[Federal Register Volume 65, Number 26 (Tuesday, February 8, 2000)]
[Proposed Rules]
[Pages 6065-6090]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-1899]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-208280-86]
RIN 1545-AJ57


Exclusions From Gross Income of Foreign Corporations

AGENCY:  Internal Revenue Service (IRS), Treasury.

ACTION:  Notice of proposed rulemaking and notice of public hearing.

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SUMMARY:  This document contains proposed rules implementing the 
portions of section 883(a) and (c) of the Internal Revenue Code (Code) 
that relate to income derived by foreign corporations from the 
international operation of a ship or ships or aircraft. The proposed 
rules reflect changes made by the Tax Reform Act of 1986 and subsequent 
legislative amendments. The proposed rules provide, in general, that a 
foreign corporation organized in a qualified foreign country and 
engaged

[[Page 6066]]

in the international operation of ships or aircraft shall exclude 
qualified income from gross income for purposes of United States 
Federal income taxation, provided that the corporation can satisfy 
certain ownership and related documentation requirements. The proposed 
rules explain when a foreign country is a qualified foreign country and 
what income is considered to be qualified income.
    The proposed rules specify how a foreign corporation may satisfy 
the ownership and related documentation requirements. In addition, the 
proposed rules describe the information that the foreign corporation 
must include on its United States income tax return in order to claim 
an exemption. This document provides notice of a public hearing on 
these proposed rules.

DATES:  Written comments must be received by May 8, 2000.
    Requests to speak and outlines of topics to be discussed at the 
public hearing scheduled for Thursday, April 27, 2000, at 10 a.m. must 
be received by Wednesday, April 5, 2000.

ADDRESSES:  Send submissions to: CC:DOM:CORP:R (REG-208280-86), room 
5226, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-
208280-86), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC.
    Alternatively, taxpayers may submit comments electronically via the 
Internet by selecting the ``Tax Regs'' option on the IRS Home Page, or 
by submitting comments directly to the IRS Internet site at http://
www.irs.ustreas.gov/tax__regs/regslist.html. The public hearing will be 
held in room 2615, Internal Revenue Building, 1111 Constitution Avenue, 
NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT:  Concerning the proposed rules, 
Patricia A. Bray, (202) 622-3880; concerning submissions, the hearing, 
and/or to be placed on the building access list to attend the hearing, 
Guy Traynor, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collection of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the IRS, Attn: IRS 
Reports Clearance Officer, OP:FS:FP, Washington, DC 20224. Comments on 
the collection of information should be received by April 10, 2000. 
Comments are specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the Internal Revenue Service, 
including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information (see below);
    How the quality, utility and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    The collection of information in this proposed regulation is in 
Secs. 1.883-1, 1.883-2, 1.883-3, 1.883-4, and 1.883-5. The information 
required in these sections will enable a foreign corporation to 
determine if it is eligible to exclude its income from the 
international operation of a ship or ships or aircraft from gross 
income on its U.S. Federal income tax return. The information required 
in these sections will also enable the IRS to monitor compliance with 
the provisions of the proposed regulations with respect to the stock 
ownership requirements of Sec. 1.883-1(c)(2), and to make a preliminary 
determination of whether the foreign corporation is eligible to claim 
such an exemption and is accurately reporting income as required under 
section 6012.
    The collection of information and responses to these collections of 
information are mandatory. The likely respondents are foreign 
corporations engaged in the international operation of a ship or ships 
or aircraft that wish to claim an exemption from U.S. tax under section 
883, and certain of their shareholders owning (directly or indirectly) 
a majority of the value of the shares of such corporations.
    Estimated total annual reporting/recordkeeping burden on 
corporations: 1,400 hours.
    The estimated annual burden per respondent varies from 30 minutes 
to eight hours, depending on the circumstances of the foreign 
corporation, with an estimated average of one hour.
    Estimated number of respondents: 1,400.
    Estimated annual frequency of responses: Once.
    Estimated total annual reporting burden on shareholders: 22,500 
hours.
    The estimated annual burden per respondent varies from 15 minutes 
to eight hours, depending on the circumstances of the shareholder or 
intermediary, with an estimated average of 90 minutes.
    Estimated number of respondents: 15,000.
    Estimated annual frequency of responses: Once.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number assigned by the Office of 
Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    Section 883 provides an exemption from gross income for earnings of 
a foreign corporation derived from the international operation of a 
ship or ships or aircraft (hereinafter ships or aircraft) if an 
equivalent exemption from tax is granted by the applicable foreign 
country to corporations organized in the United States. Section 883 has 
generally been referred to as the reciprocal exemption provision. 
Before 1986, section 883 eliminated U.S. tax on earnings from the 
operation of ships or aircraft derived by foreign persons, including 
U.S.-controlled foreign corporations, based on whether the country of 
documentation of the ship or registry of the aircraft provided an 
exemption to U.S. persons. Section 883 did not require a foreign 
transportation company to be organized or resident in the country of 
registration or documentation. Many countries offered various 
incentives, including no taxation, to non-resident shipping companies 
that registered ships in that jurisdiction (referred to as flagging-out 
or documenting ships under flags of convenience). Thus, foreign 
corporations that documented their

[[Page 6067]]

ships in such flag of convenience countries could claim a reciprocal 
exemption from U.S. income tax.
    Congress concluded in 1986 that the reciprocal exemption provisions 
were not meeting their original goal of reserving the right to tax 
transportation income to the country of residence of the taxpayer (and 
therefore to eliminate double taxation). In cases where residents of a 
country with which the United States might desire a reciprocal 
exemption used vessels or aircraft documented or registered under 
another flag, the unilateral U.S. concession provided under prior law 
left the country of residence little incentive to exempt U.S. shippers. 
Congress was concerned that U.S.-based transportation companies were at 
a competitive disadvantage because U.S. companies remained potentially 
subject to tax by the countries in which their foreign competitors were 
organized and resident.
    Congress amended the reciprocal exemption provisions of section 883 
to rectify this situation. Tax Reform Act of 1986, section 1212, Public 
Law 99-514, ((1986-3 C.B. 1) (the 1986 Act)), as amended by the 
Technical and Miscellaneous Revenue Act of 1988 (TAMRA), Public Law 
100-647 (1988-3 C.B. 1), and by the Omnibus Budget Reconciliation Act 
of 1989, Public Law 101-239 (1990-1 C.B. 210), (the 1986 Act, as 
amended). It is now irrelevant under section 883 where a ship is 
documented or an aircraft is registered. Instead, section 883 provides 
that a foreign corporation may qualify for the reciprocal exemption 
only if it is organized in a foreign country that grants corporations 
organized in the United States an equivalent exemption with respect to 
income derived from the international operation of ships or aircraft. 
In addition, more than 50 percent of the value of the stock of the 
foreign corporation must be owned by individuals who are residents of a 
foreign country that grants corporations organized in the United States 
an equivalent exemption. The 50 percent ownership requirement generally 
does not apply if the corporation is either a qualifying controlled 
foreign corporation (CFC) or if its stock is primarily and regularly 
traded on an established securities market in a qualified foreign 
country or the United States.
    Since 1986, the United States and more than 30 foreign countries 
have entered into reciprocal exemption agreements incorporating the 
statutory amendments of section 883. In addition, more than 60 
countries now provide an equivalent exemption through domestic law or 
an income tax convention. The current regulations under Sec. 1.883-1, 
however, have not been amended to reflect the statutory changes enacted 
since 1986. This document proposes updated rules reflecting the 
statutory changes.

Explanation of Provisions

General Rule

    Section 1.883-1(a) provides the general rule. A foreign corporation 
engaged in the international operation of a ship or aircraft shall 
exclude from its gross income for U.S. Federal income tax purposes any 
income it derives from the international operation of ships or aircraft 
if such income is qualified income under paragraph (b) and if the 
corporation is a qualified foreign corporation under paragraph (c).
    Section 1.883-1(b) provides that qualified income is income that is 
properly includible in an income category described in paragraph (h)(2) 
of this section and that is the subject of an equivalent exemption 
granted by the foreign country in which the foreign corporation seeking 
qualified foreign corporation status is organized.
    Section 1.883-1(c)(1) describes the general requirements that a 
foreign corporation must satisfy to be considered a qualified foreign 
corporation. A qualified foreign corporation is a corporation, as 
defined in Secs. 301.7701-2(b) and 301.7701-3, that is engaged in the 
international operation of ships or aircraft and that is organized in a 
qualified foreign country. A qualified foreign corporation must also 
satisfy one of the three stock ownership tests described in paragraph 
(c)(2) of this section as well as the substantiation and reporting 
requirements described in paragraph (c)(3) of this section.
    Paragraph (c)(2) describes the three stock ownership tests. 
Generally, a foreign corporation must be able to demonstrate and 
document that more than fifty percent of the value of its stock is 
owned by qualified shareholders, as determined under Sec. 1.883-4 
(qualified shareholder stock ownership test). However, a foreign 
corporation will not be required to demonstrate that it satisfies the 
qualified shareholder stock ownership test if it can demonstrate either 
that its stock is primarily and regularly traded on an established 
securities market in a qualified foreign country or in the United 
States, as determined under Sec. 1.883-2 (publicly-traded test), or 
that it is a qualifying controlled foreign corporation as determined 
under Sec. 1.883-3 (CFC test).
    To satisfy the substantiation and reporting requirements described 
in paragraph (c)(3) of this section, a foreign corporation must include 
the information set out in that paragraph in its Form 1120F, ``U.S. 
Income Tax Return of a Foreign Corporation,'' in such form and manner 
as the Form 1120F and its accompanying instructions prescribe. The 
information to be submitted with the return includes information set 
out in Secs. 1.883-2(f), 1.883-3(d) and 1.883-4(e), as applicable, 
relating to information demonstrating that the foreign corporation 
satisfies one of the three stock ownership tests. Section 1.883-5(c) 
provides a transition rule that will require such information to be 
included in a statement attached to the return until the Form 1120F and 
its instructions are amended to conform to final regulations under this 
section.
    Paragraph (c)(3)(ii) provides that if the Commissioner requests in 
writing that the foreign corporation substantiate representations made 
under paragraph (c)(3)(i) of this section, or under Sec. 1.883-2(f), 
1.882-3(d) or 1.883-4(e), the foreign corporation must provide the 
supporting documentation or substantiation within 60 days following the 
written request. If the foreign corporation does not provide all of the 
information requested within the 60 day period but demonstrates that 
the failure was due to reasonable cause and not willful neglect, the 
Commissioner may grant the foreign corporation a 30-day extension to 
provide the supporting documentation or substantiation. Whether a 
failure to obtain the documentation or substantiation in a timely 
manner was due to reasonable cause shall be determined by the 
Commissioner after considering all the facts and circumstances.
    Paragraph (c)(4) contains a rule that allows the Commissioner to 
retain the right to cure any defects in the documentation where the 
Commissioner is satisfied that the foreign corporation would otherwise 
be a qualified foreign corporation.
    Paragraph (d) defines a qualified foreign country as a foreign 
country that grants an equivalent exemption to corporations organized 
in the United States for the relevant category of qualified income 
earned by the foreign corporation seeking qualified foreign corporation 
status. A foreign country may be a qualified foreign country with 
respect to one category of income but not with respect to other 
categories of income.

[[Page 6068]]

Operation of Ships or Aircraft

    Section 1.883-1(e) explains what it means to be engaged in the 
operation of ships or aircraft for purposes of these proposed rules and 
provides examples of activities that are not treated as the operation 
of ships or aircraft. Under the general rule, only a corporation that 
is an owner, lessor, or lessee of an entire ship or aircraft used to 
carry cargo or persons for hire can be considered engaged in the 
operation of ships or aircraft.
    The term operation of ships or aircraft, which includes the 
operation of a single ship or aircraft, means: The carrying of cargo or 
passengers for hire; the time or voyage charter of a ship or the wet 
lease of an aircraft, as those terms are defined in the regulations; 
and the bareboat charter of a ship or the dry lease of an aircraft, as 
those terms are defined in the regulations. The term also includes 
active participation by a corporation that is otherwise engaged in the 
operation of ships or aircraft in a pool, partnership, strategic 
alliance, joint operating agreement or code sharing arrangement, or 
other joint venture that is itself engaged in the operation of ships or 
aircraft.
    Paragraph (e)(2) provides as examples that activities of the 
following will not be considered operation of ships or aircraft: A non-
vessel operating common carrier (an NVOCC); a space or slot charterer; 
a ship management company; a company that obtains ships crews; a ship's 
agent; a ship or aircraft broker; a freight forwarder; a travel agent; 
a tour operator; a pure container leasing company; a passive investor 
in a shipping or aircraft business; or a concessionaire. The proposed 
rule also provides the definitions of a number of relevant terms.

International Operation of Ships or Aircraft

    Section 1.883-1(f) distinguishes international from domestic 
operation of ships or aircraft. In TAMRA, Congress directed that 
transportation income derived solely from sources within the United 
States under section 863(c)(1) should not be granted exemption from 
U.S. income taxation under section 883. Congress also specified, 
however, that the reciprocal exemption generally should be available 
for income from international transport activity that is treated as 50 
percent U.S. source income under section 863(c)(2). This is the same 
type of income on which the gross basis tax of section 887 generally 
would be imposed. See, S. Rep. No. 100-445, 100th Cong., 2d Sess. 241-
242 (1988). However, the reciprocal exemption may not necessarily be 
available to all types of persons earning that type of income.
    To carry out Congress's intent, Sec. 1.883-1(f)(1) defines the term 
international operation to mean the operation of ships or aircraft on 
voyages or flights that begin or end in the United States and 
correspondingly end or begin in a foreign country, determined on a 
passenger-by-passenger or cargo-by-cargo basis, as discussed below. The 
term specifically excludes a ``cruise to nowhere'' that begins in a 
U.S. port, travels out into open waters beyond the territorial limits 
of the United States, and then returns to the U.S. port of origin 
without touching a foreign port during the voyage. The fact that a ship 
travels beyond United States territorial limits does not, in itself, 
constitute international operation of ships or aircraft if there is no 
stop in a foreign country, as determined under paragraph (f)(2). The 
same rules apply for aircraft.
    Paragraph (f)(2) provides rules for determining the beginning and 
ending points of a voyage for purposes of the definition of the term 
international operation. Except in the case of a round trip cruise, the 
carriage of a passenger will be treated as ending at the passenger's 
final destination even if, en route to the passenger's final 
destination, a stop is made at a U.S. intermediate point for refueling, 
maintenance, or other business reasons, provided the passenger does not 
change aircraft or ships at the U.S. intermediate point. Similarly, 
carriage of a passenger will be treated as beginning at the passenger's 
point of origin even if en route to the passenger's final destination, 
a stop is made at a U.S. intermediate point provided the passenger does 
not change aircraft or ships at the U.S. intermediate point. Carriage 
of a passenger will be treated as beginning or ending at a U.S. 
intermediate point if the passenger changes aircraft or ships at that 
location. See, H.R. Rep No. 432, 98th Cong., 2d Sess. 1340 (1984); H.R. 
Rep. No. 861, 98th Cong., 2d Sess. 934 (1984).
    The carriage of a passenger on a round trip cruise that begins in 
the United States and stops at one or more foreign ports for day 
excursions, maintenance or other business reasons, and returns to the 
same or another U.S. port will be treated as the international 
operation of a ship. Pursuant to paragraph (f)(2)(i)(A) such a round 
trip cruise may also include one or more intermediate stops at a U.S. 
port or ports for similar purposes.
    Carriage of cargo will be treated as ending at the final 
destination of the cargo even if, en route to that final destination, a 
stop is made at a U.S. intermediate point, provided that the cargo is 
transported to its ultimate destination on the same ship or aircraft, 
or provided the same taxpayer transports the cargo to and from the U.S. 
intermediate point and the cargo does not pass through customs at the 
U.S. intermediate point. Similarly, carriage of cargo will be treated 
as beginning at the cargo's point of origin even if, en route to its 
final destination, a stop is made at a U.S. intermediate point, 
provided that the cargo is transported to its ultimate destination on 
the same ship or aircraft or provided both that the same taxpayer 
transports the cargo on both legs of the trip and that the cargo does 
not pass through customs at the U.S. intermediate point. Repackaging, 
recontainerization, or any other activity involving the unloading of 
the cargo at the U.S. intermediate point will not change these results. 
See, H.R. Rep No. 432, 98th Cong., 2d Sess. 1340 (1984); H.R. Rep. No. 
861, 98th Cong., 2d Sess. 934 (1984), reprinted in 1984-3 C.B. Vol.2., 
1, 188.
    Whether income is from international operation is generally to be 
determined on a passenger-by-passenger and item of cargo-by-item of 
cargo basis. In the case of income from the bareboat charter of a ship 
or the dry lease of an aircraft, whether the charter income is derived 
from international operation is determined by reference to the use of 
the ship or aircraft by the lowest-tier lessee-operator in the chain of 
lessees.
    A person that is the lessor of a ship under a bareboat charter or 
of an aircraft under a dry lease will be treated as engaged in the 
international operation of such ship or aircraft to the extent that the 
lowest-tier lessee-operator in the chain of ownership uses such ship or 
aircraft for the international carriage of passengers or cargo for hire 
during the shorter of the period of the charter or the taxable year. 
Paragraph (f)(2)(iii) adopts the guidance in section 5.02 of Rev. Proc. 
91-12 (1991-1 C.B. 473), for determining the amount of income from the 
bareboat charter of a ship or the dry lease of an aircraft that is 
treated as derived from the international operation of the ship or 
aircraft. The rule provides that a foreign corporation must use a 
reasonable method for determining the proportion of the charter income 
that is attributable to such international operation.
    One reasonable method, described in Sec. 1.883-1(f)(2)(iii)(A), is 
based on the proportion of the days in the term of the charter or the 
taxable year, whichever is shorter, that the ship or aircraft is used 
in international operation by the lowest tier lessee-operator in its 
chain of lessees. For this purpose, the number of

[[Page 6069]]

days during which the ship or aircraft is not generating transportation 
income, within the meaning of section 863(c)(2) (for example, days 
during which the ship or aircraft is out of service while being 
repaired or maintained) should not be included in the numerator of the 
ratio. Another reasonable method described in paragraph (f)(2)(iii)(B) 
is based on the proportion of the gross income of the lowest tier 
lessee-operator of the ship or aircraft derived from the international 
operation of the ship or aircraft during the taxable year. An 
allocation based on the net income of such lessee-operator will not be 
considered reasonable for this purpose due to the administrative 
difficulties involved in determining and verifying the proper 
allocation of the operator's expenses.

