[Federal Register Volume 67, Number 149 (Friday, August 2, 2002)]
[Proposed Rules]
[Pages 50510-50537]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-19127]



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Part II





Department of the Treasury





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Internal Revenue Service



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26 CFR Part 1



Exclusions From Gross Income of Foreign Corporations; Proposed Rule

  Federal Register / Vol. 67, No. 149 / Friday, August 2, 2002 / 
Proposed Rules  

[[Page 50510]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-208280-86; REG-136311-01]
RIN 1545-AJ57; RIN 1545-BA07


Exclusions From Gross Income of Foreign Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Withdrawal of previously proposed rules; notice of proposed 
rulemaking; and notice of public hearing.

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SUMMARY: This document contains new proposed rules implementing the 
portions of sections 883(a) and (c) of the Internal Revenue Code of 
1986, as amended, that relate to the exclusion from gross income 
available to corporations organized in foreign countries that grant 
equivalent exemptions to corporations organized in the United States 
for income derived from the international operation of ships or 
aircraft. This document also provides notice of a public hearing on the 
proposed rules and withdraws the notice of proposed rulemaking (REG-
208280-86) (65 FR 6065) published on February 8, 2000.

DATES: Written or electronic comments, requests to speak, and outlines 
of topics to be discussed at the public hearing scheduled for November 
12, 2002, at 10 a.m. must be received by October 22, 2002. The proposed 
amendment to 26 CFR part 1 published on February 8, 2000 (65 FR 6065) 
is withdrawn as of August 2, 2002.

ADDRESSES: Send submissions to: CC:ITA:RU (REG-136311-01), 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:ITA:RU (REG-136311-01), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington, DC. Alternatively, comments may be transmitted 
electronically via the Internet by submitting comments directly to the 
IRS Internet site at: http://www.irs.gov/regs. The public hearing will 
be held in room 4718, 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, W:CAR:MP:FP:S Washington, DC 20224. Comments 
on the collection of information should be received by October 1, 2002. 
Comments are specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the IRS, 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: 1400 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: 1400.
    Estimated annual frequency of responses: Once.
    Estimated total annual reporting/recordkeeping burden on 
shareholders: 22,500 hours.
    The estimated annual burden per respondent varies from zero 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: Zero if the shareholder 
falls within a special rule that permits the foreign corporation to use 
the address of record in the shareholder records.
    Once every three years if there is no change in reported 
shareholder information.
    Annually in years in which a change of information occurs.
    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 and Explanation of Provisions

I. Overview

    On February 8, 2000, the IRS and Treasury published a notice of 
proposed rulemaking (REG-208280-86) in the Federal Register (65 FR 
6065) under sections 883(a) and (c) (the 2000 proposed regulations). 
The 2000 proposed regulations, in accordance

[[Page 50511]]

