Regulations Under Section 883
and Various Related U.S. Tax Issues for Shipowners

• James C. Cofer, Esq.
• Seward Kissel LLP
• New York, NY

2
Agenda

• History of Section 883
• Overview of Final Regulations
• Specific Issues Affecting Members
• Taxation in Absence of 883 Exemption
• 15 Dividend Tax Rate

3
History of Section 883

• Tax Reform Act of 1986
• Proposed Regulations (2000, withdrawn 2002)
• Reproposed Regulations (2002)
• Final Regulations (2003)

4
General Rule of Final Regulations

• Qualified income of
• a qualified foreign corporation
• from the international operation of ships
• is exempt from U.S. federal income tax.

5
Qualified Income

• Derived from the international operation of ships
  or certain activities incidental thereto.
• Subject of an equivalent exemption in the foreign
  country in which the foreign corporation is
  organized.

6
Qualified Foreign Corporation

• Country of Organization Test

• Stock Ownership Test
• Qualified Shareholder Stock Ownership Test or
• Publicly-Traded Test or
• CFC Ownership Test

7
Country of Organization Test

• Must be organized in a qualified foreign
  country.
• Grants equivalent exemption from tax (whether by
  treaty, internal law or exchange of notes) to
  U.S. corporations with respect to a category of
  income.
• IRS publishes non-exclusive list of qualified
  foreign corporations.

8
Qualified Shareholder Stock Ownership Test

• More than 50 of the outstanding shares are owned
  for at least half the number of days in the
  foreign corporations taxable year by one or more
  qualified shareholders.
• A qualified shareholder is an individual
  resident of a qualified foreign
  country--meaning a country granting an
  equivalent tax exemption to U.S.
  corporations--and certain entities.

9
Publicly Traded Test

• Foreign corporations stock is primarily and
  regularly traded on an established securities
  market.
• Established securities market can be in the
  U.S. or in a qualified foreign country.
• Closely-held exception applies.

10
Closely-Held Exception

• A foreign corporations class of stock will not
  be treated as publicly traded if one or more 5
  (by vote and value) shareholders own 50 of more
  of the vote and value of such class on more than
  half the days of the taxable year.
• Can avoid exception if corporation can identify
  sufficient 5 shareholders who are qualified
  shareholders.

11
Closely-Held Example
U.S. Person
Hedge Fund 1
Hedge Fund 2
Hedge Fund 3
15
25
5
6
Foreign Shipping Corporation

• 51 of class of stock owned by 5 s/h on 6/1/04
• Must reduce ownership prior to December 1,
  2004 (more than half the days in the taxable
  year rule)

12
International Operation of Ships

• Carriage of passengers or cargo for hire.
• Leasing vessel under time, voyage, space, slot or
  bareboat charter if vessel is used to carry
  passengers or cargo for hire.
• Activities may be conducted directly, or
  indirectly through a joint venture.

13
Filing Requirements

• U.S. Federal Income Tax Return (Form 1120F)
• Must identify by name and address each ultimate
  5 beneficial owner relied upon to satisfy stock
  ownership test.
• Ownership Statements
• Every entity or person in chain of ownership must
  provide statement under penalty of perjury prior
  to Form 1120F filing.

14
Joint Ventures

• Income from a joint venture will be exempt under
  Section 883 if
• Joint venture entity is fiscally transparent
  under U.S. law and
• The entity would be treated as engaged in the
  international operation of ships if it were a
  foreign corporation.

15
Fiscally Transparent Entities

• Questionable Result Under Reproposed Regulations
• Acceptable Under Final Regulations

16
Repatriation of Funds

• Final Regulations have two conflicting rules
• Temporary investment of working capital funds is
  exempt but
• Investment of excess funds awaiting repatriation
  is not exempt.
• Treatment of funds held overnight or
  over-the-weekend in U.S. banks is unclear.

17
Backhaul

• Reproposed regulations could have attributed
  income to unladen backhaul voyages of oil tankers
  under time charter and taxed such income.
• Final regulations clarify that unladen backhaul
  voyages will be treated as part of the
  international operation of ships and not subject
  to tax.

18
Failure to Qualify For Section 883

• 4 tax on gross U.S. source transportation income
  (non-ECI) or
• Up to 54.5 tax on net U.S. source transportation
  income (ECI).
• U.S. source transportation income includes 50
  of gross income derived by vessel trading to or
  from U.S. ports.

19
15 Dividend Rate

• U.S. income tax rate on dividends paid by a
  qualified foreign corporation is 15 through
  2008.
• Qualified foreign corporation
• Eligible for benefits of comprehensive U.S.
  income tax treaty or
• Stock (or ADR) is readily tradable on an
  established securities market (e.g., NYSE,
  NASDAQ) in the United States.