Activities Incidental to International Operations

    Some corporations engaged in the operation of ships or aircraft 
earn income from activities that are so closely related to the primary 
activity of operation of ships or aircraft that it is appropriate to 
exclude income from these activities from taxation under section 883 of 
the Code. By contrast, in cases where the operator's activities are not 
so closely related to the primary activity of operation of ships or 
aircraft, it is not appropriate to exclude the income from such 
activities from taxation.
    The purpose of Sec. 1.883-1(g) is to provide rules for determining 
when a closely related activity is incidental to the business of the 
international operation of ships or aircraft. Paragraph (g)(1) provides 
examples of activities that will be considered incidental to the 
international operation of ships or aircraft. For example, where a ship 
operator contracts for the international carriage of cargo or 
passengers on a second operator's ship, the activity may be incidental 
to the international operation of a ship by the first operator. Other 
examples are: the temporary investment of working capital funds; the 
sale of tickets for international travel by a ship operator for another 
ship operator, or by an air carrier for another air carrier; the rental 
by the operator of a ship or aircraft of containers and related 
equipment used in connection with the international operation of its 
ship or aircraft; and bareboat charter of ships or aircraft normally 
operated on international voyages or flights but currently not needed 
by the operator, and that are used for international voyages or flights 
by the lessee/charterer.
    If an operator enters into a contract that requires a 
concessionaire to provide services onboard during the international 
operation of the operator's ship or aircraft and if the operator 
receives income from such services, then the income of the operator is 
appropriately treated as incidental to the operation of the ship or 
aircraft by the operator.
    Paragraph (g)(2) provides examples of activities that are not 
considered incidental to the international operation of ships or 
aircraft. These examples include: the sale of or arranging for train 
travel, bus transfers, land tour packages, or port city hotel 
accommodations within the United States or a foreign country; and the 
sale of airline tickets by a cruise ship operator or cruise tickets by 
an air carrier. Further examples include the sale or rental of U.S. 
real property; treasury activities involving the investment of excess 
funds or funds awaiting repatriation generated by the operation of 
ships or aircraft; rental of containers for a domestic leg of 
transportation in connection with international carriage of cargo; mere 
passive investment in an enterprise engaged in the international 
operation of ships or aircraft; services performed by the operator for 
parties other than passengers, consignors or consignees; or the 
carriage of passengers or cargo on ships or aircraft on domestic legs, 
not treated as international operation, either by the foreign operator 
or by a U.S. member of a joint operating agreement, such as a code 
sharing arrangement, pooling or alliance.

Determining Whether a Foreign Country Grants an Equivalent Exemption

    Section 1.883-1(h)(1) addresses the conditions under which a 
foreign country's exemption of certain categories of income from income 
tax may constitute an ``equivalent exemption'' within the meaning of 
section 883 of the Code. A foreign country will be considered to grant 
an equivalent exemption if: the foreign country generally imposes no 
tax on income, including income from the international operation of 
ships or aircraft; the foreign country specifically provides a domestic 
law exemption from a tax on income from the international operation of 
ships or aircraft either by statute, decree, or otherwise; or the 
foreign country provides for a reciprocal exemption by means of an 
exchange of diplomatic notes or other agreement with the United States. 
In addition, solely with respect to determining whether a shareholder 
is a resident of a qualified foreign country in Sec. 1.883-4 (for 
purposes of the qualified shareholder stock ownership test), the 
foreign country may provide a reciprocal exemption with respect to 
income from the international operation of ships or aircraft by means 
of an income tax convention with the United States. Paragraph (h)(3) of 
this section discusses under what circumstances an income tax 
convention will be considered to provide an equivalent exemption.
    Whether a foreign country provides an equivalent exemption is 
determined separately with respect to each of the following categories 
of income--
    (A) Income from the carriage of cargo and passengers;
    (B) Time or voyage (full) charter income;
    (C) Bareboat charter income;
    (D) Incidental bareboat charter income;
    (E) Incidental container-related income;
    (F) Any other income that is incidental to the business of 
operating ships or aircraft; or
    (G) Gains of the operator from the sale, exchange or other 
disposition of a ship, aircraft, container or related equipment or 
other moveable property used by that operator in international 
operation.
    If an equivalent exemption is not granted by the foreign country 
for a category of income, income in that category cannot be exempted 
from U.S. tax regardless of whether the foreign country grants an 
equivalent exemption for other categories of income. Furthermore, an 
equivalent exemption may be available for income derived from the 
international operation of ships even though income derived from the 
international operation of aircraft may not be exempt, and vice versa.
    Section 1.883-1(h)(3) contains a special rule regarding income tax 
conventions. If a foreign corporation is organized in a foreign country 
that provides an equivalent exemption only through an income tax 
convention with the United States, the foreign corporation may claim 
benefits under section 894 and the income tax convention, but not under 
section 883. See, H.R. Rep. No. 841, 99th Cong., 2d Sess., (1986); 
Staff of joint Comm. on Taxation, 100th Cong., 1st Sess., General 
Explanation of the Tax Reform Act of 1986, 931 (1987). If, however, the 
foreign corporation is organized in a country that offers an equivalent 
exemption under an income tax convention and also by some other means, 
such as by a diplomatic note, the foreign corporation may choose 
annually whether it will claim an

[[Page 6070]]

exemption under section 894 and the income tax convention or under 
section 883 by means of the diplomatic note. Such an election must be 
made with respect to all income of the foreign corporation from the 
international operation of ships or aircraft and cannot be made 
separately with respect to each category of such income. If a foreign 
corporation elects to be covered under section 883 rather than under 
the income tax convention, the foreign corporation must satisfy the 
requirements of this proposed rule, including demonstrating that it 
satisfies the stock ownership test of paragraph (c)(2) of this section.
    Section 1.883-1(h)(4) describes certain foreign residence-based 
taxation systems that may not satisfy the equivalent exemption 
requirements of this section. For example, the exemption granted by a 
foreign country's law or income tax convention must be a complete 
exemption and not merely a reduction to a non-zero rate of tax levied 
against corporations organized in the United States engaged in the 
international operation of ships or aircraft, except in the case of a 
reduction to a zero rate for an unlimited period of time. An exemption 
granted by a foreign country's law that reduces the rate of tax to a 
zero rate for only a limited period of time, such as in the case of a 
tax holiday, would not be considered a complete exemption for purposes 
of this rule.
    Similarly, many foreign countries impose tax only on the income of 
ships or aircraft derived from transporting cargoes into, but not out 
of, the country or vice versa. Such a foreign country will not be 
treated as granting an equivalent exemption on the non-taxed income. 
For example, a foreign country that imposes tax only on the 
transportation of cargo carried out of the country (outbound freight) 
will not be treated as granting an equivalent exemption for income from 
the transporting of cargo into that country (inbound freight). Thus, if 
a corporation organized in such a country derives U.S. source income 
from voyages that end in the United States, it cannot claim an 
exemption on the basis of an equivalent exemption granted by the 
foreign country for inbound freight income. With respect to the 
carriage of cargo, the foreign country must provide an exemption from 
tax for income from transporting cargo both inbound and outbound before 
it will be considered to grant an equivalent exemption.
    An equivalent exemption also does not arise where a foreign country 
only exempts tax on specific types of cargo. Unless a country exempts 
income from transporting all types of cargo, it will not be considered 
to grant an equivalent exemption for purposes of this section.
    A foreign country that has a territorial tax system will be 
considered to grant an equivalent exemption only if the tax system 
treats income from the international operation of ships or aircraft as 
100 percent foreign source, and thereby not subject to tax, even if the 
income is derived from a voyage or flight that begins or ends in that 
foreign country.
    Pursuant to authority provided in section 883(a)(5) of the Code, 
these rules provide that if a foreign country generally grants an 
equivalent exemption to corporations organized in the United States, 
but also imposes a residence-based tax on certain corporations 
organized in the United States, the foreign country may nevertheless be 
considered to grant an equivalent exemption and to be a qualified 
foreign country if the residence-based tax is imposed only on a 
corporation organized in the United States that is treated as a 
resident of the other country because its place of management or 
control, or other comparable standard, is in that foreign country. See, 
H.R. Rep. No. 247, 101st Cong., 1st Sess. 1415 (1989). If instead the 
residence-based tax is imposed on a corporation organized in the United 
States that is not managed and controlled in that foreign country, the 
foreign country would not be treated as a qualified foreign country and 
would not grant an equivalent exemption for purposes of this section.
    Finally, a foreign country must provide an exemption from tax for 
all income in a category of income, as defined in paragraph (h)(2) of 
this section. For example, a country that exempts income from the 
bareboat charter of passenger aircraft but not the bareboat charter of 
cargo aircraft does not provide an equivalent exemption for income from 
bareboat charter of aircraft.
    Pursuant to section 872(b)(7), the proposed rule explains in 
Sec. 1.883-1(i) that a possession of the United States is considered to 
be a foreign country for purposes of this proposed rule. Thus, a 
possession on a mirror system is a qualified foreign country and is 
considered to grant an equivalent exemption to corporations organized 
in the United States. The term mirror system refers to the general 
applicability of the Code in the possession with the name of the 
possession substituted for United States in the Code where appropriate. 
Therefore, a qualified foreign corporation that is organized in a 
possession on a mirror system, and that operates a transportation 
business between the possession and the United States, could exclude 
its income from the international operation of ships or aircraft from 
its gross income for purposes of U.S. Federal income tax and such 
income could be exempt from U.S. income tax. In cases where a 
possession is not on a mirror system, the possession may nevertheless 
be a qualified foreign country if, for example, it provides for an 
equivalent exemption through its internal law.
    Section 1.883-1(j) confirms the rule of section 265(a)(1). If a 
qualified foreign corporation derives income from a non-exempt activity 
as well as qualified income, and both are effectively connected with 
the conduct of a U.S. trade or business, the foreign corporation may 
not deduct from any income derived from the non-exempt activity any 
amount otherwise allowable as a deduction from qualified income that is 
excluded from gross income and exempt under this proposed rule.

Stock Ownership Tests

    As provided in Sec. 1.883-1(c)(2), a foreign corporation must 
satisfy one of three stock ownership tests to be considered a qualified 
foreign corporation. It must demonstrate that more than fifty percent 
of the value of its stock is owned by qualified shareholders, as 
determined under Sec. 1.883-4 (qualified shareholder test) or that its 
stock is primarily and regularly traded on an established securities 
market in a qualified foreign country or in the United States, as 
determined under Sec. 1.883-2 (publicly-traded test), or that it is a 
controlled foreign corporation as determined under Sec. 1.883-3 (CFC 
test). Separate reporting and documentation requirements apply to each 
test. A foreign corporation that satisfies the publicly-traded test or 
the CFC test and its relevant reporting and documentation requirements 
does not have to comply with the reporting and documentation 
requirements of the qualified shareholder test.

The Publicly-Traded Stock Ownership Test

    The branch profits tax rules under Sec. 1.884-5(d) provide the 
framework for the publicly traded test due to the strong similarities 
between the statutory language in sections 883(c) and 884(d)(4)(B) and 
the fact that both statutes were first enacted as part of the Tax 
Reform Act of 1986. Section 1.883-2(a) provides that a corporation is a 
publicly-traded corporation if its stock is primarily and regularly 
traded on one or more established securities markets in any qualified 
foreign country or in the United States. The proposed rule

[[Page 6071]]

generally follows Sec. 1.884-5(d)(2) of the branch profits tax 
regulations in defining the term established securities market, except 
that the proposed rule does not require the foreign securities exchange 
to be the principal exchange in a country. In addition, the proposed 
rule follows Sec. 1.884-5(d)(3) in defining the term primarily traded, 
except that in the proposed rule the corporation's stock may be traded 
in any qualified foreign country or the United States and is not 
limited to trading only in the country where the corporation is 
organized or the United States.
    Similarly, the proposed rule follows Sec. 1.884-5(d)(4)(i) in 
defining the general rule for the term regularly traded. Section 1.883-
2(d) provides that stock of a foreign corporation is regularly traded 
if one or more classes of stock of the corporation that, in the 
aggregate, represent 80 percent or more of the total combined voting 
power of all classes of stock of such corporation entitled to vote and 
80 percent or more of the total value of all classes of stock of such 
corporation are listed on an established securities market or markets 
during the taxable year; and, with respect to each class relied on to 
meet the 80 percent requirement, trades in each such class are 
effected, other than in de minimis quantities, on such market or 
markets on at least 60 days during the taxable year (or \1/6\ of the 
number of days in a short taxable year). In addition, the aggregate 
number of shares in each such class that are traded on such market or 
markets during the taxable year must be at least 10 percent of the 
average number of shares outstanding in that class during the taxable 
year (or, in the case of a short taxable year, a percentage that equals 
at least 10 percent of the average number of shares outstanding in that 
class during the short taxable year multiplied by the number of days in 
the short taxable year, divided by 365).
    In addition, if a class of stock of the foreign corporation is 
traded on an established securities market in the United States, and it 
is regularly quoted by brokers or dealers making a market in the stock, 
it can also be treated as meeting the trading requirements, provided 
that the closely-held exception, described below, does not apply. A 
broker or dealer makes a market in a stock only if the broker or dealer 
holds himself out to buy or sell the stock at the quoted price.
    A closely-held class of stock, as set out in Sec. 1.883-2(d)(3)(i), 
cannot be treated as meeting the trading requirements of the publicly-
traded stock ownership test. See, Sec. 1.884-5(d)(4)(iii)(A). Section 
1.883-2(d)(3)(i) provides that a class of stock is closely held if at 
any time during the taxable year, one or more 5 percent shareholders 
own, in the aggregate, 50 percent or more of the value of the 
outstanding shares of the class of stock at any time during the taxable 
year. A five percent shareholder is any person who owns at least five 
percent of the value of the outstanding shares of the class of stock, 
taking into account stock owned by related persons. See Sec. 1.883-
2(d)(3)(iii). See also Sec. 1.884-5(d)(4)(iii)(B).
    For this purpose, persons will be treated as related if they are 
related within the meaning of section 267(b). In determining whether 
two or more corporations are members of the same controlled group under 
section 267(b)(3), a person is considered to own stock owned directly 
by such person, stock owned with the application of section 1563(e)(1), 
and stock owned with the application of section 267(c). Further, in 
determining whether a corporation is related to a partnership under 
section 267(b)(10), a person is considered to own the partnership 
interest owned directly by such person and the partnership interest 
owned with the application of section 267(e)(3).
    The closely-held test in this proposed rule differs in one 
significant respect from the rule in the branch profits tax 
regulations. The proposed rule allows the foreign corporation to look 
through the five percent shareholders of the closely-held class to the 
ultimate owners and to demonstrate that such owners are qualified 
shareholders, provided no shares of stock in the chain of ownership are 
issued in bearer form. In the proposed rule, a class of stock of a 
foreign corporation that is otherwise regularly traded but is also 
closely-held will be treated as regularly traded if the foreign 
corporation demonstrates that more than 50 percent of the value of that 
class of stock is owned, or is treated as owned by applying the rules 
of attribution contained in Sec. 1.883-4(c), by qualified shareholders 
for more than half of the days of the taxable year. The requirements 
for being treated as a qualified shareholder are described in 
Sec. 1.883-4(b). Under this rule, an individual cannot be treated as a 
qualified shareholder if any corporation in the relevant chain of 
ownership issues stock in bearer form.
    Thus, a foreign corporation with a class of stock that is closely-
held may nevertheless count that class as regularly traded provided 
that the foreign corporation is able to establish that more than 50 
percent of the value of the entire class of stock is owned (for 
example, through a partnership, trust or holding company) by persons 
who would themselves be qualified shareholders. The branch profits tax 
regulations do not treat a closely-held class of stock as regularly 
traded if 50 percent or more of the value of the closely-held block is 
owned by one or more 5 percent shareholders who are not qualifying 
shareholders, as defined in Sec. 1.884-5(b)(1) and those regulations do 
not permit the foreign corporation to look beyond the 5 percent 
shareholders to the owners. The IRS is considering whether to make 
conforming changes to Sec. 1.884-5(d)(4)(iii).
    Paragraph (d)(4) is similar to Sec. 1.884-5(d)(4)(iv) and provides 
that trades between related persons described in section 267(b), as 
modified by Sec. 1.883-2(d)(3)(iii), and trades conducted in order to 
meet the regularly traded requirements are disregarded. A class of 
stock shall not be treated as meeting the trading requirements if there 
is a pattern of trades conducted to meet such requirements. For 
example, trades between two persons that occur several times during the 
taxable year may be treated as an arrangement or a pattern of trades 
conducted to meet the trading requirements of paragraph (d) of this 
section.
    Section 1.883-2(d)(5) provides an example to illustrate the 
application of the rules regarding regularly traded stock and the 
closely-held exception.
    Section 1.883-2(e) provides that a foreign corporation relying on 
the publicly-traded stock ownership test to establish that it satisfies 
the stock ownership test of Sec. 1.883-1(c)(2) must substantiate that 
it meets such requirements. The proposed rule requires, for example, 
that if a class of stock of a foreign corporation is closely-held 
within the meaning of paragraph (d)(3)(i), then the foreign corporation 
must obtain an ownership statement from each qualified shareholder upon 
whom it relies to meet the exception to the closely-held test. The 
ownership statements are described in Sec. 1.883-4(d). In addition, the 
foreign corporation must maintain and provide to the Commissioner upon 
request a list of its shareholders of record and any other relevant 
information.
    Section 1.883-2(f) describes the information that the foreign 
corporation must include in its Form 1120F in order to rely on the 
publicly-traded stock ownership test to satisfy the stock ownership 
test of Sec. 1.883-1(c)(2).

Controlled Foreign Corporation Stock Ownership Test.

    Section 1.883-3 provides rules that a foreign corporation must 
follow if the foreign corporation relies on this section to satisfy the 
stock ownership test of

[[Page 6072]]

Sec. 1.883-1(c)(2). A controlled foreign corporation (CFC) satisfies 
the stock ownership test of Sec. 1.883-1(c)(2) if it is organized in a 
qualified foreign country, satisfies the income inclusion test of 
paragraph (b) of this section, and satisfies the documentation and 
reporting requirements of paragraphs (c) and (d) of this section, 
respectively (the CFC test). For purposes of these proposed rules, a 
CFC that fails the income inclusion test may only satisfy the stock 
ownership test of Sec. 1.883-1(c)(2) if the CFC demonstrates that it 
meets either the publicly traded test of Sec. 1.883-2 or the qualified 
shareholder test of Sec. 1.883-4.
    To satisfy the income inclusion test of paragraph (b), the foreign 
corporation must be a CFC as defined in section 957(a) if such section 
were applied without regard to section 318(a)(4). In addition, more 
than 50 percent of the CFC's subpart F income (as defined in section 
952) derived from the international operation of ships or aircraft must 
be included, pursuant to section 951, in the gross income of one or 
more U.S. citizens, individual residents of the United States or 
domestic corporations for the taxable years of such persons in which 
the taxable year of the CFC ends. This additional requirement was 
included in order to prevent inappropriate extension of benefits under 
section 883. The rule is illustrated by two examples.
    Paragraph (c) provides that a CFC relying on this section to 
satisfy the stock ownership test of Sec. 1.883-1(c)(2) must establish 
all the facts necessary to satisfy the Commissioner that it qualifies 
under the CFC stock ownership test. To meet this requirement with 
respect to the income inclusion test, the CFC must obtain the 
documentation described in paragraph (c)(2). This documentation 
includes a copy for the taxable year of the Form 5471, Information 
Return of U.S. Persons With Respect to Certain Foreign Corporations (if 
otherwise required to be filed) prepared by or on behalf of any U.S. 
shareholder that is a partnership, estate or trust. In addition, the 
documentation must include a written statement from each such U.S. 
shareholder that is a partnership, estate or trust providing the name, 
address, taxpayer identification number and percentage of interest in 
the U.S. shareholder held by each partner, beneficiary or other 
interest owner that is a U.S. citizen, individual resident of the 
United States or domestic corporation.
    Finally, paragraph (d) explains that if a CFC is relying on this 
section to satisfy the stock ownership test of Sec. 1.883-1(c)(2), it 
must include certain additional information in its Form 1120F for the 
taxable year, along with the information required to be included in its 
return by Sec. 1.883-1(c)(3). This additional information is set out in 
paragraph (d) and should be current as of the end of the corporation's 
taxable year.

