NEW U.S. TAX HURDLES FOR FOREIGN SHIPOWNERS

By Derick W. Betts, Jr., Seward & Kissel, LLP

Death and taxes – this is a combo that most can accept and understand. Lunch and taxes [Ed. Note: This has been excerpted from a luncheon speech made by Mr Derik Betts on June 20th 2001 during MarineMoneyWeek.] on the other hand is a different matter. It has all the ingredients to cause indigestion to all but the hard core tax enthusiasts. So I will try to be as light and breezy as I can – if any discussion of taxes can be light and breezy. The U.S. tax hurdles the proposed Section 883 regulations pose are the focus of this piece.

What does Section 883 exempt? Gross income derived from the international operation of ships. Simple in concept but as we shall see, fraught with nuances. Pay particular attention to the words “international” and “operation”.

What must a taxpayer do to qualify for the exemption? The taxpayer must be organized in a Qualified Foreign Country and satisfy one of three stock ownership tests: (i) more than 50% of its stock, in terms of value, must be beneficially owned by individuals who reside (and have their tax home) in a Qualified Foreign Country; (ii) its stock or that of its parent must be primarily and regularly traded on an established securities market located in the United States or in a Qualified Foreign Country; or (iii) it is a U.S. controlled foreign corporation – commonly called a CFC [A CFC is a non-U.S. country that grants to U.S. corporations a reciprocal tax exemption in respect of its shipping income.]

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