with section 883(a) and (c), generally provide that a foreign 
corporation organized in a qualified foreign country and engaged in the 
international operation of ships or aircraft shall exclude from its 
gross income for purposes of United States Federal income taxation 
qualified income it derives from its international operation of ships 
or aircraft, provided that the corporation satisfies certain ownership 
and related documentation and filing requirements. The 2000 proposed 
regulations explain how to determine whether a foreign country is a 
qualified foreign country, what income is considered qualified income, 
and what activities constitute international operation of ships or 
aircraft. They also specify how a foreign corporation satisfies the 
ownership and related documentation requirements.
    The IRS and Treasury held a public hearing regarding the 2000 
proposed regulations on June 8, 2000, and received numerous comments in 
connection with the hearing and otherwise. In consideration of the 
substantial number of comments received, and due to the significant 
impact the regulations have on large segments of the shipping and air 
transport industries, the IRS and Treasury believe it is appropriate to 
repropose the regulations in order to address those comments and to 
provide a further opportunity for comment both on the changes and more 
generally. Accordingly, this document withdraws the 2000 proposed 
regulations and provides new proposed regulations, which are referred 
to herein as the reproposed regulations.
    Part II of this preamble discusses the principal differences 
between the 2000 proposed regulations and the reproposed regulations 
and the reasons changes have been made. Part II.A provides background. 
Part II.B addresses comments on the 2000 proposed regulations relating 
to Sec. 1.883-1 (the general requirements for the exclusion). Part II.C 
addresses comments relating to Sec. 1.883-2 (the publicly traded test). 
Part II.D addresses comments relating to Sec. 1.883-3 (the CFC stock 
ownership test). Part II.E addresses comments relating to Sec. 1.883-4 
(the qualified shareholder stock ownership test). Finally, Part II.F 
addresses comments relating to Sec. 1.883-5 (the effective date of the 
2000 proposed regulations).
    This preamble addresses each of the five sections of the reproposed 
regulations in order. Within each section, the preamble discusses first 
the most significant differences between the 2000 proposed regulations 
and the reproposed regulations, including: (1) The qualification of 
participation in a pool, partnership, strategic alliance, joint 
operating agreement, code-sharing arrangement or other joint venture as 
operation of ships or aircraft (see Sec. 1.883-1(e)(1) and (2) and Part 
II.B.1 of this preamble); (2) the qualification of certain lightering 
activity as international operation of ships (see Sec. 1.883-
1(f)(2)(ii) and Part II.B.2 of this preamble); (3) the treatment of 
certain income attributable to the inland leg following the 
international carriage of passengers or cargo (see Sec. 1.883-
1(g)(1)(v) and (vi) and (g)(2)(vi) and Part II.B.2 of this preamble); 
(4) the treatment of income from certain container usage in the United 
States (see Sec. 1.883-1(g)(1)(x) and (g)(2)(viii) and Part II.B.3 of 
this preamble)); and (5) the revision of certain aspects of the 
closely-held test for qualification of a foreign corporation as a 
publicly traded corporation (see Sec. 1.883-2(d)(3) and Part II.C.2 of 
this preamble).

II. Section 883(a) and (c): Exclusions From Gross Income of Foreign 
Corporations

A. Background
    The reproposed regulations provide (as do the 2000 proposed 
regulations) that, in general, qualified income derived by a qualified 
foreign corporation from its international operation of ships or 
aircraft is excluded from gross income and exempt from United States 
Federal income tax. Section 1.883-1 of both the 2000 proposed 
regulations and the reproposed regulations provide general operational 
rules and definitions to determine whether a foreign corporation is 
entitled to this exclusion and exemption, which are elaborated on in 
Secs. 1.883-2 through 1.883-4. The preamble to the 2000 proposed 
regulations contains a detailed explanation of the provisions in the 
2000 proposed regulations. That explanation is not repeated herein. 
Comments the IRS received on the 2000 proposed regulations and the 
consequent changes reflected in the reproposed regulations are 
described herein.
B. Comments Relating to Sec. 1.883-1: Exclusions of Income From the 
International Operation of Ships or Aircraft
    Section 1.883-1 of the 2000 proposed regulations provides, in 
accordance with section 883, that income derived from the international 
operation of ships or aircraft by a foreign corporation organized in a 
foreign country that grants a reciprocal exemption to U.S. corporations 
shall be exempt from U.S. Federal income tax. In response to comments 
the IRS received concerning the 2000 proposed regulations, the 
reproposed regulations modify the rules of the 2000 proposed 
regulations regarding the definition of international operation of 
ships and aircraft and the scope of income considered derived from such 
operation.
    1. Operation of ships or aircraft. Section 1.883-1(e) of the 2000 
proposed regulations provides generally that the term operation of 
ships or aircraft includes carriage of passengers or cargo for hire; 
time or voyage charter (full charter) of a ship, or wet lease of an 
aircraft; and bareboat charter of a ship, or dry lease of an aircraft. 
The 2000 proposed regulations also include within the term the 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 arrangements or other 
joint venture, that is itself engaged in the operation of ships or 
aircraft.
    i. Investment in a pool, partnership, strategic alliance, joint 
operating agreement, code-sharing arrangement or other joint venture. 
Commentators suggested modifying the definition of operation of ships 
or aircraft to permit an investor in a pool, partnership, strategic 
alliance, joint operating agreement, code-sharing arrangement or other 
joint venture that is itself engaged in the operation of ships or 
aircraft to be treated as engaged in the operation of ships or 
aircraft, whether or not the investor is itself so engaged and whether 
or not its participation is active.
    This suggestion has been generally adopted in the reproposed 
regulations, with modifications. Under Sec. 1.883-1(e)(2) of the 
reproposed regulations, a foreign corporation is considered engaged in 
the operation of ships or aircraft with respect to its participation in 
a pool, partnership, strategic alliance, joint operating agreement, 
code-sharing arrangement or other joint venture, provided that such 
arrangement is a fiscally transparent entity under the income tax laws 
of the United States and that it would be considered engaged in the 
operation of ships or aircraft if it were a foreign corporation. 
Alternatively, if the pool, strategic alliance, joint operating 
agreement, code-sharing arrangement or other joint venture does not 
rise to the level of a partnership or other entity under the income tax 
laws of the United States (e.g., it is a contractual arrangement only 
that involves the carriage of cargo or passengers for hire), a foreign