Qualified Shareholder Stock Ownership Test

    Section 1.883-4(a) provides that a foreign corporation shall 
satisfy the stock ownership test of Sec. 1.883-1(c)(2) if more than 50 
percent of its stock (by value) is owned, or treated as owned by 
applying the attribution rules of paragraph (c) of this section, for at 
least half of the number of days in the foreign corporation's taxable 
year by one or more qualified shareholders. In addition, a foreign 
corporation must meet the substantiation and reporting requirements of 
paragraphs (d) and (e) of this section (qualified shareholder stock 
ownership test).
    Paragraph (b)(1) of this section explains that a shareholder is a 
qualified shareholder only if the shareholder meets certain criteria. 
First, the shareholder must be a resident in a country that offers an 
equivalent exemption for the same type of income as that earned by the 
foreign corporation. Second, the shareholder must not own its interest 
in the foreign corporation through bearer shares either directly or by 
applying the attribution rules of paragraph (c) of this section. Third, 
the shareholder must provide to the foreign corporation the 
documentation required in paragraph (d) of this section and the foreign 
corporation must meet the reporting requirements of paragraph (e) of 
this section with respect to such shareholder. Finally, the shareholder 
must be described in one of the following categories of qualified 
shareholders--
    (A) An individual who is not a beneficiary of a pension fund, as 
described in paragraph (E), and who is a resident of a qualified 
foreign country, as determined under paragraph (b)(2);
    (B) The government of a qualified foreign country (or a political 
subdivision or local authority of such country);
    (C) A foreign corporation that is organized in a qualified foreign 
country and meets the publicly traded rules of Sec. 1.883-2;
    (D) A not-for-profit organization described in paragraph (b)(4) of 
this section that is not a pension fund as defined in paragraph (b)(5) 
of this section and that is organized in a qualified foreign country; 
or
    (E) A beneficiary of a pension fund (as defined in paragraph 
(b)(5)(iv) of this section) administered in or by a qualified foreign 
country (whose residency is determined under paragraph (d)(3)).
    Paragraph (b)(2) of this section explains when an individual is a 
resident of a qualified foreign country for purposes of this proposed 
rule. An individual is a resident of a qualified foreign country only 
if the individual is fully liable to tax as a resident in such country 
(for example, an individual who is liable to tax only on a remittance 
basis in a foreign country may not be treated as a resident of that 
country), and in addition, either: (1) The individual's tax home, 
within the meaning of paragraph (b)(2)(ii) of this section, is within 
that qualified foreign country 183 days or more of the taxable year; or 
(2) the individual is treated as a resident of a qualified foreign 
country based on special rules pursuant to paragraphs (d)(3) of this 
section.
    Paragraph (b)(2)(ii) explains that for purposes of this section an 
individual's tax home is considered to be located at the individual's 
regular or principal (if more than one regular) place of business. If 
the individual has no regular or principal place of business because of 
the nature of his business (or lack of a business), then the 
individual's tax home is located at his regular place of abode in a 
real and substantial sense. If an individual has no regular or 
principal place of business and no regular place of abode in a real and 
substantial sense in a qualified foreign country for 183 days or more 
of the taxable year, that individual does not have a tax home for 
purposes of this section and, therefore, is not a qualified shareholder 
unless either a special rule in paragraphs (d)(3)(ii) through (v) of 
this section applies or the individual demonstrates that he is fully 
liable to tax as a resident in such country. If further guidance is 
needed to determine the tax home of an individual for the purpose of 
determining whether the individual is a qualified shareholder under 
this paragraph, the proposed rule anticipates that the foreign 
corporation would look to published guidance under section 911(d)(3), 
with the exception of guidance relating to the treatment of itinerants.
    Paragraph (b)(3) provides that a shareholder otherwise described in 
paragraph (b)(1) of this section may be a resident of a foreign country 
that provides an equivalent exemption for the category of income at 
issue through an income tax convention with the

[[Page 6073]]

United States. If the shareholder relies on the convention to 
demonstrate that the country of residence provides an equivalent 
exemption and the convention has a requirement in the shipping and air 
transport article other than residence, such as place of registration 
or documentation of the ship or aircraft, or in the limitation on 
benefits article, such as a percentage of resident ownership, the 
shareholder is not a qualified shareholder unless the corporation 
seeking qualified foreign corporation status would satisfy any such 
additional requirement if it were organized in such foreign country. 
The proposed rule offers two examples to illustrate this rule.
    Paragraph (b)(4) explains the requirements for a not-for-profit 
organization to be a qualified shareholder. This rule generally follows 
the rules in the first paragraph of Sec. 1.884-5(b)(1)(iv) of the 
branch profits tax regulations. Similarly, paragraph (b)(5) explains 
the requirements that a pension fund must satisfy in order for its 
beneficiaries to be qualified shareholders. The proposed rule addresses 
both government and non-government pension funds and defines the term 
beneficiary of a pension fund. This paragraph generally follows 
Sec. 1.884-5(b)(8)(i) through (iii) of the branch profits tax 
regulations.
    Paragraph (c) of this section contains the rules for determining 
constructive ownership for purposes of applying the stock ownership 
test of Sec. 1.883-1(c)(2) and the qualified shareholder stock 
ownership test of paragraph (a) of this section. Paragraph (c)(1) 
provides that stock owned by or for a corporation, partnership, trust, 
estate, or mutual insurance company or similar entity shall be treated 
as owned proportionately by its shareholders, partners, beneficiaries, 
grantors, or other interest holders as provided in paragraphs 
(c)(2)through (6) of this section. The proportionate interest rules of 
this paragraph apply successively upward through a chain of ownership, 
and a person's proportionate interest shall be computed for the 
relevant days or period that is taken into account in determining 
whether a foreign corporation satisfies the requirements of paragraph 
(a) of this section. Stock treated as owned by a person by reason of 
this paragraph shall be treated as actually owned by such person for 
purposes of this section. An owner of an interest in an association 
taxable as a corporation shall be treated as a shareholder of such 
association for purposes of this paragraph (c).
    Paragraph (c)(2) explains that a partner shall be treated as having 
an interest in stock of a foreign corporation owned by a partnership in 
proportion to the least of three distributive shares: The partner's 
percentage distributive share of the partnership's dividend income from 
the stock; the partner's percentage distributive share of gain from 
disposition of the stock by the partnership; or the partner's 
percentage distributive share of the stock (or proceeds from the 
disposition of the stock) upon liquidation of the partnership. This 
rule generally follows the constructive ownership rules in Sec. 1.884-
5(b)(2)(ii) of the branch profits tax regulations. It differs, however, 
because all qualified shareholders that are partners in a partnership 
and that are residents of, or organized in, the same qualified foreign 
country shall be treated as one partner. Thus, the percentage 
distributive shares of dividend income, gain and liquidation rights of 
all qualified shareholders that are partners in a partnership and that 
are residents of, or organized in, the same qualified foreign country 
are aggregated prior to determining the least of the three percentages 
set out in paragraph (c)(2)(i) of this section. This divergence was 
necessary because one country may be a qualified foreign country while 
another may not and it is necessary for the foreign corporation to 
identify the value of the stock owned by residents of each country. 
Several examples illustrate the rules of this paragraph.
    Paragraph (c)(3) of this section provides rules for determining the 
owners of stock owned by or for a trust or estate. These rules 
generally adopt the rules of Sec. 1.884-5(b)(2)(iii) of the branch 
profits tax regulations. Similarly, paragraphs (c)(4) and (5) provide 
rules for determining the owners of stock owned by corporations that 
issue stock and by mutual insurance companies and similar entities, 
respectively. These rules adopt the rules of Sec. 1.884-5(b)(2)(iv) and 
(v) of the branch profits tax regulations, respectively.
    Paragraph (c)(6) explains how to compute the beneficial interests 
of individuals in non-government pension funds. This rule differs from 
the rule in Sec. 1.884-5(b)(8)(iv) of the branch profits tax 
regulations in that the proposed rule provides that stock held by a 
non-government pension fund shall be considered owned by the 
beneficiaries of the fund equally on a pro-rata basis if certain 
conditions are met. For example, the trustees, directors or other 
administrators of the pension fund must have no knowledge, and no 
reason to know, that a pro-rata allocation of interests of the fund to 
all beneficiaries would differ significantly from an actuarial 
allocation of interests in the fund (or, if the beneficiaries' 
actuarial interest in the stock held directly or indirectly by the 
pension fund differs from the beneficiaries's actuarial interest in the 
pension fund, that a pro-rata allocation of interests of the fund to 
all beneficiaries would differ significantly from the actuarial 
interests computed by reference to the beneficiaries' actuarial 
interest in the stock).
    The branch profits tax regulations determine such beneficial 
interests on an actuarial basis. The other conditions that must be 
satisfied generally follow those set out in Sec. 1.884-5(b)(8)(iv).
    Paragraph (d)(1) provides that a foreign corporation that relies on 
this section to satisfy the ownership requirements of Sec. 1.883-
1(c)(2), must establish all the facts necessary to satisfy the 
Commissioner that more than 50 percent of the value of its shares is 
owned, or treated as owned by applying paragraph (c) of this section, 
by qualified shareholders. A foreign corporation cannot meet this 
requirement with respect to any stock issued in bearer form. A 
shareholder that holds shares in the foreign corporation either 
directly or indirectly in bearer form cannot be a qualified 
shareholder.
    Paragraph (d)(2)(i) provides that, except as provided in paragraph 
(d)(3), a person may only be a qualified shareholder if for the 
relevant period, the person completes an ownership statement, which is 
described in paragraph (d)(4) of this section. In the case of a person 
owning stock in the foreign corporation indirectly through one or more 
intermediaries (including mere legal owners or recordholders acting as 
nominees), each intermediary in the chain of ownership between that 
person and the foreign corporation seeking qualified foreign 
corporation status must also complete an intermediary ownership 
statement, which is described in paragraph (d)(4)(v). In addition, the 
foreign corporation must receive such ownership statements and retain 
them with the corporate books and records until the close of statute of 
limitations for the taxable year to which the statements relate.
    The ownership statements required in paragraph (d)(2)(i) remain 
valid until the earlier of the last day of the third calendar year 
following the year in which the ownership statement is signed or the 
day that a change of circumstance occurs that makes any information on 
the ownership statement incorrect. For example, an ownership statement 
signed on September 30,

[[Page 6074]]

2000, remains valid through December 31, 2003, unless circumstances 
change that make the information of the statement no longer correct.
    Paragraph (d)(3) contains special rules for determining the 
residence of certain shareholders. These rules are intended to simplify 
and reduce the effort needed by the foreign corporation and its 
intermediary shareholders to obtain the documentation required to 
substantiate whether the foreign corporation satisfies the qualified 
shareholder stock ownership test. If one of these special rules 
applies, the foreign corporation is not required to obtain an ownership 
statement from the individual owners covered by that rule.
    Paragraph (d)(3)(ii) provides a special rule for registered 
shareholders owning less than one percent of widely-held corporations. 
This rule is adopted from Sec. 1.884-5(b)(3)(iii) of the branch profits 
tax regulations. A foreign corporation with at least 250 registered 
individual shareholders, that is not a publicly-traded corporation, as 
described in Sec. 1.883-2, (a widely-held corporation), may not be 
required to obtain an ownership statement from an individual 
shareholder owning less than one percent of the widely-held corporation 
at all times during the taxable year. If such widely-held foreign 
corporation is the foreign corporation seeking qualified foreign 
corporation status, or an intermediary that meets the documentation 
requirements of paragraphs (d)(4)(v)(A) and (B) of this section, 
relating to ownership statements from widely-held intermediaries with 
registered shareholders owning less that one percent of such 
intermediary, the widely-held foreign corporation may treat the address 
of record in its ownership records as the residence of any less than 
one percent individual shareholder if the individual's address of 
record is not a non-residential address, such as a post office box or 
in care of a financial intermediary or stock transfer agent and the 
officers and directors of the widely-held corporation neither know nor 
have reason to know that the individual does not reside at that 
address.
    Paragraph (d)(3)(iii) provides special rules for pension funds. An 
individual who is a beneficiary of a government pension fund shall be 
treated as a resident of the country in which the pension fund is 
administered if the pension fund satisfies the documentation 
requirements of paragraphs (d)(4)(v)(A) and (C)(1) of this section, 
relating to ownership statements from pension funds. An individual who 
is a beneficiary of a non-government pension fund having more than 100 
beneficiaries shall be treated as a resident of the country of the 
beneficiary's address as it appears on the records of the fund, 
provided it is not a nonresidential address, such as a post office box 
or an address in care of a financial intermediary, and provided none of 
the trustees, directors or other administrators of the pension fund 
know, or have reason to know, that the beneficiary is not an individual 
resident of such foreign country. This rule applies only if the non-
government pension fund satisfies the documentation requirements of 
paragraphs (d)(4)(v)(A) and (C)(2) of this section.
    Paragraph (d)(3)(iv) provides a special rule for publicly-traded 
corporations owning a direct or indirect interest in the foreign 
corporation seeking qualified foreign corporation status. Any stock in 
a foreign corporation seeking qualified foreign corporation status that 
is owned by a publicly traded corporation will be treated as owned by a 
person resident in the country where the publicly traded corporation is 
organized if the foreign corporation receives the statement described 
in paragraph (d)(4)(iii) of this section from the publicly-traded 
shareholder along with copies of any relevant ownership statements that 
the publicly traded shareholder relies on to satisfy the exception to 
the closely-held class of stock rule of Sec. 1.883-2(d)(3)(ii).
    Finally, paragraph (d)(3)(v) provides a special rule for not-for-
profit organizations. For purposes of meeting the ownership 
requirements of paragraph (a) of this section, a not-for-profit 
organization may rely on the addresses of record of its individual 
beneficiaries and supporters to determine where such persons are 
resident, provided that: The addresses of record are not nonresidential 
addresses such as a post office box or in care of a financial 
intermediary; the officers, directors or administrators or the 
organization do not know or have reason to know that the individual 
beneficiaries or supporters do not reside at that address; and the 
foreign corporation seeking qualified foreign corporation status 
receives the statement required in paragraph (d)(4)(iv) of this section 
from the not-for profit organization.
    Paragraph (d)(4) describes the information that must be obtained by 
a corporation seeking qualified foreign corporation status for each 
taxable year if the foreign corporation relies on Sec. 1.883-4 to meet 
the stock ownership requirements of Sec. 1.883-1(c)(2), or to 
demonstrate that it is not a closely-held corporation. Treasury and the 
IRS solicit comments with respect to the appropriateness of these 
information requirements.
    Paragraph (d)(4)(i) provides that an ownership statement from an 
individual shareholder is a written statement signed under penalties of 
perjury stating certain general information about a shareholder's 
ownership interest and country of residence. Paragraph (d)(4)(ii) 
provides additional information that must be included if the 
shareholder is a foreign government. Paragraph (d)(4)(iii) provides 
additional information that must be included if the shareholder is a 
publicly traded corporation. Paragraph (d)(4)(iv) provides additional 
information that must be included if the shareholder is a not-for-
profit organization.
    The foreign corporation seeking qualified foreign corporation 
status must obtain an intermediary ownership statement from each 
intermediary standing in the chain of ownership between it and the 
qualified shareholders upon whom it relies to meet the qualified 
shareholder stock ownership test. Paragraph (d)(4)(v) provides that an 
intermediary ownership statement is a written statement signed under 
penalties of perjury by the intermediary (if the intermediary is an 
individual) or a person who would be authorized to sign a tax return on 
behalf of the intermediary (if the intermediary is not an individual) 
stating certain general information about the intermediary's ownership 
interest and residence. Paragraph (d)(4)(v)(B) provides additional 
information that must be included if the shareholder is a widely-held 
intermediary with registered shareholders owning less than one percent 
of the widely-held intermediary. Paragraph (d)(4)(v)(C) provides 
additional information that must be included if the shareholder is a 
pension fund. This paragraph describes the information to be included 
in the intermediary ownership statement by both government and non-
government pension funds and provides that the determinations required 
to be made under this paragraph (d)(4)(v)(C) shall be made using 
information shown on the records of the pension fund for a date during 
the foreign corporation's taxable year to which the determination is 
relevant.
    Paragraph (d)(5) requires the foreign corporation seeking qualified 
foreign corporation status to retain the documentation described in 
paragraphs (d)(3) and (4) of this section until the expiration of the 
statute of limitations for the taxable year of the foreign corporation 
to which the documentation

[[Page 6075]]

relates. Such documentation must be made available for inspection by 
the Commissioner at such place as the Commissioner may request.
    A foreign corporation relying on the ownership requirements of this 
section to demonstrate that it is a qualified foreign corporation for 
purposes of Sec. 1.883-1(c)(2) must provide the information described 
in paragraph (e) in addition to the information required in Sec. 1.883-
1(c)(3) to be included in its Form 1120F for each taxable year. The 
information should be current as of the end of the corporation's 
taxable year. This information is to be based on an analysis of the 
ownership records of the foreign corporation, as well as on the 
ownership statements and other documentation that are obtained from its 
shareholders.

