FROM THE OFFICE OF PUBLIC AFFAIRS

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Today the Treasury Department issued final regulations regarding the treatment of income derived by foreign corporations from the international operation of ships or aircraft.  These regulations generally follow regulations that were issued in proposed form in August 2002, with some modifications in response to comments received.

A foreign corporation’s income from the international operation of ships or aircraft generally is exempt from U.S. tax if the foreign corporation is organized in a country that provides an equivalent exemption to U.S. corporations under its domestic law or under a diplomatic agreement with the United States. 

The regulations provide guidance on the scope of this exemption and set forth certain information reporting requirements for foreign corporations claiming this exemption.  In particular, the regulations provide guidance on when a foreign corporation is to be considered engaged in the international operation of ships or aircraft, and when a foreign country is to be considered to provide an equivalent exemption.

The regulations also provide detailed guidance on the types of income that qualify for the exemption.  Generally, the exemption is available for income from the international carriage of passengers and cargo and from certain activities that are incidental to the international operation of ships or aircraft, such as the sale of tickets for another airline under a code-sharing arrangement.

In addition, the regulations provide guidance regarding the ownership requirements for foreign corporations claiming the exemption.  Generally, the exemption is available to foreign corporations that are majority-owned by residents of the country in which they are incorporated (or of another country that provides a reciprocal exemption to U.S. corporations) or that are publicly traded and widely held.  The regulations provide detailed rules regarding the information required for foreign corporations to substantiate that they meet the applicable ownership requirements.

The text of the final regulations is attached.

Related Documents:

• final regulations text