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corporation that participates in such a pool, strategic alliance, joint 
operating agreement, code-sharing arrangement or other joint venture 
will be considered engaged in the operation of ships or aircraft only 
if the foreign corporation is otherwise engaged in the operation of 
ships or aircraft under paragraph (e)(1). Thus, through participation 
in a fiscally transparent entity, a foreign corporation may be 
considered engaged in the operation of ships or aircraft even if it is 
not itself otherwise engaged in the operation of ships or aircraft. 
However, through participation in a contractual arrangement that is not 
a fiscally transparent entity, a foreign corporation may only be 
considered engaged in the operation of ships or aircraft with respect 
to activities under such contractual arrangement only if the foreign 
corporation is otherwise engaged in the operation of ships or aircraft.
    Section 1.883-1(e)(5)(iv) and (v) defines for these purposes the 
terms entity and fiscally transparent entity under the income tax laws 
of the United States respectively. In general, an entity is fiscally 
transparent under the income tax laws of the United States with respect 
to a category of income if the entity would be considered fiscally 
transparent under the income tax laws of the United States for purposes 
of Sec. 1.894-1 with respect to an item of income within that category 
of income.
    In the case of a foreign corporation that is considered engaged in 
the operation of ships or aircraft with respect to its participation in 
certain fiscally transparent entities, Sec. 1.883-1(h)(3)(ii) provides 
an exception to the general rule that a foreign country that provides 
an exemption only through an income tax convention with the United 
States will not be considered to grant an equivalent exemption for 
purposes of section 883. Under the reproposed regulations, a foreign 
corporation will be treated as organized in a foreign country that 
grants an equivalent exemption for purposes of section 883 with respect 
to a category of income derived by or pursuant to a pool, partnership, 
strategic alliance, joint operating agreement, code-sharing arrangement 
or other joint venture, but only if treaty benefits are denied to the 
foreign corporation solely because the foreign corporate interest 
holder's jurisdiction (i.e., the treaty-partner jurisdiction) views the 
pool, partnership, strategic alliance, joint operating agreement, code-
sharing arrangement or other joint venture as not fiscally transparent.
    ii. Space or slot charters. Commentators also suggested modifying 
the definition operation of ships or aircraft to include space or slot 
chartering, which involves the leasing out of a certain amount of space 
(but less than all of the space) on a ship or aircraft. In the context 
of passenger aircraft, such a charter may be referred to as a block 
seat sale or charter. In response to these comments and to clarify the 
concept of what it means for a foreign corporation to be engaged in the 
operation of ships or aircraft, the rules of the 2000 proposed 
regulations have been revised.
    Section 1.883-1(e)(1) of the reproposed regulations provides 
generally that a foreign corporation is considered engaged in the 
operation of ships or aircraft only during the time it is an owner or 
lessee of an entire ship or aircraft and the foreign corporation (1) 
uses that ship or aircraft to carry passengers or cargo for hire; or 
(2) either (a) leases out the ship under a time or voyage charter (full 
charter), space or slot charter, or bareboat charter to a lessee or 
sublessee, provided the ship is used to carry passengers or cargo for 
hire; or (b) leases out the aircraft under a wet lease (full charter), 
space, slot, or block-seat charter, or dry lease to a lessee or 