Proposed Effective Dates

    The effective date provisions for the proposed rule are contained 
in Sec. 1.883-5. The proposed rule applies to taxable years of the 
foreign corporation ending 30 days or more after the date the proposed 
rule is published as a final regulation in the Federal Register. When 
the regulation is final, taxpayers may rely on all the provisions of 
this section for guidance and may elect to apply all such substantive 
provisions for any open taxable year beginning after December 31, 1986, 
and ending before the date the final regulation is effective. Such 
election will be applicable for the year of the election and for all 
subsequent taxable years. However, in no event will Sec. 1.883-1(c)(3) 
(relating to the substantiation and reporting required to be treated as 
a qualified foreign corporation) or Secs. 1.883-2(f), 1.883-3(d) and 
1.883-4(e) (relating to additional information to be included in the 
return to demonstrate whether the foreign corporation satisfies one of 
three stock ownership tests) apply to any taxable years ending prior to 
the effective date of this regulation.
    Section 1.883-1(c)(3) (relating to the substantiation and reporting 
required to be treated as a qualified foreign corporation) requires 
that certain information be included in the foreign corporation's Form 
1120F, ``U.S. tax Return of Foreign Corporation.'' Sections 1.883-2(f), 
1.883-3(d) and 1.883-4(e) (relating to information to be included to 
demonstrate whether the foreign corporation satisfies one of three 
stock ownership tests) require that additional information also be 
included in such return. When this regulation becomes generally 
applicable, and until the taxable year for which the Form 1120F and its 
instructions are revised to conform to this regulation and the foreign 
corporation seeking qualified foreign corporation status is otherwise 
directed by such instructions, the information required in Sec. 1.883-
1(c)(3) and Sec. 1.883-2(f), 1.883-3(d) or 1.883-4(e), as applicable, 
must be included in a written statement signed under penalties of 
perjury by a person authorized to sign the return, attached to the Form 
1120F, and filed with the return.

Special Analysis

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. Pursuant to 
section 7805(f) of the Code, this notice of proposed rulemaking will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business. An initial 
regulatory flexibility analysis has been prepared as required for the 
collection of information in this notice of proposed rulemaking under 5 
U.S.C. 603. The analysis is set forth in this preamble under the 
heading ``Initial Regulatory Flexibility Analysis.''

Initial Regulatory Flexibility Analysis

    This initial analysis is prepared pursuant to the Regulatory 
Flexibility Act (5 U.S.C. chapter 6). The objective of the proposed 
regulations is to provide guidance to foreign corporations engaged in 
the international operation of a ship or ships or aircraft. This 
guidance will enable the foreign corporation to determine if it is 
eligible to exclude its income from these activities from gross income 
for purposes of its United States Federal income tax. The legal basis 
for these requirements is section 883. The IRS and Treasury are not 
aware of any Federal rules that duplicate, overlap, or conflict with 
the proposed regulations.
    The documentation and reporting requirements of the proposed 
regulations enable the IRS to identify those taxpayers that may or may 
not be eligible to claim a reciprocal exemption. In addition, analysis 
of the required shareholder documentation will enable the foreign 
corporation to correctly file its U.S. Federal income tax return.
    There are approximately 1,400 foreign corporations that operate a 
ship or ships or aircraft on voyages or flights to or from the United 
States annually. These foreign corporations all have an obligation to 
file a U.S. Federal income tax return, regardless of whether they are 
entitled to a reciprocal exemption. However, many of those corporations 
are organized in qualified foreign countries and may be eligible to 
exempt their income from the international operation of a ship or ships 
or aircraft from U.S. tax. Because it is impossible to determine at 
this time which of these foreign corporations satisfies the ownership 
requirements of the proposed rule, an estimate of the number of small 
entities that would be affected by these regulations is unavailable. A 
foreign corporation that complies with the documentation requirements 
of these proposed rules should have the information necessary to 
determine with certainty whether it is eligible for an equivalent 
exemption. This, in turn, is expected to create the additional benefits 
of increasing compliance with the filing requirements of the Internal 
Revenue Code and enabling the IRS to confirm whether the foreign 
corporation is entitled to an exemption.
    None of the significant alternatives considered in drafting these 
regulations would have significantly altered the economic impact of the 
collections of information on small entities. In considering the 
significant alternatives that would be permissible under the Code and 
would enable the IRS to ensure compliance with the Code, the IRS and 
Treasury concluded that the alternatives generally would impose equal 
or greater burdens.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) that are submitted timely to the IRS. The IRS and 
Treasury request comments on the clarity of the proposed rule and how 
it may be made easier to understand. All comments will be made 
available for public inspection and copying.
    A public hearing has been scheduled for April 27, 2000, at 10 a.m., 
in room 2615, Internal Revenue Building, 1111 Constitution Ave., NW., 
Washington, DC. Due to building security procedures, visitors must 
enter at the 10th Street entrance, located between Constitution and 
Pennsylvania Avenues, NW. In addition, all visitors must present photo 
identification to enter the building. Because of access restrictions, 
visitors will not be admitted beyond the immediate entrance area more 
than 15 minutes before the hearing starts. For information about having 
your name placed on the building access list to attend the hearing, see 
the FOR FURTHER INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to this hearing. Persons 
who wish

[[Page 6076]]

to present oral comments at the hearing must submit written comments 
and an outline of the topics to be discussed and the time to be devoted 
to each topic (signed original and eight (8) copies) by April 5, 2000. 
A period of 10 minutes will be allotted to each person for making 
comments. An agenda showing the scheduling of the speakers will be 
prepared after the deadline for receiving outlines has passed. Copies 
of the agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these proposed regulations is Patricia A. 
Bray of the Office of the Associate Chief Counsel (International). 
However, other personnel from the IRS and Treasury Department 
participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order to read as follows:

    Authority:  26 U.S.C. 7805 * * *
    Section 1.883-1 is also issued under 26 U.S.C. 883.
    Section 1.883-2 is also issued under 26 U.S.C. 883.
    Section 1.883-3 is also issued under 26 U.S.C. 883.
    Section 1.883-4 is also issued under 26 U.S.C. 883.
    Section 1.883-5 is also issued under 26 U.S.C. 883. * * *

    Par. 2. Section 1.883-0 is added to read as follows:


Sec. 1.883-0  Outline of major topics.

    This section lists the major paragraphs contained in Secs. 1.883-1 
through 1.883-5.

Sec. 1.883-0  Outline of major topics.

Sec. 1.883-1  Exclusion of income from the international operation 
of ships or aircraft.

    (a) General rule.
    (b) Qualified income.
    (c) Qualified foreign corporation.
    (1) General rule.
    (2) Stock ownership tests.
    (3) Substantiation and reporting requirements.
    (i) General rule.
    (ii) Further documentation.
    (4) Commissioner's discretion to cure defects in documentation.
    (d) Qualified foreign country.
    (e) Operation of ships or aircraft.
    (1) General rule.
    (2) Activities not considered operation of ships or aircraft.
    (3) Definitions.
    (i) Full charter.
    (ii) Time charter.
    (iii) Voyage charter.
    (iv) Wet lease.
    (v) Bareboat charter.
    (vi) Dry lease.
    (vii) Space or slot charter.
    (viii) Nonvessel operating common carrier (NVOCC).
    (ix) Code sharing arrangements.
    (f) International operation.
    (1) General rule.
    (2) Determining whether income is from international operation.
    (i) International carriage of passengers.
    (A) In general.
    (B) Round trip travel on cruise ships.
    (ii) International carriage of cargo.
    (iii) Bareboat charter of ships or aircraft used in 
international operations.
    (A) Ratio based on use.
    (B) Ratio based on gross income.
    (g) Activities incidental to the international operation of 
ships or aircraft.
    (1) General rule.
    (2) Activities not considered incidental to the international 
operation of ships or aircraft.
    (h) Equivalent exemption.
    (1) General rule.
    (2) Determining equivalent exemptions for each category of 
income.
    (3) Special rule with respect to income tax conventions.
    (4) Exemptions not qualifying as equivalent exemptions.
    (i) General rule.
    (ii) Reduced tax rate or time limited exemption.
    (iii) Inbound or outbound freight tax.
    (iv) Exemptions for limited types of cargo.
    (v) Territorial tax systems.
    (vi) Countries that tax on a residence basis.
    (vii) Exemptions within categories of income.
    (i) Treatment of possessions.
    (j) Expenses related to exempt income not deductible from non-
exempt income.

Sec. 1.883-2  Treatment of publicly-traded corporations.

    (a) General rule.
    (b) Established securities market.
    (1) General rule.
    (2) Exchanges with multiple tiers.
    (3) Computation of dollar value of stock traded.
    (4) Over-the-counter market.
    (5) Discretion to determine that an exchange does not qualify as 
an established securities market.
    (c) Primarily traded.
    (d) Regularly traded.
    (1) General rule.
    (2) Classes of stock traded on a domestic established securities 
market treated as meeting trading requirements.
    (3) Closely-held classes of stock not treated as meeting trading 
requirements.
    (i) General rule.
    (ii) Exception.
    (iii) Treatment of related persons.
    (4) Anti-abuse rule.
    (5) Example.
    (e) Substantiation that a foreign corporation is publicly-
traded.
    (i) In general.
    (ii) Availability and retention of documents for inspection.
    (f) Reporting requirements.

Sec. 1.883-3  Treatment of controlled foreign corporations.

    (a) General rule.
    (b) Special rule for CFC's with certain entity shareholders.
    (1) Income inclusion test.
    (2) Examples.
    (c) Substantiating CFC stock ownership.
    (1) In general.
    (2) Documentation from certain U.S. shareholders.
    (3) Availability and retention of documents for inspection.
    (d) Reporting requirements.

Sec. 1.883-4  Qualified shareholder stock ownership test.

    (a) General rule.
    (b) Qualified shareholder.
    (1) General rule.
    (2) Residence of individual shareholders.
    (i) General rule.
    (ii) Tax home.
    (3) Certain income tax convention restrictions applied to 
shareholders.
    (i) Application of restrictions.
    (ii) Examples.
    (4) Not-for-profit organizations.
    (5) Pension funds.
    (i) Pension fund defined.
    (ii) Government pension funds.
    (iii) Non-government pension funds.
    (iv) Beneficiary of a pension fund.
    (c) Rules for determining constructive ownership.
    (1) General rules for attribution.
    (2) Partnerships.
    (i) General rule.
    (ii) Partners resident in same country.
    (iii) Examples.
    (3) Trusts and estates.
    (i) Beneficiaries.
    (ii) Grantor trusts.
    (4) Corporations that issue stock.
    (5) Mutual insurance companies and similar entities.
    (6) Computation of beneficial interests in non-government 
pension funds.
    (d) Substantiation of stock ownership.
    (1) General rule.
    (2) Application of general rule.
    (i) Ownership statements.
    (ii) Three-year period of validity.
    (3) Special rules.
    (i) Determining residence of certain shareholders.
    (ii) Special rule for registered shareholders owning less than 
one percent of widely-held corporations.
    (iii) Special rules for beneficiaries of pension funds.
    (A) Government pension fund.
    (B) Non-government pension fund.
    (iv) Special rule for stock owned by publicly-traded 
corporations.

[[Page 6077]]

    (v) Special rule for not-for-profit organizations.
    (4) Ownership statements from shareholders.
    (i) Ownership statements from individuals.
    (ii) Ownership statements from foreign governments.
    (iii) Ownership statements from publicly-traded corporate 
shareholders.
    (iv) Ownership statements from not-for-profit organizations.
    (v) Ownership statements from intermediaries.
    (A) General rule.
    (B) Ownership statements from widely-held intermediaries with 
registered shareholders owning less than one percent of such widely-
held intermediary.
    (C) Ownership statements from pension funds.
    (1) Ownership statements from government pension funds.
    (2) Ownership statements from non-government pension funds.
    (3) Time for making determinations.
    (5) Availability and retention of documents for inspection.
    (e) Reporting requirements.

Sec. 1.883-5  Effective date.

    (a) General rule.
    (b) Election for retroactive application.
    (c) Transition rule.
    Par. 3. Section 1.883-1 is revised to read as follows:


Sec. 1.883-1  Exclusion of income from the international operation of 
ships or aircraft.

    (a) General rule. A foreign corporation shall exclude from its 
gross income for U.S. tax purposes any income it derives from the 
international operation of ships or aircraft if such income is 
qualified income under paragraph (b) of this section and if the 
corporation is a qualified foreign corporation under paragraph (c) of 
this section. See paragraph (e) of this section for the definition of 
the term operation of ships or aircraft and see paragraph (f) of this 
section for the definition of the term international operation.
    (b) Qualified income. Qualified income is income from the 
international operation of ships or aircraft that--
    (1) Is properly includible in any of the income categories 
described in paragraph (h)(2) of this section; and
    (2) Is the subject of an equivalent exemption, as described in 
paragraph (h) of this section, granted by the qualified foreign country 
in which the foreign corporation seeking qualified foreign corporation 
status is organized. See paragraph (d) of this section for the 
definition of the term qualified foreign country.
    (c) Qualified foreign corporation--(1) General rule. A qualified 
foreign corporation is a corporation, as defined in Secs. 301.7701-2(b) 
and 301.7701-3 of this chapter, that is engaged in the international 
operation of ships or aircraft and that is organized in a qualified 
foreign country. To be a qualified foreign corporation the corporation 
must also satisfy one of the three stock ownership tests described in 
paragraph (c)(2) of this section and satisfy the substantiation and 
reporting requirements described in paragraph (c)(3) of this section. A 
corporation may be a qualified foreign corporation with respect to one 
category of qualified income but may not be with respect to another 
category of income. See paragraph (h)(2) of this section for a 
discussion of categories of qualified income.
    (2) Stock ownership tests. To be a qualified foreign corporation 
the foreign corporation generally must demonstrate and document that 
more than fifty percent of the value of its stock is owned by qualified 
shareholders, as determined in Sec. 1.883-4 (qualified shareholder 
stock ownership test). However, a foreign corporation will not be 
required to demonstrate that it satisfies the qualified shareholder 
stock ownership test if it can demonstrate either that its stock is 
primarily and regularly traded on an established securities market in a 
qualified foreign country or in the United States, as determined under 
Sec. 1.883-2 (publicly-traded test), or that it is a controlled foreign 
corporation as determined under Sec. 1.883-3 (CFC test).
    (3) Substantiation and reporting requirements--(i) General rule. To 
be a qualified foreign corporation, a foreign corporation must include 
the following information in its Form 1120F, ``U.S. Income Tax Return 
of a Foreign Corporation,'' in the manner that the Form 1120F and its 
accompanying instructions prescribes--
    (A) The corporation's name and address (including mailing code);
    (B) The corporation's U.S. taxpayer identification number;
    (C) The foreign country in which the corporation is organized;
    (D) The applicable authority for an equivalent exemption, (e.g., a 
citation to either a statute in the country where the corporation is 
organized or a diplomatic note between the foreign country where the 
corporation was organized and the United States that provides an 
equivalent exemption, or to Rev. Rul. 97-31 (1997-1 C.B. 703) (see 
Sec. 601.601(d)(2) of this chapter), if the foreign country is included 
in Part II or III of the Table of countries that currently provide an 
equivalent exemption);
    (E) The category or categories of qualified income for which an 
exemption is being claimed;
    (F) A reasonable estimate of the amount of each category of U.S. 
source qualified income for which the exemption is claimed;
    (G) Any other information required under Sec. 1.883-2(f), 1.883-
3(d), or 1.883-4(e); and
    (H) Any other specified information.
    (ii) Further documentation. If the Commissioner requests in writing 
that the foreign corporation substantiate representations made under 
paragraph (c)(3)(i) of this section, or under Sec. 1.883-2(f), 1.882-
3(d) or 1.883-4(e), the foreign corporation must provide the supporting 
documentation or substantiation within 60 days following the written 
request. If the foreign corporation does not provide all of the 
information requested within the 60 day period but demonstrates that 
the failure was due to reasonable cause and not willful neglect, the 
Commissioner may grant the foreign corporation a 30-day extension to 
provide the supporting documentation or substantiation. Whether a 
failure to obtain the documentation or substantiation in a timely 
manner was due to reasonable cause shall be determined by the 
Commissioner after considering all the facts and circumstances.
    (4) Commissioner's discretion to cure defects in documentation. The 
Commissioner retains the discretion to cure any defects in the 
documentation where the Commissioner is satisfied that the foreign 
corporation would otherwise be a qualified foreign corporation.
    (d) Qualified foreign country. A qualified foreign country is a 
foreign country that grants to corporations organized in the United 
States an equivalent exemption, as described in paragraph (h) of this 
section, for the category of qualified income earned by the foreign 
corporation seeking qualified foreign corporation status. A foreign 
country may be a qualified foreign country with respect to one category 
of income but not with respect to another category of income, as 
described in paragraph (h)(2) of this section.
    (e) Operation of ships or aircraft--(1) General rule. Only a 
corporation that is an owner, lessor or lessee of an entire ship or 
aircraft used to carry cargo or passengers for hire can be considered 
engaged in the operation of ships or aircraft. The term operation of 
ships or aircraft, which includes the operation of a single ship or 
aircraft, means--
    (i) Carriage of passengers or cargo for hire;
    (ii) Time or voyage charter of a ship, or wet lease of an aircraft 
(full charter), as defined in paragraph (e)(3) of this section;

[[Page 6078]]

    (iii) Bareboat charter of a ship, or dry lease of an aircraft, as 
defined in paragraph (e)(3) of this section; or
    (iv) Active participation by a foreign corporation that is 
otherwise engaged in the operation of ships or aircraft in a pool, 
partnership, strategic alliance, joint operating agreement, code 
sharing or other joint venture, that is itself engaged in the operation 
of ships or aircraft.
    (2) Activities not considered operation of ships or aircraft. A 
corporation that is not engaged in any of the activities described in 
paragraph (e)(1) of this section shall not be considered engaged in the 
operation of ships or aircraft. Examples of activities that do not 
constitute activities described in paragraph (e)(1) of this section 
include--
    (i) The activities of a nonvessel-operating common carrier (NVOCC), 
as defined in paragraph (e)(3)(viii) of this section;
    (ii) Space or slot charter, as defined in paragraph (e)(3)(vii) of 
this section;
    (iii) Ship management;
    (iv) Obtaining crews for ships or aircraft not operated by the 
corporation;
    (v) The activities of a ship's agent;
    (vi) Ship or aircraft brokering;
    (vii) Freight forwarding;
    (viii) The activities of travel agents and tour operators;
    (ix) Rental by a container leasing company of containers and 
related equipment for inland transportation;
    (x) Passive investment in an enterprise, including a pool, 
partnership, strategic alliance, joint operating agreement, or other 
joint venture, engaged in the international operation of ships or 
aircraft; or
    (xi) The activities of a concessionaire.
    (3) Definitions--(i) Full charter. Full charter (or full rental) 
means a time charter or a voyage charter of a ship or a wet lease of an 
aircraft.
    (ii) Time charter. A time charter is a contract for the use of a 
ship or aircraft for a specific period of time during which the owner/
lessor of the ship or aircraft retains control of the navigation and 
management of the ship or aircraft (e.g., the owner/lessor continues to 
be responsible for the crew, supplies, repairs and maintenance, fees 
and insurance, charges, commissions and other expenses connected with 
the use of the ship or aircraft).
    (iii) Voyage charter. A voyage charter is a contract similar to a 
time charter except that the ship or aircraft is chartered for a 
specific voyage or flight rather than for a specific period of time.
    (iv) Wet lease. When a time charter or voyage charter involves an 
aircraft, it is referred to, in both cases, as a wet lease.
    (v) Bareboat charter. A bareboat charter is a contract for the use 
of aircraft whereby the charterer/lessee is in complete possession, 
control, and command of the ship or aircraft and performs functions 
normally performed by the owner/lessor of the ship or aircraft. For 
example, the charterer/lessee is responsible for the navigation and 
management of the ship or aircraft, the crew, supplies, repairs and 
maintenance, fees, insurance, charges, commissions and other expenses 
connected with the use of the ship or aircraft. The owner/lessor of the 
ship bears none of the expense or responsibility of operation of the 
ship or aircraft.
    (vi) Dry lease. When a bareboat charter involves an aircraft, it is 
referred to as a dry lease.
    (vii) Space or slot charter. A space or slot charter is a contract 
for use of a certain amount of space (but less than all of the space) 
on a ship or aircraft, and may be on a time or voyage basis. When used 
in connection with passenger aircraft this may be referred to as the 
sale of block seats.
    (viii) Nonvessel operating common carrier (NVOCC). A nonvessel 
operating common carrier is an entity that holds itself out to the 
public as providing transportation for hire, assumes responsibility or 
has liability by law for safe transportation of shipments and arranges 
in its own name with underlying carriers for the performance of such 
transportation. An NVOCC is distinguishable from a charterer/lessee in 
that a charterer/lessee hires and has control of all or part of a 
vessel. An NVOCC is merely a customer of the ocean common carrier. 
Where an NVOCC consolidates shipments and holds itself out to the 
public as providing transportation for hire, its services and 
liabilities are comparable to that of a freight forwarder.
    (ix) Code-sharing arrangements. Code sharing is an arrangement in 
which one air carrier puts its identification code on the flight of 
another carrier. This allows the first carrier to hold itself out as 
providing service in markets where it does not operate or where it 
operates infrequently. Code sharing can range from a very limited 
agreement involving only one market, to alliances between international 
carriers involving agreements on joint marketing, baggage handling, 
one-stop check-in service and sharing of frequent flyer awards.
    (f) International operation--(1) General rule. The term 
international operation means operation of ships or aircraft, as 
defined in paragraph (e) of this section, on voyages or flights that 
begin or end in the United States, as determined in paragraph (f)(2) of 
this section, and correspondingly end or begin in a foreign country. 
The term does not include a voyage or flight that begins and ends in 
the United States even if the voyage or flight contains a segment 
extending beyond the territorial limits of the United States with no 
stop in a foreign country. Operation of ships or aircraft beyond the 
territorial limits of the United States does not, in itself, constitute 
international operation of ships or aircraft.
    (2) Determining whether income is from international operation. 
Whether income is derived from the international operation of ships or 
aircraft is determined on a passenger-by-passenger basis (as provided 
in paragraph (f)(2)(i) of this section) and item of cargo-by-item of 
cargo basis (as provided in paragraph (f)(2)(ii) of this section). In 
the case of the bareboat charter of a ship or the dry lease of an 
aircraft, whether the charter income is derived from international 
operation is determined by reference to the use of the ship or aircraft 
by the lowest-tier operator in the chain of lessees (as provided in 
paragraph (f)(2)(iii) of this section).
    (i) International carriage of passengers--(A) In general. Except in 
the case of a round trip cruise, income from the carriage of a 
passenger will be income from the international operation of ships or 
aircraft if the passenger is carried between a beginning point in the 
United States and an ending point in a foreign country and vice versa. 
Carriage of a passenger will be treated as ending at the passenger's 
final destination even if, en route to the passenger's final 
destination, a stop is made at an intermediate point for refueling, 
maintenance, or other business reasons, provided the passenger does not 
change aircraft or ships at the intermediate point. Similarly, carriage 
of a passenger will be treated as beginning at the passenger's point of 
origin even if, en route to the passenger's final destination, a stop 
is made at an intermediate point and the passenger does not change 
aircraft or ships at the intermediate point. Carriage of a passenger 
will be treated as beginning or ending at a U.S. or foreign 
intermediate point if the passenger changes aircraft or ships at that 
intermediate point.
    (B) Round trip travel on cruise ships. In the case of the carriage 
of a passenger on a round trip cruise that begins in the United States, 
stops at a foreign intermediate port for shore excursions, refueling, 
maintenance, or other business reasons, and returns to the same or 
another U.S. port, the carriage of such passenger on the round trip 
cruise will be treated as international

[[Page 6079]]

operation of a ship under paragraph (f)(2)(i)(A) of this section. Such 
a round trip cruise may also include one or more intermediate stops at 
a U.S. port or ports for similar purposes.
    (ii) International carriage of cargo. Income from the carriage of 
cargo will be income from the international operation of ships or 
aircraft if the cargo is carried between a beginning point in the 
United States and an ending point in a foreign country or vice versa. 
Carriage of cargo will be treated as ending at the final destination of 
the cargo even if, en route to that final destination, a stop is made 
at a U.S. intermediate point, provided that the cargo is transported to 
its ultimate destination on the same ship or aircraft. If the cargo is 
transferred to another ship or aircraft, the carriage of the cargo may 
nevertheless be treated as ending at its final destination if the same 
taxpayer transports the cargo to and from the U.S. intermediate point 
and the cargo does not pass through customs at the U.S. intermediate 
point. Similarly, carriage of cargo will be treated as beginning at the 
cargo's point of origin, even if en route to its final destination, a 
stop is made at a U.S. intermediate point, provided that the cargo is 
transported to its ultimate destination on the same ship or aircraft. 
If the cargo is transferred to another ship or aircraft, the carriage 
of the cargo may nevertheless be treated as beginning at the point of 
origin if the same taxpayer transports the cargo to and from the U.S. 
intermediate point and the cargo does not pass through customs at the 
U.S. intermediate point. Repackaging, recontainerization, or any other 
activity involving the unloading of the cargo at the U.S. intermediate 
point will not change these results if the same taxpayer transports the 
cargo to and from the U.S. intermediate point and the cargo does not 
pass through customs at the U.S. intermediate point.
    (iii) Bareboat charter of ships or aircraft used in international 
operations. If a qualified foreign corporation bareboat charters a ship 
or dry leases an aircraft to a lessee and the lowest tier lessee-
operator in the chain of ownership uses such ship or aircraft for the 
international carriage of passengers or cargo for hire, as described in 
paragraphs (f)(2)(i) and (ii) of this section, the qualified foreign 
corporation may exclude the proportion of the bareboat charter income 
attributable to such international operation of the ship or aircraft. 
The foreign corporation must use a reasonable method for determining 
the proportion of the charter income that is attributable to such 
international operation. Two reasonable methods for determining the 
amount of charter income attributable to the international operation of 
the ship or aircraft are the following:
    (A) Ratio based on use. Multiply the annual charter amount 
attributable to use of the ship or aircraft by a lessee by a ratio, the 
numerator of which is the total number of days of uninterrupted travel 
on voyages or flights of such ship or aircraft between the United 
States and the farthest point or points where cargo or passengers are 
loaded en route to, or discharged en route from, the United States, and 
the denominator of which is the total number of days in the smaller of 
the taxable year or the particular charter period. For this purpose, 
the number of days during which the ship or aircraft is not generating 
transportation income, within the meaning of section 863(c)(2), for 
example while the ship or aircraft is out of service while being 
repaired or maintained, should not be included in the numerator of the 
ratio.
    (B) Ratio based on gross income. Multiply the annual charter amount 
attributable to the use of the ship or aircraft by the lessee by a 
ratio, the numerator of which is the U.S. source gross transportation 
income (USSGTI as that term is defined in section 887(b)) earned from 
the operation of the vessel or aircraft by the lowest tier lessee-
operator, and the denominator of which is the total gross income of 
such lessee-operator from the operation of the ship or aircraft during 
the smaller of the taxable year or the term of the charter, if such 
information is available. An allocation based on the net income of such 
lessee-operator will not be considered reasonable for this purpose.
    (g) Activities incidental to the international operation of ships 
or aircraft--(1) General rule. Certain activities of an operator of 
ships or aircraft are so closely related to the primary activity of 
operation of ships or aircraft that they are considered incidental to 
such operations. Income from these incidental activities is eligible 
for the reciprocal exemption under this section. Examples of activities 
of a foreign corporation engaged in the international operation of 
ships or aircraft that may be considered incidental to such operation 
include--
    (i) Contracting for the international carriage of cargo or 
passengers, as defined in paragraph (f) of this section, using a space 
or slot charter, alliance, code sharing or similar arrangement, on 
ships or aircraft operated by another carrier;
    (ii) Temporary investment of working capital funds;
    (iii) Sale of tickets for an international voyage by a ship 
operator for another ship operator;
    (iv) Sale of tickets for an international flight by an air carrier 
for another air carrier;
    (v) Rental of containers in connection with the international 
carriage of goods by sea by the operator of a ship or by air by the 
operator of an aircraft;
    (vi) Contracting with concessionaires for performance of services 
onboard during the international operation of the operator's ship or 
aircraft as the case may be; or
    (vii) Bareboat charter of ships or aircraft normally used by the 
operator in international operation but currently not needed, if the 
ship or aircraft is used by the lessee for international voyages or 
flights.
    (2) Activities not considered incidental to the international 
operation of ships or aircraft. Examples of activities that are not 
considered to be incidental to the international operation of ships or 
aircraft by an operator include--
    (i) The sale of or arranging for train travel, bus transfers, land 
tour packages, or port city hotel accommodations within the United 
States or a foreign country, or the sale of airline tickets by a cruise 
ship operator or cruise tickets by an air carrier;
    (ii) The sale or rental of real property;
    (iii) Treasury activities involving the investment of excess funds 
or funds awaiting repatriation generated by the operation of ships or 
aircraft;
    (iv) Rental of containers for a domestic leg of transportation in 
connection with international carriage of cargo;
    (v) Passive investment in an enterprise engaged in the 
international operation of ships or aircraft;
    (vi) Services performed for parties other than passengers, 
consignors or consignees, such as ground services at ports or airports 
or ship or aircraft maintenance; or
    (vii) The carriage of passengers or cargo on ships or aircraft on 
domestic legs, not treated as international operation under paragraph 
(f) of this section, either by the foreign operator or by a U.S. 
operator that is a member with the foreign operator in a pool, 
partnership, strategic alliance, joint operating agreement, code 
sharing or other joint venture, that is itself engaged in the operation 
of ships or aircraft.
    (h) Equivalent exemption--(1) General rule. A foreign country 
grants an equivalent exemption when it exempts from taxation income 
from the

[[Page 6080]]

international operation of ships or aircraft derived by corporations 
organized in the United States. Whether a foreign country provides an 
equivalent exemption must be determined separately with respect to each 
category of income, as provided in paragraph (h)(2) of this section. 
However, an equivalent exemption may be available for income derived 
from the international operation of ships even though income derived 
from the international operation of aircraft may not be exempt, and 
vice versa. For rules regarding shareholders resident in a foreign 
country that offers an exemption under an income tax convention, see 
Sec. 1.883-4(b)(3). An equivalent exemption may exist where the foreign 
country--
    (i) Generally imposes no tax on income, including income from the 
international operation of ships or aircraft;
    (ii) Specifically provides a domestic law tax exemption for income 
derived from the international operation of ships or aircraft, either 
by statute, decree, or otherwise; or
    (iii) Exchanges diplomatic notes with the United States, or enters 
into an agreement with the United States, that provides for a 
reciprocal exemption under section 883.
    (2) Determining equivalent exemptions for each category of income. 
Whether a foreign country grants an equivalent exemption is determined 
separately with respect to each category of income listed in paragraphs 
(h)(2)(i) through (vii) of this section and is determined separately 
with respect to income from the operation of ships and income from the 
operation of aircraft. Where an exemption is unavailable in the foreign 
country for a particular category of income, a foreign corporation 
organized in that country shall not be permitted to exempt that 
category of income from U.S. tax under this section, even though the 
foreign country may grant an equivalent exemption for other categories 
of income. An equivalent exemption may be available for income derived 
from the international operation of ships even though income derived 
from the international operation of aircraft may not be exempt, and 
vice versa. A separate determination of whether a foreign country 
grants an equivalent exemption must be made for each of the following 
categories of income--
    (i) Income from the carriage of cargo and passengers (operating 
income);
    (ii) Time or voyage (full) charter income (or full rental);
    (iii) Bareboat charter income (or bareboat rental);
    (iv) Incidental bareboat charter income (or incidental bareboat 
rental);
    (v) Incidental container-related income;
    (vi) Income incidental to the operation of ships or aircraft other 
than incidental income described in paragraphs (h)(2)(iv) and (v) of 
this section; and
    (vii) Capital gains of the operator from the sale, exchange or 
other disposition of a ship, aircraft, container or related equipment 
or other moveable property used by that operator in the international 
operation of ships or aircraft.
    (3) Special rule with respect to income tax conventions. If a 
corporation is organized in a foreign country that provides an 
equivalent exemption only through an income tax convention with the 
United States, the foreign corporation must satisfy the terms of that 
convention before it can receive a benefit under the convention and the 
foreign corporation may not claim an exemption under section 883. If, 
however, the corporation is organized in a foreign country that offers 
an equivalent exemption under an income tax convention and also by some 
other means, such as by diplomatic note or domestic law, the foreign 
corporation may choose annually whether it will claim benefits under 
section 894 and the income tax convention or an exemption under section 
883. This choice will apply with respect to all income of the 
corporation from the international operation of ships or aircraft and 
the choice cannot be made separately with respect to different 
categories of such income. If a foreign corporation bases its claim for 
an exemption on section 883 rather than the income tax convention, the 
foreign corporation must satisfy all of the requirements under this 
regulation to qualify for an exemption from U.S. income tax. See 
Sec. 1.883-4(b)(3) for rules regarding shareholders resident in a 
foreign country that offers an equivalent exemption under a treaty.
    (4) Exemptions not qualifying as equivalent exemptions--(i) General 
rule. Exemptions provided to corporations organized in the United 
States by certain foreign countries may not satisfy the equivalent 
exemption requirements of this section.
    (ii) Reduced tax rate or time limited exemption. The exemption 
granted by the foreign country's law or income tax convention must be a 
complete exemption. The exemption may not constitute merely a reduction 
to a non-zero rate of tax levied against corporations organized in the 
United States engaged in the international operation of ships or 
aircraft or a temporary reduction to a zero rate of tax for only a 
limited period of time, such as in the case of a tax holiday.
    (iii) Inbound or outbound freight tax. With respect to the carriage 
of cargo, the foreign country must provide an exemption from tax for 
income from transporting freight both inbound and outbound before it 
will be considered to grant an equivalent exemption. A foreign country 
that imposes tax only on outbound freight will not be treated as 
granting an equivalent exemption for income from transporting freight 
inbound into that country.
    (iv) Exemptions for limited types of cargo. A foreign country must 
provide an exemption from tax for income from transporting all 
categories of cargo before it will be considered to grant an equivalent 
exemption. For example, if a foreign country were generally to impose 
tax on income from the international carriage of cargo but to provide a 
statutory exemption for income from transporting agricultural products, 
the foreign country would not be considered to grant an equivalent 
exemption with respect to income from the international carriage of 
cargo and passengers and would not be a qualified foreign country with 
respect to that type of income.
    (v) Territorial tax systems. A foreign country with a territorial 
tax system will be treated as granting an equivalent exemption if it 
treats income from the international operation of ships or aircraft 
derived by a U.S. corporation as 100 percent foreign source and thereby 
not subject to tax, even if the income is derived from a voyage or 
flight that begins or ends in that foreign country.
    (vi) Countries that tax on a residence basis. A foreign country 
that generally provides an equivalent exemption to corporations 
organized in the United States but also imposes a residence-based tax 
on certain corporations organized in the United States, may 
nevertheless be considered to grant an equivalent exemption if the 
residence-based tax is imposed only on a corporation organized in the 
United States that maintains its center of management and control or 
other comparable attributes in that foreign country. If the residence-
based tax is imposed on corporations organized in the United States and 
engaged in the international operation of ships or aircraft that are 
not managed and controlled in that foreign country, the foreign country 
shall not be treated as a qualified foreign country and shall not be 
considered to grant an equivalent exemption for purposes of this 
section.
    (vii) Exemptions within categories of income. A foreign country 
must provide

[[Page 6081]]

an exemption from tax for all income in a category of income, as 
defined in paragraph (h)(2) of this section. For example, a country 
that exempts income from the bareboat charter of passenger aircraft but 
not the bareboat charter of cargo aircraft does not provide an 
equivalent exemption. However, an equivalent exemption may be available 
for income derived from the international operation of ships even 
though income derived from the international operation of aircraft may 
not be exempt, and vice versa.
    (i) Treatment of possessions. A possession of the United
    States will be considered to grant an equivalent exemption and will 
be treated as a qualified foreign country if it is on a mirror system. 
The term mirror system refers to the general applicability in the 
possession of the Internal Revenue Code of 1986, as amended, with the 
name of the possession substituted for ``United States'' where 
appropriate. If a possession does not use a mirror system, the 
possession may nevertheless be a qualified foreign country if, for 
example, it provides for an equivalent exemption through its internal 
law.
    (j) Expenses related to exempt income not deductible from non-
exempt income. If a qualified foreign corporation derives income from 
the international operation of ships or aircraft as well as from a non-
exempt activity, and that income is effectively connected with the 
conduct of a trade or business within the United States, the foreign 
corporation may not deduct from income derived from a non-exempt 
activity, any amount otherwise allowable as a deduction from qualified 
shipping or aircraft income if that income is excluded under this 
proposed rule. See section 265(a)(1).
    Par. 4. Sections 1.883-2 through 1.883-5 are added to read as 
follows:


Sec. 1.883-2  Treatment of publicly-traded corporations.