sublessee, provided the aircraft is used to carry passengers or cargo 
for hire. In addition, Sec. 1.883-1(g)(1)(ix) clarifies that a foreign 
corporation that is engaged in the international operation of ships or 
aircraft within the meaning of Sec. 1.883-1(e) may derive income that 
is incidental to the operation ships or aircraft by arranging by means 
of a space or slot charter for the carriage of cargo listed on a bill 
of lading or airway bill issued by the foreign corporation on the ship 
or aircraft of another corporation engaged in the international 
operation of ships or aircraft.
    Thus, the reproposed regulations generally adopt the commentators' 
recommendations regarding space or slot chartering. A foreign 
corporation that has an ownership interest in an entire ship or an 
aircraft will be considered engaged in the operation of ships or 
aircraft if it space or slot charters the ship or block-seat charters 
the aircraft to another corporation that uses the ship or aircraft to 
carry passengers or cargo for hire.
    iii. Non-vessel operating common carriers. The 2000 proposed 
regulations do not include within the list of activities constituting 
the operation of ships or aircraft the activities of a non-vessel 
operating common carrier (an NVOCC). Commentators suggested that NVOCCs 
should be treated as engaged in the operation of ships because they are 
common carriers that issue bills of lading and have liability for the 
goods shipped under that bill of lading just as an ocean common 
carrier.
    The reproposed regulations do not adopt this suggestion. An NVOCC 
is not engaged in the operation of ships within the meaning of 
Sec. 1.883-1(e) because it does not own an entire ship or use it in one 
of the listed activities in Sec. 1.883-1(e)(1). Section 883 does not 
apply simply because a corporation is a common carrier. Therefore, the 
activities of an NVOCC continue to be included on the Sec. 1.883-
1(e)(3) list of activities that do not constitute the operation of 
ships or aircraft.
    2. International operation of ships or aircraft. i. General 
definition. Section 1.883-1(f) of the 2000 proposed regulations 
distinguishes the international operation of ships or aircraft from the 
domestic operation of ships or aircraft based largely upon the 
amendments made to section 863(c)(1) and (2) by the Technical and 
Miscellaneous Revenue Act of 1988 (TAMRA). In the legislative history 
to TAMRA, Congress directed that transportation income derived solely 
from sources within the United States (section 863(c)(1) income) should 
not be exempt from U.S. income tax under section 883. Congress further 
provided that transportation income derived 50 percent from sources 
within the United States (section 863(c)(2) income) should be eligible 
for exemption from U.S. income tax under section 883. See S. Rep. No. 
100-445, 100th Cong., 2d Sess. 241-242 (1988).
    Section 863(c)(1) income is defined as income attributable to 
transportation that begins and ends in the United States. Section 
863(c)(2) income is defined as income attributable to transportation 
that begins or ends in the United States, and that is not section 
863(c)(1) income. The 2000 proposed regulations adopt this distinction 
between section 863(c)(1) income and section 863(c)(2) income in 
defining 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.
    Commentators objected to this definition. Several argued that the 
term international operation should be defined coextensively with the 
term international transport, as used in Article 8 of the OECD Model 
Income Tax Convention and in the 1996 United States Model Income Tax 
Convention.
    Nevertheless, the IRS and Treasury believe that Congress meant the 
definition of international operation to correspond with the definition 
of section 863(c)(2) income. Section 863(c)(2) does not apply to