    (a) General rule. A foreign corporation shall satisfy the stock 
ownership test of Sec. 1.883-1(c)(2) if it is considered a publicly-
traded corporation and satisfies the substantiation and reporting 
requirements of paragraphs (e) and (f) of this section. To be 
considered a publicly-traded corporation, the stock of the foreign 
corporation must be primarily traded and regularly traded on one or 
more established securities markets, as those terms are defined in 
paragraphs (b), (c), and (d) of this section, in the United States or 
any qualified foreign country.
    (b) Established securities market--(1) General rule. For purposes 
of this section, the term established securities market means, for any 
taxable year--
    (i) A foreign securities exchange that is officially recognized, 
sanctioned, or supervised by a governmental authority of the country in 
which the market is located, and has an annual value of shares traded 
on the exchange exceeding $1 billion during each of the three calendar 
years immediately preceding the beginning of the taxable year;
    (ii) A national securities exchange that is registered under 
section 6 of the Securities Act of 1934 (15 U.S.C. 78f);
    (iii) A United States over-the-counter market, as defined in 
paragraph (b)(4) of this section;
    (iv) Any exchange designated under a Limitation On Benefits article 
in a United States income tax convention; and
    (v) Any other exchange that the Secretary may designate by 
regulation or otherwise.
    (2) Exchanges with multiple tiers. If an exchange in a foreign 
country has more than one tier or market level on which stock may be 
separately listed or traded, each such tier shall be treated as a 
separate exchange.
    (3) Computation of dollar value of stock traded. For purposes of 
paragraph (b)(1)(i) of this section, the value in U.S. dollars of 
shares traded during a calendar year shall be determined on the basis 
of the dollar value of such shares traded as reported by the 
International Federation of Stock Exchanges located in Paris, or, if 
not so reported, then by converting into U.S. dollars the aggregate 
value in local currency of the shares traded using an exchange rate 
equal to the average of the spot rates on the last day of each month of 
the calendar year.
    (4) Over-the-counter market. An over-the-counter market is any 
market reflected by the existence of an interdealer quotation system. 
An interdealer quotation system is any system of general circulation to 
brokers and dealers that regularly disseminates quotations of stocks 
and securities by identified brokers or dealers, other than by 
quotation sheets that are prepared and distributed by a broker or 
dealer in the regular course of business and that contain only 
quotations of such broker or dealer.
    (5) Discretion to determine that an exchange does not qualify as an 
established securities market. The Commissioner may determine that a 
securities exchange that otherwise meets the requirements of this 
paragraph (b) of this section does not qualify as an established 
securities market, if--
    (i) The exchange does not have adequate listing, financial 
disclosure, or trading requirements (or does not adequately enforce 
such requirements); or
    (ii) There is not clear and convincing evidence that the exchange 
ensures the active trading of listed stocks.
    (c) Primarily traded. For purposes of this section, stock of a 
corporation is primarily traded on one or more established securities 
markets, as defined in paragraph (b) of this section, if, with respect 
to each class of stock described in paragraph (d)(1)(i) of this section 
(relating to classes of stock relied on to meet the regularly traded 
test)--
    (1) The number of shares in each such class that are traded during 
the taxable year on all established securities markets in that country 
exceeds.
    (2) The number of shares in each such class that are traded during 
that year on established securities markets in any other single foreign 
country.
    (d) Regularly traded--(1) General rule. For purposes of this 
section, stock of a corporation is regularly traded on one or more 
established securities markets, as defined in paragraph (b) of this 
section, if--
    (i) One or more classes of stock of the corporation that, in the 
aggregate, represent 80 percent or more of the total combined voting 
power of all classes of stock of such corporation entitled to vote and 
of the total value of the stock of such corporation are listed on such 
market or markets during the taxable year; and
    (ii) With respect to each class relied on to meet the 80 percent 
requirement of paragraph (d)(1)(i) of this section--
    (A) Trades in each such class are effected, other than in de 
minimis quantities, on such market or markets on at least 60 days 
during the taxable year (or 1/6 of the number of days in a short 
taxable year); and
    (B) The aggregate number of shares in each such class that are 
traded on such market or markets during the taxable year are at least 
10 percent of the average number of shares outstanding in that class 
during the taxable year (or, in the case of a short taxable year, a 
percentage that equals at least 10 percent of the average number of 
shares outstanding in that class during the taxable year multiplied by 
the number of days in the short taxable year, divided by 365).
    (2) Classes of stock traded on a domestic established securities 
market treated as meeting trading requirements. A class of stock that 
is traded during the taxable year on an established securities market 
located in the United States shall

[[Page 6082]]

be considered to meet the trading requirements of paragraph (d)(1)(ii) 
of this section if the stock is regularly quoted by dealers making a 
market in the stock. A dealer makes a market in a stock only if the 
dealer regularly and actively offers to, and in fact does, purchase the 
stock from, and sell the stock to, customers who are not related 
persons (as defined in section 954(d)(3)) with respect to the dealer in 
the ordinary course of a trade or business.
    (3) Closely-held classes of stock not treated as meeting trading 
requirement--(i) General rule. Except as provided in paragraph 
(d)(3)(ii) of this section, a class of stock of a foreign corporation 
listed on an established securities market or markets and otherwise 
meeting the trading requirements of paragraph (d)(1)(ii) of this 
section shall not be treated as meeting the trading requirements of 
paragraph (d)(1)(ii) of this section (or the requirements of paragraph 
(d)(2) of this section) for a taxable year if, at any time during the 
taxable year, one or more persons who own at least 5 percent of the 
value of the outstanding shares of the class of stock (5 percent 
shareholders as determined under paragraph (d)(3)(iii) of this section) 
own, in the aggregate, 50 percent or more of the value of the shares.
    (ii) Exception. Notwithstanding the general rule of paragraph 
(d)(3)(i) of this section, a closely-held class of stock that otherwise 
satisfies the trading requirements of paragraph (d)(1)(ii) of this 
section may be treated as meeting such trading requirements if the 
foreign corporation can establish that more than 50 percent of the 
value of the outstanding shares of the class of stock is owned, or 
treated as owned under Sec. 1.883-4(c), by persons who are qualified 
shareholders, within the meaning of Sec. 1.883-4(b), for more than half 
the number of days during the taxable year. In addition, such persons 
may not own their interests in the foreign corporation either directly 
or by applying the attribution rules of Sec. 1.883-4(c) through bearer 
shares. Further, the foreign corporation must obtain from such persons 
the relevant documentation described in Sec. 1.883-4(d).
    (iii) Treatment of related persons. Solely for purposes of 
determining whether a person is a 5 percent shareholder, persons 
related within the meaning of section 267(b) shall be treated as one 
person. In determining whether two or more corporations are members of 
the same controlled group under section 267(b)(3), a person is 
considered to own stock owned directly by such person, stock owned with 
the application of section 1563(e)(1), and stock owned with the 
application of section 267(c). Further, in determining whether a 
corporation is related to a partnership under section 267(b)(10), a 
person is considered to own the partnership interest owned directly by 
such person and the partnership interest owned with the application of 
section 267(e)(3).
    (4) Anti-abuse rule. Trades between related persons described in 
section 267(b), as modified by paragraph (d)(3)(iii) of this section, 
and trades conducted in order to meet the requirements of paragraph 
(d)(1) of this section (the trading rule) shall be disregarded. A class 
of stock shall not be treated as meeting the trading requirements of 
paragraph (d)(1) of this section if there is a pattern of trades 
conducted to meet the requirements of paragraph (d)(1) of this section. 
For example, trades between two persons that occur several times during 
the taxable year may be treated as an arrangement or a pattern of 
trades conducted to meet the trading requirements of paragraph 
(d)(1)(ii) of this section.
    (5) Example. The closely-held class of stock rule in paragraph 
(d)(3) is illustrated by the following example:

    Example.
    Closely-held exception-- (i)Facts. X is a corporation organized 
in a qualified foreign country. X has one class of stock that is 
listed and primarily traded on an established securities market in 
the qualified foreign country. The class of stock of X also meets 
the trading requirements of paragraph (d)(1)(ii) of this section. 
However, the founding family owns 60 percent of that class of stock 
through Hold Co. The remaining 40 percent is not owned by any 5 
percent shareholder. Some of the family members are U.S. residents, 
while the remaining family members are residents of the qualified 
foreign country. Individuals A and B are members of the founding 
family and each owns 10 percent of the stock of Hold Co.
    (ii) Analysis. Because Hold Co owns 60 percent of the class of 
stock, Hold Co is a 5 percent shareholder and the class of stock 
will not be regularly traded unless X can prove, applying the 
attribution rules of Sec. 1.883-4(c), that more than 50 percent of 
the stock of X is owned, or treated as owned under Sec. 1.883-4(c), 
by residents of a qualified foreign country. If X can demonstrate 
that more than 50 percent of the stock held by Hold Co is owned by 
qualified shareholders, X can meet this burden and the stock of X 
will be regularly traded because the exception in paragraph 
(d)(3)(ii) of this section would apply.

    (e) Substantiation that a foreign corporation is publicly traded--
(1) In general. A foreign corporation that relies on the publicly 
traded test of this section to establish that it is a qualified foreign 
corporation for purposes of Sec. 1.883-1(c)(2) must substantiate that 
the stock of the foreign corporation is primarily and regularly traded 
on an established securities market. If one of the classes of stock on 
which the foreign corporation relies to meet this test is closely-held 
within the meaning of paragraph (d)(3)(i) of this section, the foreign 
corporation must obtain an ownership statement described in Sec. 1.883-
4(d) from each qualified shareholder and intermediary that it relies 
upon to satisfy the exception to the closely-held class of stock rule, 
but only to the extent such statement would be required if the foreign 
corporation were relying on the qualified shareholder test of 
Sec. 1.883-4 with respect to those shares of stock. The foreign 
corporation must also maintain and provide to the Commissioner upon 
request a list of its shareholders of record and any other relevant 
information known to the foreign corporation.
    (2) Availability and retention of documents for inspection. The 
documentation described in paragraph (e)(1) of this section must be 
retained by the corporation seeking qualified foreign corporation 
status (the foreign corporation) until the expiration of the statute of 
limitations for the taxable year of the foreign corporation to which 
the documentation relates. Such documentation must be made available 
for inspection by the Commissioner at such time and such place as the 
Commissioner may request in writing.
    (f) Reporting requirements. A foreign corporation relying on this 
section to satisfy the stock ownership requirements of Sec. 1.883-
1(c)(2) must provide the following information that is current as of 
the end of the corporation's taxable year, in addition to the 
information required in Sec. 1.883-1(c)(3) to be included in its Form 
1120F for the taxable year--
    (1) The name of the country in which the stock is primarily traded;
    (2) The name of the established securities market or markets on 
which that the stock is listed;
    (3) A description of each class of stock relied upon to meet the 
requirements of paragraph (d) of this section, including the number of 
shares issued and outstanding as of the close of the taxable year;

[[Page 6083]]

    (4) For each class of stock relied upon to meet the requirements of 
paragraph (d) of this section, if one or more 5 percent shareholders, 
as defined in paragraph (d)(3)(i) of this section, own in the aggregate 
50 percent or more of the value of the outstanding shares of that class 
of stock at any time during the taxable year, state--
    (i) The name and address of each 5 percent shareholder of that 
class of stock and each related person whose stock is treated as owned 
by the 5 percent shareholder;
    (ii) For each qualified shareholder of the closely-held class of 
stock upon whom the corporation intends to rely to satisfy the 
exception to the closely-held class of stock rule of paragraph 
(d)(3)(ii) of this section--
    (A) The name of each such shareholder;
    (B) The percentage of the total value of the stock held by each 
such shareholder;
    (C) The address of record of each such shareholder;
    (D) The country of residence of each such shareholder, determined 
under Sec. 1.883-4(b)(2) (residence of individual shareholders) or 
Sec. 1.883-4(d)(3) (special rules for residence of certain 
shareholders);
    (E) The portion of the taxable year of the foreign corporation 
during which the requisite ownership in the closely-held block of stock 
by qualified shareholders was satisfied;
    (5) The percentage of the value of the class of stock represented 
by the widely-held block of stock; and
    (6) Any other specified information.


Sec. 1.883-3  Treatment of controlled foreign corporations.

    (a) General rule. A foreign corporation that is a controlled 
foreign corporation (CFC), as defined in section 954(a), satisfies the 
stock ownership test of Sec. 1.883-1(c)(2) if it meets the income 
inclusion test in paragraph (b)(1) of this section and satisfies the 
substantiation and reporting requirements of paragraphs (c) and (d) of 
this section, respectively (the CFC test). A CFC that fails the income 
inclusion test of paragraph (b)(1) of this section may not satisfy the 
stock ownership test of Sec. 1.883-1(c)(2) unless the CFC demonstrates 
that it meets either the publicly traded test of Sec. 1.883-2 or the 
qualified shareholder test of Sec. 1.883-4.
    (b) Special rule for CFCs with certain entity shareholders-- (1) 
Income inclusion test. For purposes of these proposed rules, a CFC will 
not be considered to satisfy the requirements of paragraph (a) of this 
section unless--
    (i) Such corporation would be a CFC as defined in section 957(a) if 
such section were applied without regard to section 318(a)(4); and
    (ii) More than 50 percent of the CFC's subpart F income (as defined 
in section 952) derived from the international operation of ships or 
aircraft is includible, pursuant to section 951, in the gross income of 
one or more U.S. citizens, individual residents of the United States or 
domestic corporations for the taxable years of such persons in which 
the taxable year of the CFC ends.
    (2) Examples. The income inclusion test of this paragraph
    (b) is illustrated in the following examples:

    Example 1. CFC earns U.S. source income from the international 
operation of aircraft that is not effectively connected with the 
conduct of a U.S. trade or business. CFC is organized in a qualified 
foreign country. CFC is not a publicly traded corporation and all of 
its U.S. shareholders, as defined in section 951(b), are domestic 
partnerships. All of the partners in those domestic partnerships are 
citizens and residents of foreign countries. Thus, the CFC fails the 
income inclusion test of paragraph (b)(1) of this section because no 
amount of the CFC's relevant subpart F income is includible in the 
gross income of one or more U.S. citizens, individual residents of 
the United States or domestic corporations. Therefore the CFC must 
satisfy the rules of Sec. 1.883-4, regarding the qualified 
shareholder stock ownership test, in order to satisfy the stock 
ownership test of Sec. 1.883-1(c)(2) and be considered a qualified 
foreign corporation.
    Example 2. Ship Co is a CFC organized in a qualified foreign 
country and is not a publicly traded corporation. Corp A, a domestic 
corporation, owns 50 percent of the value of the stock of Ship Co. 
X, a domestic partnership, owns the remaining 50 percent of the 
value of the stock of Ship Co. A U.S. citizen is a partner owning a 
20 percent interest in X. Individual partners owning 80 percent of X 
are citizens and residents of foreign countries. There are no 
special allocations of partnership income. Ship Co satisfies the 
income inclusion test of paragraph (b)(1) of this section because 60 
percent (50% + (20%  x  50%)) of the subpart F income would be 
includible in the gross income of U.S. citizens or individual 
residents of the United States or domestic corporations. If Ship Co 
satisfies the substantiation and reporting requirements of 
paragraphs (c) and (d) of this section, respectively and the 
reporting requirements of Sec. 1.883-1(c)(3), it will be a qualified 
foreign corporation.

    (c) Substantiating CFC stock ownership--(1) In general. A CFC 
relying on this section to satisfy the stock ownership test of 
Sec. 1.883-1(c)(2) must establish all the facts necessary to satisfy 
the Commissioner that it qualifies under the CFC test. For purposes of 
the income inclusion test of paragraph (b)(1) of this section, if the 
CFC has one or more U.S. shareholders that are domestic partnerships, 
estates, or trusts, the proportionate interest of the subpart F income 
of the CFC will not be treated as includible in the gross income of any 
partner, beneficiary or other interest owner of such U.S. shareholder 
that is a U.S. citizen, resident of the United States or a domestic 
corporation unless the CFC obtains the documentation described in 
paragraph (c)(2) of this section.
    (2) Documentation from certain U.S. shareholders--(i) In general. A 
CFC can only meet the documentation requirements of paragraph (c)(1) of 
this section if the CFC obtains the following documentation from each 
U.S. shareholder that is a partnership, estate or trust, with respect 
to the taxable year of the entity which ends with or within the taxable 
year of the CFC--
    (A) A copy of the Form 5471, ``Information Return of U.S. Persons 
With Respect to Certain Foreign Corporations,'' if required to be filed 
with the U.S. shareholder's return and with the Internal Revenue 
Service Center, Philadelphia PA 19255;
    (B) A written statement, signed under penalties of perjury by a 
person authorized to sign the U.S. Federal tax return of the U.S. 
shareholder, providing the following information with respect to each 
U.S. citizen, individual resident of the United States or domestic 
corporation that is a partner, beneficiary or other interest owner of 
each such U.S. shareholder and upon whom the CFC intends to rely to 
satisfy the income inclusion test of paragraph (b)(1) of this section--
    (1) The name, address (if not a non-residential address, such as a 
post office box or in care of a financial intermediary or stock 
transfer agent), and taxpayer identification number;
    (2) The interest owner's proportionate interest in the U.S. 
shareholder that reflects that owner's share of subpart F income 
required to be included in income on such interest owner's U.S. Federal 
income tax return;
    (3) The percentage of the vote and the percentage of the value of 
shares of the CFC owned by each such interest owner; and
    (C) Any other specified information.
    (ii) Availability and retention of documents for inspection. The 
documentation described in paragraph (c)(2)(i) of this section must be 
retained by the corporation seeking qualified foreign corporation 
status (the CFC) until the expiration of the statute of limitations for 
the taxable year of the CFC to which the documentation relates. Such 
documentation must be made available for inspection by the

[[Page 6084]]

Commissioner at such place as the Commissioner may request in writing.
    (d) Reporting requirements. A foreign corporation that relies on 
the CFC test of this section to satisfy the stock ownership test of 
Sec. 1.883-1(c)(2), must provide the following information in addition 
to the information required in Sec. 1.883-1(c)(3) to be included in its 
Form 1120F for the taxable year. The information must be current as of 
the end of the corporation's taxable year and must include the 
following--
    (1) The name, address in the corporate records (if that address is 
not a non-residential address such as a post office box or in care of a 
financial intermediary or stock transfer agent) and taxpayer 
identification number of each U.S. shareholder of the CFC;
    (2) The percentage of the value of the shares of the CFC that is 
owned by each U.S. shareholder, as defined in section 957(a) if such 
section were applied without regard to section 318(a)(4);
    (3) If one or more of the U.S. shareholders is a domestic 
partnership, estate or trust, the name, address, taxpayer 
identification number and percentage of the vote and the percentage of 
the value of shares of the CFC owned by each interest owner of each 
such U.S. shareholder that is a U.S. citizen, individual resident of 
the United States or a domestic corporation; and
    (4) Any other specified information.


Sec. 1.883-4  Qualified shareholder stock ownership test.

    (a) General rule. A foreign corporation shall satisfy the stock 
ownership test of Sec. 1.883-1(c)(2) if more than 50 percent of its 
stock (by value) is owned, or treated as owned by applying the 
attribution rules of paragraph (c) of this section, for at least half 
of the number of days in the foreign corporation's taxable year by one 
or more qualified shareholders. In addition, a foreign corporation must 
meet the substantiation and reporting requirements of paragraphs (d) 
and (e) of this section.
    (b) Qualified shareholder--(1) General rule. A shareholder is a 
qualified shareholder only if the shareholder--
    (i) Is a resident of a country that offers an equivalent exemption 
for the same type of income (as described in Sec. 1.883-1(h)(2)), as 
that earned by the foreign corporation and for which the foreign 
corporation is seeking an exemption;
    (ii) Does not own its interest in the foreign corporation through 
bearer shares either directly or by applying the attribution rules of 
paragraph (c) of this section;
    (iii) Provides to the foreign corporation the documentation 
required in paragraph (d) of this section and the foreign corporation 
meets the reporting requirements of paragraph (e) of this section with 
respect to such shareholder; and
    (iv) Is described in one of the following categories of qualified 
shareholders--
    (A) An individual not described in paragraph (b)(1)(iv)(E) of this 
section (whose residency is determined under paragraph (b)(2) of this 
section);
    (B) The government of a qualified foreign country (or a political 
subdivision or local authority of such country);
    (C) A foreign corporation that is organized in a qualified foreign 
country and meets the publicly traded rules of Sec. 1.883-2;
    (D) A not-for-profit organization described in paragraph (b)(4) of 
this section that is not a pension fund as defined in paragraph (b)(5) 
of this section and that is organized in a qualified foreign country; 
or
    (E) A beneficiary of a pension fund (as defined in paragraph 
(b)(5)(iv) of this section) administered in or by a qualified foreign 
country (whose residency is determined under paragraph (d)(3)(iii) of 
this section).
    (2) Residence of individual shareholders--(i) General rule. An 
individual not described in paragraph (b)(1)(iv)(E) of this section is 
a resident of a qualified foreign country only if the individual is 
fully liable to tax as a resident in such country (e.g., an individual 
who is liable to tax on a remittance basis in a foreign country will 
not be treated as a resident of that country) and, in addition--
    (A) The individual's tax home, within the meaning of paragraph 
(b)(2)(ii) of this section, is within that qualified foreign country 
for 183 days or more of the taxable year; or
    (B) The individual is treated as a resident of a qualified foreign 
country based on special rules pursuant to paragraph (d)(3) of this 
section.
    (ii) Tax home. For purposes of this section, an individual's tax 
home is considered to be located at the individual's regular or 
principal (if more than one regular) place of business. If the 
individual has no regular or principal place of business because of the 
nature of his business (or lack of a business), then the individual's 
tax home is located at his regular place of abode in a real and 
substantial sense. If an individual has no regular or principal place 
of business and no regular place of abode in a real and substantial 
sense in a qualified foreign country for 183 days or more of the 
taxable year, that individual does not have a tax home for purposes of 
this section.
    (3) Certain income tax convention restrictions applied to 
shareholders--(i) Application of restrictions. A shareholder otherwise 
described in paragraph (b)(1) of this section may be a resident of a 
foreign country that provides an equivalent exemption for the category 
of income at issue through an income tax convention with the United 
States. If the shareholder relies on the convention to demonstrate that 
the country of residence provides an equivalent exemption and the 
convention has a requirement in the shipping and air transport article 
other than residence, such as place of registration or documentation of 
the ship or aircraft, or in the limitation on benefits (LOB) article, 
such as a percentage of resident ownership, the shareholder is not a 
qualified shareholder unless the corporation seeking qualified foreign 
corporation status would satisfy any such additional requirement if it 
were organized in such foreign country.
    (ii) Examples. The rules of this paragraph (b)(3) are illustrated 
by the following examples:

    Example 1. LOB article requiring additional Country B ownership. 
Ship Co is organized in Country A. Country A provides an equivalent 
exemption through a diplomatic note. Eighty percent of the value of 
the shares of Ship Co is owned by a resident of Country B. Country B 
provides an equivalent exemption only through an income tax 
convention with the United States. The limitation on benefits 
article in the income tax convention between the United States and 
Country B requires that more than 75 percent of the value of the 
shares of a Country B corporation must be owned by residents of 
Country B before such corporation could receive benefits under the 
income tax convention. In accordance with paragraph (b)(3) of this 
section, in order for the Country B resident to be a qualified 
shareholder, Ship Co must meet the LOB requirements of the United 
States/Country B income tax convention applied as if Ship Co were a 
Country B corporation. Because 80 percent of the value of the shares 
of Ship Co is owned by a resident of Country B, this requirement is 
satisfied and the Country B shareholder may be a qualified 
shareholder.
    Example 2. 2Income tax convention requiring registration of 
ship. Ship Co is organized in Country X and owned entirely by 
residents of Country Y. Country X's domestic law grants an 
equivalent exemption to shipping corporations organized in the 
United States. Country Y grants an equivalent exemption for shipping 
income through an income tax convention between the United States 
and Country Y. Article 8 of the income tax convention provides that 
the exemption will apply only if the ships are registered in

[[Page 6085]]

the contracting state of the taxpayer's country of residence. Ship 
Co owns a ship registered in Country Y and a ship registered in 
Country Z. In accordance with paragraph (b)(3) of this section, in 
order for the Country Y resident to be a qualified shareholder, Ship 
Co must meet the flagging requirements of the United States/Country 
Y income tax convention applied as if Ship Co were a Country Y 
corporation. Thus, the Country Y shareholders may be qualified 
shareholders with respect to income earned by the ship registered in 
Country Y but not with respect to the income earned by the ship 
registered in Country Z. Thus, if Ship Co otherwise satisfies the 
requirements of this proposed rule, Ship Co may exclude its income 
derived from the international operation of the ship registered in 
Country Y from gross income for purposes of its United States income 
tax, but may not exclude its income from the international operation 
of the ship registered in Country Z.

    (4) Not-for-profit organizations. A not-for-profit organization is 
a qualified shareholder if it meets the following requirements--
    (i) It is a corporation, association taxable as a corporation, 
trust, fund, foundation, league or other entity operated exclusively 
for religious, charitable, educational, or recreational purposes, and 
not organized for profit;
    (ii) It is generally exempt from tax in its country of organization 
by virtue of its not-for-profit status; and
    (iii) Either--
    (A) More than 50 percent of its annual support is expended on 
behalf of persons described in paragraph (b)(1)(i) of this section (see 
paragraph (d)(3)(v) of this section for rules regarding the residence 
of individual beneficiaries); or
    (B) More than 50 percent of its annual support is derived from 
persons described in paragraph (b)(1)(i) of this section (see paragraph 
(d)(3)(v) of this section for rules regarding the residence of 
individual supporters).
    (5) Pension funds--(i) Pension fund defined. The term pension fund 
shall mean a government pension fund or a non-government pension fund, 
as those terms are defined, respectively, in paragraph (b)(5)(ii) and 
paragraph (b)(5)(iii) of this section, that is a trust, fund, 
foundation, or other entity that is established exclusively for the 
benefit of employees or former employees of one or more employers, the 
principal purpose of which is to provide retirement, disability, and 
death benefits to beneficiaries of such entity and persons designated 
by such beneficiaries in consideration for prior services rendered.
    (ii) Government pension funds. A government pension fund is a 
pension fund that is a controlled entity of a foreign sovereign within 
the principles of Sec. 1.892-2T(c)(1) (relating to pension funds 
established for the benefit of employees or former employees of a 
foreign government).
    (iii) Non-government pension funds. A non-government pension fund 
is a pension fund that--
    (A) Is administered in a foreign country and is subject to 
supervision or regulation by a governmental authority (or other 
authority delegated to perform such supervision or regulation by a 
governmental authority) in such country;
    (B) Is generally exempt from income taxation in its country of 
administration;
    (C) Has 100 or more beneficiaries; and
    (D) The trustees, directors or other administrators of which 
pension fund provide the documentation required in paragraph (d) of 
this section.
    (iv) Beneficiary of a pension fund. The term beneficiary of a 
pension fund shall mean any person who has made contributions to a 
pension fund, as that term is defined in paragraph (b)(5)(i) of this 
section, or on whose behalf contributions have been made, and who is 
currently receiving retirement, disability, or death benefits from the 
pension fund or can reasonably be expected to receive such benefits in 
the future, whether or not the person's right to receive benefits from 
the fund has vested. See paragraph (c)(6) of this section for rules 
regarding the computation of stock ownership through non-government 
pension funds.
    (c) Rules for determining constructive ownership--(1) General rules 
for attribution. For purposes of applying the exception to the closely-
held test of Sec. 1.883-2(d)(3)(ii) and paragraph (a) of this section, 
stock owned by or for a corporation, partnership, trust, estate, or 
mutual insurance company or similar entity shall be treated as owned 
proportionately by its shareholders, partners, beneficiaries, grantors, 
or other interest holders as provided in paragraphs (c)(2)through (6) 
of this section. The proportionate interest rules of this paragraph (c) 
shall apply successively upward through a chain of ownership, and a 
person's proportionate interest shall be computed for the relevant days 
or period that is taken into account in determining whether a foreign 
corporation satisfies the requirements of paragraph (a) of this 
section. Stock treated as owned by a person by reason of this paragraph 
(c) shall be treated as actually owned by such person for purposes of 
this section. An owner of an interest in an association taxable as a 
corporation shall be treated as a shareholder of such association for 
purposes of this paragraph (c).
    (2) Partnerships--(i) General rule. A partner shall be treated as 
having an interest in stock of a foreign corporation owned by a 
partnership in proportion to the least of--
    (A) The partner's percentage distributive share of the 
partnership's dividend income from the stock;
    (B) The partner's percentage distributive share of gain from 
disposition of the stock by the partnership; or
    (C) The partner's percentage distributive share of the stock (or 
proceeds from the disposition of the stock) upon liquidation of the 
partnership.
    (ii) Partners resident in the same country. For purposes of this 
paragraph, all qualified shareholders that are partners in a 
partnership and that are residents of, or organized in, the same 
qualified foreign country shall be treated as one partner. Thus, the 
percentage distributive shares of dividend income, gain and liquidation 
rights of all qualified shareholders that are partners in a partnership 
and that are residents of, or organized in, the same qualified foreign 
country are aggregated prior to determining the least of the three 
percentages set out in paragraph (c)(2)(i) of this section. For the 
meaning of the term resident, see paragraph (b)(2) of this section.

    (iii) Examples. The rules of paragraph (c)(2)(ii) of this section 
are illustrated by the following examples:

    Example 1. Stock held solely by qualified shareholders through a 
partnership. Country X grants an equivalent exemption. A and B are 
individual residents of Country X and are qualified shareholders 
within the meaning of paragraph (b)(1) of this section. A and B are 
the sole partners of Partnership P. P's only asset is the stock of 
Corporation Z, a Country X corporation seeking a reciprocal 
exemption under this section. A's distributive share of P's income 
and gain on the disposition of P's assets is 80 percent, but A's 
distributive share of P's assets (or the proceeds therefrom) on P's 
liquidation is 20 percent. B's distributive share of P's income and 
gain is 20 percent and B is entitled to 80 percent of the assets (or 
proceeds therefrom) on P's liquidation. Under the attribution rules 
of paragraph (c)(2)(ii) of this section, A and B will be treated as 
a single partner owning in the aggregate 100 percent of the stock of 
Z owned by P.
    Example 2. Stock held by both qualified and non-qualified 
shareholders through a partnership. Assume the same facts as in 
Example 1

[[Page 6086]]

except that C, an individual who is not a resident of a qualified 
foreign country, is also a partner in P and that C's distributive 
share of P's income is 60 percent. The distributive shares of A and 
B are the same as in Example 1 except that A's distributive share of 
income is 20 percent. Under the attribution rules of paragraph 
(c)(2)(ii) of this section, qualified shareholders A and B will be 
treated as a single partner owning in the aggregate 40 percent of 
the stock of Z owned by P (i.e., the lowest aggregate percentage of 
A and B's distributive shares of dividend income (40 percent), gain 
(100 percent), and liquidation rights (100 percent) with respect to 
the Z stock). Thus, Z fails to satisfy the ownership requirements of 
paragraph (a) of this section.
    Example 3. Stock held through tiered partnerships. Country X 
grants an equivalent exemption. A and B are individual residents of 
Country X and are qualified shareholders within the meaning of 
paragraph (b)(1) of this section. A and B are the sole partners of 
Partnership P. P is a partner in Partnership P1, which owns the 
stock of Corporation Z, a Country X corporation seeking a reciprocal 
exemption under this section. Assume that P's distributive share of 
the dividend income, gain and liquidation rights with respect to the 
Z stock held by P1 is 40 percent. Assume that of the remaining 
partners of P1 only D is a qualified shareholder. D's distributive 
share of P1's dividend income and gain is 15 percent; D's 
distributive share of P1's assets on liquidation is 25 percent. 
Under the attribution rules of paragraph (c)(2)(ii) of this section, 
A and B, treated as a single partner, will own 40 percent of the Z 
stock owned by P1 (100 percent X 40 percent) and D will be treated 
as owning 15 percent of the Z stock owned by P1 (the least of D's 
dividend income (15 percent), gain (15 percent), and liquidation 
rights (25 percent) with respect to the Z stock). Thus, 55 percent 
of the Z stock owned by P1 is treated as owned by qualified 
shareholders.

    (3) Trusts and estates--(i) Beneficiaries. In general, an 
individual shall be treated as having an interest in stock of a foreign 
corporation owned by a trust or estate in proportion to the 
individual's actuarial interest in the trust or estate, as provided in 
section 318(a)(2)(B)(i), except that an income beneficiary's actuarial 
interest in the trust will be determined as if the trust's only asset 
were the stock. The interest of a remainder beneficiary in stock will 
be equal to 100 percent minus the sum of the percentages of any 
interest in the stock held by income beneficiaries. The ownership of an 
interest in stock owned by a trust shall not be attributed to any 
beneficiary whose interest cannot be determined under the preceding 
sentence, and any such interest, to the extent not attributed by reason 
of this paragraph (c)(3)(i), shall not be considered owned by a 
beneficiary unless all potential beneficiaries with respect to the 
stock are qualified shareholders. In addition, a beneficiary's 
actuarial interest will be treated as zero to the extent that someone 
other than the beneficiaries is treated as owning the stock under 
paragraph (c)(3)(ii) of this section. A substantially separate and 
independent share of a trust, within the meaning of section 663(c), 
shall be treated as a separate trust for purposes of this paragraph 
(c)(3)(i), provided that payment of income, accumulated income or 
corpus of a share of one beneficiary (or group of beneficiaries) cannot 
affect the proportionate share of income, accumulated income or corpus 
of another beneficiary (or group of beneficiaries).
    (ii) Grantor trusts. A person is treated as the owner of stock of a 
foreign corporation owned by a trust to the extent that the stock is 
included in the portion of the trust that is treated as owned by the 
person under sections 671 through 679 (relating to grantors and others 
treated as substantial owners).
    (4) Corporations that issue stock. A shareholder of a corporation 
that issues stock shall be treated as owning stock of a foreign 
corporation that is owned by such corporation on any day in a 
proportion that equals the value of the stock owned by such shareholder 
to the value of all stock of such corporation. If, however, there is an 
agreement, express or implied, that a shareholder of a corporation will 
not receive distributions from the earnings of stock owned by the 
corporation, the shareholder will not be treated as owning that stock 
owned by the corporation.
    (5) Mutual insurance companies and similar entities. Stock held by 
a mutual insurance company, mutual savings bank, or similar entity 
(including an association taxable as a corporation that does not issue 
stock interests) shall be considered owned proportionately by the 
policy holders, depositors, or other owners in the same proportion that 
such persons share in the surplus of such entity upon liquidation or 
dissolution.
    (6) Computation of beneficial interests in non-government pension 
funds. Stock held by a pension fund shall be considered owned by the 
beneficiaries of the fund equally on a pro-rata basis if--
    (i) The pension fund meets the requirements of paragraph 
(b)(5)(iii) of this section;
    (ii) The trustees, directors or other administrators of the pension 
fund have no knowledge, and no reason to know, that a pro-rata 
allocation of interests of the fund to all beneficiaries would differ 
significantly from an actuarial allocation of interests in the fund 
(or, if the beneficiaries' actuarial interest in the stock held 
directly or indirectly by the pension fund differs from the 
beneficiaries's actuarial interest in the pension fund, the actuarial 
interests computed by reference to the beneficiaries' actuarial 
interest in the stock);
    (iii) Either--
    (A) Any overfunding of the pension fund would be payable, pursuant 
to the governing instrument or the laws of the foreign country in which 
the pension fund is administered, only to, or for the benefit of, one 
or more corporations that are organized in the country in which the 
pension fund is administered, individual beneficiaries of the pension 
fund or their designated beneficiaries, or social or charitable causes 
(the reduction of the obligation of the sponsoring company or companies 
to make future contributions to the pension fund by reason of 
overfunding shall not itself result in such overfunding being deemed to 
be payable to or for the benefit of such company or companies); or
    (B) The foreign country in which the pension fund is administered 
has laws that are designed to prevent overfunding of a pension fund and 
the funding of the pension fund is within the guidelines of such laws; 
or
    (C) The pension fund is maintained to provide benefits to employees 
in a particular industry, profession, or group of industries or 
professions and employees of at least 10 companies (other than 
companies that are owned or controlled, directly or indirectly, by the 
same interests) contribute to the pension fund or receive benefits from 
the pension fund; and
    (iv) The trustees, directors or other administrators provide the 
relevant documentation as required in paragraph (d) of this section.
    (d) Substantiation of stock ownership--(1) General rule. A foreign 
corporation that relies on this section to satisfy the ownership 
requirements of Sec. 1.883-1(c)(2), must establish all the facts 
necessary to satisfy the Commissioner that more than 50 percent of the 
value of its shares is owned, or treated as owned applying paragraph 
(c) of this section, by qualified shareholders. A foreign