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transportation that begins and ends in the United States; it applies to 
transportation that begins or ends in the United States. Therefore, the 
reproposed regulations do not modify the definition of international 
operation of ships or aircraft to include transportation that begins 
and ends in the United States (such as the U.S. inland legs following 
international transport, discussed immediately below). The IRS and 
Treasury believe this interpretation to be consistent with the intent 
of Congress.
    ii. Inland leg of transportation. The 2000 proposed regulations 
generally do not include within the definition of international 
operation the inland leg of transportation of passengers or cargo 
before or after an intermediate stop in the United States.
    Commentators criticized the exclusion of the inland leg in the 2000 
proposed regulations as inconsistent with long-standing industry 
practice and other provisions of domestic law, such as the Shipping Act 
of 1984, Public Law 98-237, 2 (97 Stat. 67) (March 20, 1984), as 
amended, Public Law 105-258, Title 1, 101 (112 Stat. 1902) (Oct. 14, 
1998), which considers certain inland transportation to form a part of 
international service. Commentators also suggested that the 2000 
proposed regulations contradicted the established U.S. transportation 
policy of promoting intermodal transportation (i.e., transportation by 
more than one form of carrier during a single journey).
    After reviewing these comments, the IRS and Treasury have 
determined not to change the definition of international operation of 
ships or aircraft in the reproposed regulations. As explained above, in 
Part II.B.2.i, the language of section 883 and the legislative history 
of TAMRA, in the view of IRS and Treasury, do not permit the inland leg 
of transportation to be considered international operation of ships or 
aircraft. In recognition of the need to promote efficient international 
transportation, however, the IRS and Treasury have amended the rules of 
the 2000 proposed regulations to include income with respect to certain 
inland transportation as income from an activity incidental to the 
international operation of ships or aircraft, and thus eligible for 
exemption. See Part II.B.3, below.
    iii. Cruises to nowhere. The 2000 proposed regulations generally 
include within the definition of international operation a round trip 
cruise that begins in the United States, stops at a foreign port, and 
returns to the same or another US port. Because the 2000 proposed 
regulations require a stop at a foreign intermediate port, the 2000 
proposed regulations effectively exclude from the definition of 
international operation of ships or aircraft a ``cruise to nowhere'' 
(i.e., a cruise that begins and ends in the United States without 
stopping at a foreign port).
    Several commentators criticized the exclusion of cruises to 
nowhere. The reproposed regulations, however, do not treat a cruise to 
nowhere as international operation of ships or aircraft. Although a 
cruise to nowhere travels beyond the U.S. territorial limits, its 
passengers may embark and disembark only in the United States. A cruise 
to nowhere begins and ends its voyage in the United States, within the 
meaning of section 863(c)(1), with respect to its passengers and thus 
should not constitute international operation of ships or aircraft.
    iv. Lightering. The 2000 proposed regulations exclude from the 
definition of international operation the activities of a lighter 
vessel that carries cargo to, or picks up cargo from, a vessel located 
beyond the territorial limits of the United States, and correspondingly 
loads or unloads that cargo at a U.S. port.
    Commentators recommended that lighter vessels that service host 
vessels engaged in international operation should be considered engaged 
in international operation. Commentators relied for support on 
Sec. 1.954-6(b)(3)(iv), which treats a lighter vessel that services a 
host vessel used in foreign commerce as also used in foreign commerce 
for purposes of determining foreign base company shipping income.
    While the IRS and Treasury did not adopt the commentators' 
approach, the reproposed regulations, unlike the 2000 proposed 
regulations, do not require that a ship be operated on voyages that 
begin or end in the United States and correspondingly end or begin in a 
foreign country. Instead, the reproposed regulations require simply 
that the ship or aircraft be operated on voyages or flights that begin 
or end in the United States and correspondingly end or begin outside 
the United States. In servicing a host vessel beyond the territorial 
limits of the United States, a lighter vessel begins its voyage outside 
the United States alongside the host vessel with respect to the cargo 
transported, and ends its voyage with respect to that cargo upon 
delivery of the cargo in the United States. Accordingly, under 
Sec. 1.883-1(f)(2)(ii) of the reproposed regulations, lightering 
activity that extends beyond United States territorial waters will 
constitute the international operation of a ship.
    3. Activities Incidental to International Operation. Section 1.883-
1(g) of the 2000 proposed regulations provides that certain activities 
of an operator of a ship or aircraft are so closely related to the 
primary activity of the international operation of ships or aircraft 
that income from those incidental activities shall be considered income 
from the international operation of ships or aircraft, and thus 
eligible for exemption.
    i. Intermodal containers. Section 1.883-1(g)(1)(v) of the 2000 
proposed regulations provides that rental of containers during the 
international carriage of goods by sea by the operator of a ship or by 
air by the operator of an aircraft is incidental to the international 
operation of ships or aircraft. By contrast, Sec. 1.883-1(g)(2)(iv) of 
the 2000 proposed regulations provides that the rental of containers 
for a domestic leg of transportation in connection with international 
carriage of cargo is not incidental to the international operation of 
ships or aircraft.
    As discussed above in Part II.B.2(ii), the reproposed regulations 
do not change the general definition of the term international 
operation of ships or aircraft to cover the inland leg. The IRS and 
Treasury, however, recognize that intermodal transportation is a 
critical adjunct to the international transportation of cargo.
    Accordingly, Sec. 1.883-1(g)(1)(x) of the reproposed regulations 
treats certain container rental activities in the United States as 
incidental to the international operation of ships or aircraft. The 
reproposed regulations limit incidental treatment to the rental of 
containers for use in the United States for a period not exceeding five 
days beyond the original delivery date to the consignee as stated on 
the bill of lading. The reproposed regulations also impose other 
limitations on incidental treatment, and no other rental of containers 
within the United States is considered incidental to the international 
operation of ships or aircraft (e.g., the extended rental of containers 
for use by the customer for temporary warehousing of cargo).
    ii. Inland legs of transportation--cargo transport. As discussed 
above, the 2000 proposed regulations may treat some inland legs of 
transportation of cargo as domestic because the international 
transportation provided by a ship or aircraft is considered to end when 
the cargo is transferred from the ship or aircraft and clears customs 
or is considered to begin when the ship or aircraft is loaded at the 
United States port or airport. Again as discussed above, commentators 
argued that this rule inhibits intermodal transportation.