[[Page 6087]]

corporation cannot meet this requirement with respect to any stock that 
is issued in bearer form. A shareholder that holds shares in the 
foreign corporation either directly or indirectly in bearer form cannot 
be a qualified shareholder.
    (2) Application of general rule--(i) Ownership statements. Except 
as provided in paragraph (d)(3) of this section, a person shall only be 
treated as a qualified shareholder of a foreign corporation if--
    (A) For the relevant period, the person completes an ownership 
statement described in paragraph (d)(4) of this section or has a valid 
ownership statement in effect under paragraph (d)(2)(ii) of this 
section;
    (B) In the case of a person owning stock in the foreign
    corporation indirectly through one or more intermediaries 
(including mere legal owners or recordholders acting as nominees), each 
intermediary in the chain of ownership between that person and the 
foreign corporation seeking qualified foreign corporation status 
completes an intermediary ownership statement described in paragraph 
(d)(4)(v) of this section or has a valid intermediary ownership 
statement in effect under paragraph (d)(2)(ii) of this section; and
    (C) The foreign corporation seeking qualified foreign corporation 
status obtains the statements described in paragraphs (d)(2)(i)(A) and 
(B) of this section.
    (ii) Three-year period of validity. The ownership statements 
required in paragraph (d)(2)(i) of this section shall remain valid 
until the earlier of the last day of the third calendar year following 
the year in which the ownership statement is signed, or the day that a 
change of circumstance occurs that makes any information on the 
ownership statement incorrect. For example, an ownership statement 
signed on September 30, 2000, remains valid through December 31, 2003, 
unless circumstances change that make the information of the statement 
no longer correct.
    (3) Special rules--(i) Determining residence of certain 
shareholders. A foreign corporation seeking qualified foreign 
corporation status or an intermediary that is a direct or indirect 
shareholder of such foreign corporation may determine the residence of 
certain shareholders, for purposes of paragraph (b)(2)(i)(B) of this 
section, under one of the following special rules, in lieu of obtaining 
the ownership statements required in paragraph (d)(2)(i) of this 
section from such shareholders.
    (ii) Special rule for registered shareholders owning less than one 
percent of widely-held corporations. A foreign corporation with at 
least 250 registered individual shareholders, that is not a publicly-
traded corporation, as described in Sec. 1.883-2, (a widely-held 
corporation), may not be required to obtain an ownership statement from 
an individual shareholder owning less than one percent of the widely-
held corporation at all times during the taxable year. If such widely-
held foreign corporation is the foreign corporation seeking qualified 
foreign corporation status, or an intermediary that meets the 
documentation requirements of paragraphs (d)(4)(v)(A) and (B) of this 
section, the widely-held foreign corporation may treat the address of 
record in its ownership records as the residence of any less than one 
percent individual shareholder if--
    (A) The individual's address of record is not a non-residential 
address, such as a post office box or in care of a financial 
intermediary or stock transfer agent; and
    (B) The officers and directors of the widely-held corporation 
neither know nor have reason to know that the individual does not 
reside at that address.
    (iii) Special rule for beneficiaries of pension funds--(A) 
Government pension fund. An individual who is a beneficiary of a 
government pension fund, as defined in paragraph (b)(5)(ii) of this 
section, shall be treated as a resident of the country in which the 
pension fund is administered if the pension fund satisfies the 
documentation requirements of paragraphs (d)(4)(v)(A) and (C)(1) of 
this section.
    (B) Non-government pension fund. An individual who is a beneficiary 
of a non-government pension fund, as described in paragraph (b)(5)(iii) 
of this section, shall be treated as a resident of the country of the 
beneficiary's address as it appears on the records of the fund, 
provided it is not a nonresidential address, such as a post office box 
or an address in care of a financial intermediary, and provided none of 
the trustees, directors or other administrators of the pension fund 
know, or have reason to know, that the beneficiary is not an individual 
resident of such foreign country. The rules of this paragraph 
(d)(3)(iii)(B) shall apply only if the non-government pension fund 
satisfies the documentation requirements of paragraphs (d)(4)(v)(A) and 
(C)(2) of this section.
    (iv) Special rule for stock owned by publicly-traded corporations. 
Any stock in a foreign corporation seeking qualified foreign 
corporation status that is owned by a publicly-traded corporation will 
be treated as owned by an individual resident in the country where the 
publicly-traded corporation is organized if the foreign corporation 
receives the statement described in paragraph (d)(4)(iii) of this 
section from the publicly-traded intermediary and copies of any 
relevant ownership statements from shareholders of the publicly traded 
corporation relied on to satisfy the exception to the closely-held 
class of stock rule of Sec. 1.883-2(d)(3)(ii) as required in paragraph 
(d)(2)(i) of this section.
    (v) Special rule for not-for-profit organizations. For purposes of 
meeting the ownership requirements of paragraph (a) of this section, a 
not-for-profit organization may rely on the addresses of record of its 
individual beneficiaries and supporters to determine the residence of 
an individual beneficiary or supporter, within the meaning of paragraph 
(b)(2)(i)(B) of this section, to the extent required under paragraph 
(b)(4) of this section, provided that--
    (A) The addresses of record are not nonresidential addresses such 
as a post office box or in care of a financial intermediary;
    (B) The officers, directors or administrators or the organization 
do not know or have reason to know that the individual beneficiaries or 
supporters do not reside at that address; and
    (C) The foreign corporation seeking qualified foreign corporation 
status receives the statement required in paragraph (d)(4)(iv) of this 
section from the not-for-profit organization.
    (4) Ownership statements from shareholders--(i) Ownership 
statements from individuals. An ownership statement from an individual 
is a written statement signed by the individual under penalties of 
perjury stating--
    (A) The individual's name, permanent address, and country where the 
individual is fully liable to tax as a resident, if any;
    (B) If the individual was not a resident of the country for the 
entire taxable year of the foreign corporation seeking qualified 
foreign corporation status, state each of the foreign countries in 
which the individual resided and the dates of such residence during the 
taxable year of such foreign corporation;
    (C) If the individual directly owns stock in the corporation 
seeking qualified foreign corporation status, the name of the 
corporation, the number of shares in each class of stock of the 
corporation that are so owned, and the period of time during the 
taxable year of

[[Page 6088]]

the foreign corporation during which the individual owned the stock;
    (D) If the individual directly owns an interest in a corporation, 
partnership, trust, estate or other intermediary that directly or 
indirectly owns stock in the corporation seeking qualified foreign 
corporation status, the name of the intermediary, the number and class 
of shares or amount and nature of the interest of the individual in 
such intermediary, and the period of time during the taxable year of 
the corporation seeking qualified foreign corporation status during 
which the individual held such interest;
    (E) To the extent known by the individual, a description of the 
chain of ownership through which the individual owns stock in the 
corporation seeking qualified foreign corporation status, including the 
name and address of each intermediary standing between the intermediary 
described in paragraph (d)(4)(i)(D) of this section and the foreign 
corporation and whether this interest is owned either directly or 
indirectly through bearer shares; and
    (F) Any other specified information.
    (ii) Ownership statements from foreign governments. An ownership 
statement from a government that is a qualified shareholder is a 
written statement--
    (A) Signed by either--
    (1) An official of the governmental authority, agency or office who 
has supervisory authority with respect to the government's ownership 
interest and who is authorized to sign such a statement on behalf of 
the authority, agency or office; or
    (2) The competent authority of the foreign country (as defined in 
the income tax convention between the United States and the foreign 
country);
    (B) That provides--
    (1) The title of the official signing the statement;
    (2) The name and address of the government authority, agency or 
office that has supervisory authority;
    (3) The information described in paragraphs (d)(4)(i)(C) through 
(F) of this section (substituting ``government'' for ``individual'') 
with respect to the government's direct or indirect ownership of stock 
in the corporation seeking qualified resident status; and
    (C) Any other specified information.
    (iii) Ownership statements from publicly-traded corporate 
shareholders. An ownership statement from a publicly-traded corporation 
that is a direct or indirect owner of the corporation seeking qualified 
foreign corporation status is a written statement, signed under 
penalties of perjury by a person that would be authorized to sign a tax 
return on behalf of the shareholder corporation containing the 
following information--
    (A) The name of the country in which the stock is primarily traded;
    (B) The name of the established securities market or markets on 
which that the stock is listed;
    (C) A description of each class of stock relied upon to meet the 
requirements of Sec. 1.883-2(d)(1), including the number of shares 
issued and outstanding as of the close of the taxable year;
    (D) For each class of stock relied upon to meet the requirements of 
Sec. 1.883-2(d)(1), if one or more 5 percent shareholders, as defined 
in Sec. 1.883-2(d)(3)(i), own in the aggregate 50 percent or more of 
the value of the outstanding shares of that class of stock at any time 
during the taxable year, state--
    (1) The name and address of each 5 percent shareholder and of each 
related person whose stock is treated as owned by the 5 percent 
shareholder;
    (2) For each qualified shareholder upon whom the corporation 
intends to rely to satisfy the exception to the closely-held class of 
stock rule of Sec. 1.883-2(d)(3)(ii)--
    (i) The name of each such shareholder;
    (ii) The percentage of the total outstanding shares of that class 
owned by such shareholder;
    (iii) The address of record of such shareholder;
    (iv) The country of residence of such shareholder, determined under 
paragraph (b)(2) or (d)(3) of this section; and
    (E) The information described in paragraphs (d)(4)(i)(C) through 
(F) of this section (substituting ``publicly-traded corporation'' for 
``individual'') with respect to the publicly-traded corporation's 
direct or indirect ownership of stock in the corporation seeking 
qualified resident status; and
    (F) Any other specified information.
    (iv) Ownership statements from not-for-profit organizations. An 
ownership statement from a not-for-profit organization (other than a 
pension fund as defined in paragraph (b)(5) of this section) is a 
written statement signed by a person authorized to sign a tax return on 
behalf of the organization under penalties of perjury stating--
    (A) The name, permanent address, and principal location of the 
activities of the organization (if different from its permanent 
address);
    (B) The information described in paragraphs (d)(4)(i)(C) through 
(F) of this section (substituting ``not-for-profit organization'' for 
``individual'');
    (C) A representation that the not-for-profit organization satisfies 
the requirements of paragraph (b)(4) of this section; and
    (D) Any other specified information.
    (v) Ownership statements from intermediaries--(A) General rule. The 
foreign corporation seeking qualified foreign corporation status under 
the shareholder stock ownership test must obtain an intermediary 
ownership statement from each intermediary standing in the chain of 
ownership between it and the qualified shareholders on whom it relies 
to meet this test. An intermediary ownership statement is a written 
statement signed under penalties of perjury by the intermediary (if the 
intermediary is an individual) or a person who would be authorized to 
sign a tax return on behalf of the intermediary (if the intermediary is 
not an individual) containing the following information--
    (1) The name, address, country of residence, and principal place of 
business (in the case of a corporation or partnership) of the 
intermediary and, if the intermediary is a trust or estate, the name 
and permanent address of all trustees or executors (or equivalent under 
foreign law), or the name and permanent address of place of 
administration of the intermediary (if a pension fund);
    (2) The information described in paragraphs (d)(4)(i)(C) through 
(F) (substituting ``intermediary'' for ``individual'');
    (3) If the intermediary is a nominee for a shareholder or another 
intermediary, the name and permanent address of the shareholder, or the 
name and principal place of business of such other intermediary;
    (4) If the intermediary is not a nominee for a shareholder or 
another intermediary, the name and country of residence (within the 
meaning of paragraph (b)(2) of this section) and the proportionate 
interest in the intermediary of each direct shareholder, partner, 
beneficiary, grantor, or other interest holder (or if the direct holder 
is a nominee, of its beneficial shareholder, partner, beneficiary, 
grantor, or other interest holder) which the foreign corporation 
seeking qualified foreign corporation status intends to rely on to 
satisfy the requirements of paragraph (a) of this section, as well as 
an ownership statement from such person and the period of time during 
the taxable year for which the interest in the intermediary was owned 
by the shareholder, partner, beneficiary, grantor or other interest 
holder. For

[[Page 6089]]

purposes of this paragraph (d)(4)(v)(A), the proportionate interest of 
a person in an intermediary is the percentage interest (by value) held 
by such person, determined using the principles for attributing 
ownership in paragraph (c) of this section;
    (5) If the intermediary is a widely-held corporation with 
registered shareholders owning less than one percent of the stock of 
such widely-held corporation, the statement set out in paragraph 
(d)(4)(v)(B) of this section, relating to ownership statements from 
widely-held intermediaries with registered shareholders owning less 
than one percent of such widely-held intermediaries;
    (6) If the intermediary is a pension fund, within the meaning of 
paragraph (b)(5) of this section, the statement set out in paragraph 
(d)(4)(v)(C) of this section, relating to ownership statements from 
pension funds; and
    (7) Any other specified information.
    (B) Ownerships statements from widely-held intermediaries with 
registered shareholders owning less than one percent of such widely-
held intermediary. An ownership statement from an intermediary that is 
a corporation with at least 250 individual shareholders, but that is 
not a publicly-traded corporation within the meaning of Sec. 1.883-2, 
and that relies on paragraph (d)(3)(ii) of this section, relating to 
the special rule for registered shareholders owning less than one 
percent of widely-held corporations, must provide the following 
information in addition to the information required in paragraph 
(d)(4)(v)(A) of this section--
    (1) The aggregate proportionate interest by country of residence in 
the widely-held corporation of such registered shareholders or other 
interest holders whose address of record is not a non-residential 
address, such as a post office box or in care of a financial 
intermediary or stock transfer agent; and
    (2) A representation that the officers and directors of the widely-
held intermediary neither know nor have reason to know that the 
individual shareholder does not reside at his or her address of record 
in the corporate records; and
    (3) Any other specified information.
    (C) Ownership statements from pension funds--(1) Ownership 
statements from government pension funds. A government pension fund (as 
defined in paragraph (b)(5)(ii) of this section) that relies on 
paragraph (d)(3)(iii) of this section, relating to the special rules 
for pension funds, generally must provide the documentation required in 
paragraph (d)(4)(v)(A) of this section and, in addition, the government 
pension fund must also provide the following information--
    (i) The name of the country in which the plan is administered;
    (ii) A representation that the fund is established exclusively for 
the benefit of employees or former employees of a foreign government, 
or employees or former employees of a foreign government and non-
governmental employees or former employees that perform or performed 
governmental or social services;
    (iii) A representation that the funds that comprise the trust are 
managed by trustees who are employees of, or persons appointed by, the 
foreign government;
    (iv) A representation that the trust forming part of the pension 
plan provides for retirement, disability, or death benefits in 
consideration for prior services rendered;
    (v) A representation that the income of the trust satisfies the 
obligations of the foreign government to the participants under the 
plan, rather than inuring to the benefit of a private person; and
    (vi) Any other specified information.
    (2) Ownership statement from non-government pension funds. The 
trustees, directors, or other administrators of the non-government 
pension fund, as defined in paragraph (b)(5)(iii) of this section, that 
rely on paragraph (d)(3)(iii) of this section, relating to the special 
rules for pension funds, generally must provide the pension fund's 
intermediary ownership statement described in paragraphs (d)(4)(v)(A) 
of this section, and, in addition, the non-government pension fund must 
also provide the following information--
    (i) The of the country in which the pension fund is administered;
    (ii) A representation that the pension fund is subject to 
supervision or regulation by a governmental authority (or other 
authority delegated to perform such supervision or regulation by a 
governmental authority) in such country, and, if so, the name of the 
governmental authority (or other authority delegated to perform such 
supervision or regulation);
    (iii) A representation that the pension fund is generally exempt 
from income taxation in its country of administration;
    (iv) The number of beneficiaries in the pension plan;
    (v) The aggregate percentage interest of beneficiaries by country 
of residence based on addresses shown on the books and records of the 
fund, provided the addresses are not nonresidential addresses, such as 
a post office box or an address in care of a financial intermediary, 
and provided none of the trustees, directors or other administrators of 
the pension fund know, or have reason to know, that the beneficiary is 
not a resident of such foreign country;
    (vi); A representation that the pension fund meets the requirements 
of paragraph (b)(5)(iii) of this section;
    (vii) A representation that the trustees, directors or other 
administrators of the pension fund have no knowledge, and no reason to 
know, that a pro-rata allocation of interests of the fund to all 
beneficiaries would differ significantly from an actuarial allocation 
of interests in the fund (or, if the beneficiaries' actuarial interest 
in the stock held directly or indirectly by the pension fund differs 
from the beneficiaries's actuarial interest in the pension fund, the 
actuarial interests computed by reference to the beneficiaries' 
actuarial interest in the stock);
    (viii) Either--
    (A) Any overfunding of the pension fund would be payable, pursuant 
to the governing instrument or the laws of the foreign country in which 
the pension fund is administered, only to, or for the benefit of, one 
or more corporations that are organized in the country in which the 
pension fund is administered, individual beneficiaries of the pension 
fund or their designated beneficiaries, or social or charitable causes 
(the reduction of the obligation of the sponsoring company or companies 
to make future contributions to the pension fund by reason of 
overfunding shall not itself result in such overfunding being deemed to 
be payable to or for the benefit of such company or companies); or
    (B) The foreign country in which the pension fund is administered 
has laws that are designed to prevent overfunding of a pension fund and 
the funding of the pension fund is within the guidelines of such laws; 
or
    (C) The pension fund is maintained to provide benefits to employees 
in a particular industry, profession, or group of industries or 
professions and employees of at least 10 companies (other than 
companies that are owned or controlled, directly or indirectly, by the 
same interests) contribute to the pension fund or receive benefits from 
the pension fund; and
    (ix) Any other specified information.
    (3) Time for making determinations. The determinations required to 
be made under this paragraph (d)(4)(v)(C) shall be made using 
information shown on the records of the pension fund for a date during 
the foreign corporation's

[[Page 6090]]

taxable year to which the determination is relevant.
    (5) Availability and retention of documents for inspection. The 
documentation described in paragraphs (d)(3) and (4) of this section 
must be retained by the corporation seeking qualified foreign 
corporation status (the foreign corporation) until the expiration of 
the statute of limitations for the taxable year of the foreign 
corporation to which the documentation relates. Such documentation must 
be made available for inspection by the Commissioner at such time and 
place as the Commissioner may request in writing.
    (e) Reporting requirements. A foreign corporation relying on the 
qualified shareholder test of this section to demonstrate that it is a 
qualified foreign corporation for purposes of Sec. 1.883-1(c)(2) must 
provide the following information in addition to the information 
required in Sec. 1.883-1(c)(3) to be included in its Form 1120F for 
each taxable year. The information should be current as of the end of 
the corporation's taxable year. The information must include the 
following--
    (1) A representation that more than 50 percent of the value of the 
outstanding shares of the corporation is owned (or treated as owned by 
reason of paragraph (c) of this section) by qualified shareholders for 
the category of income for which the exemption is claimed;
    (2) With respect to each individual qualified shareholder owning 5 
percent or more of the foreign corporation, applying the attribution 
rules of paragraph (c) of this section, and relied upon to meet the 50 
percent ownership test of paragraph (a) of this section, the name and 
address, as represented on each such individual's ownership statement;
    (3) With respect to all qualified shareholders relied upon to 
satisfy the 50 percent ownership test of paragraph (a) of this section, 
the total percentage of the value of the outstanding shares owned, 
applying the attribution rules of paragraph (c) of this section, by all 
qualified shareholders resident in a qualified foreign country, by 
country; and
    (4) Any other required documentation.


Sec. 1.883-5  Effective date.

    (a) General rule. Sections 1.883-1 through 1.883-4 apply to taxable 
years of the foreign corporation ending 30 days or more after the date 
these regulations are published as final regulations in the Federal 
Register.
    (b) Election for retroactive application. When Secs. 1.883-1 
through 1.883-4 become generally applicable, taxpayers may rely on all 
the provisions of Secs. 1.883-1 through 1.883-4 for guidance and may 
elect to apply all such substantive provisions for any open taxable 
year of the foreign corporation beginning after December 31, 1986, and 
ending less than 30 days after the date these regulations are published 
as final regulations in the Federal Register. However, such election is 
not required to be applied with respect to Sec. 1.883-1(c)(3) (relating 
to the substantiation and reporting required to be treated as a 
qualified foreign corporation) or Secs. 1.883-2(f), 1.883-3(d) and 
1.883-4(e) (relating to additional information to be included in the 
return to demonstrate whether the foreign corporation satisfies one of 
three stock ownership tests). Such election will be applicable for the 
year of the election and for all subsequent taxable years.
    (c) Transition rule. For taxable years of the foreign corporation 
ending 30 days or more after the date these regulations are published 
as final regulations in the Federal Register, and until such time as 
the Form 1120F and its instructions are revised to conform to 
Secs. 1.883-1 through 1.883-4, the information required in Sec. 1.883-
1(c)(3) and Sec. 1.883-2(f), 1.883-3(d) or 1.883-4(e), as applicable, 
must be included on a written statement signed under penalties of 
perjury by a person authorized to sign the return, attached to the Form 
1120F, and filed with the return.

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 00-1899 Filed 2-7-00; 8:45 am]
BILLING CODE 4831-01-U