[[Page 50514]]

    In recognition of this concern, Sec. 1.883-1(g)(1)(v) of the 
reproposed regulations provides that (i) if a foreign corporation 
engaged in the international operation of ships or aircraft issues a 
through bill of lading, airway bill or similar document for the 
carriage of cargo from a port or airport outside the United States to 
an intermediate port or airport in the United States and then to an 
inland destination within the United States, or from an inland point of 
origin in the United States to an intermediate U.S. port or airport and 
then to a destination outside the United States, and (ii) to fulfill 
its common carrier obligations under the bill, the foreign corporation 
arranges through a related or unrelated corporation (either by 
subcontracting or otherwise) for carriage of cargo by air, ship, truck 
or rail between the U.S. port or airport and the inland point either 
preceding or following the international carriage of that cargo, then 
the activity of arranging for that transportation is incidental to its 
international operation of ships or aircraft, and income from such 
activity is thus eligible for exemption.
    The reproposed regulations do not provide the same treatment where 
the bill of lading issued by the foreign corporation is solely for the 
international carriage of cargo between a U.S. port or airport where 
the cargo is loaded on or unloaded from the ship or aircraft and a 
point outside the United States. In such cases, arranging for further 
transportation of the cargo by another party on an inland leg is not 
incidental to the international operation of ships or aircraft. See 
Sec. 1.883-1(g)(2)(vi). In addition, if the qualified foreign 
corporation carries cargo between a U.S. inland point and a U.S. port 
or airport with its own trucks, buses or rail service preceding or 
following the international carriage of such cargo by the qualified 
foreign corporation, the activity is not incidental to its 
international operation of ships or aircraft. See Sec. 1.883-
1(g)(2)(vii).
    iii. Inland legs of transportation--passenger transport under a 
code-sharing arrangement. Under the 2000 proposed regulations, 
passenger carriage is deemed to begin or end upon a change of aircraft. 
Pursuant to that rule, international transportation provided by an air 
carrier ends when a passenger changes planes at a gateway city en route 
from a foreign point of origin to a U.S. destination, or begins when a 
passenger changes planes at a gateway city en route to a foreign 
destination. Thus, under the 2000 proposed regulations, an inland leg 
of passenger transportation is not treated as international even if it 
follows international transportation and is pursuant to a through 
ticket sold by a foreign airline, for example, under a code-sharing 
arrangement with a U.S. airline or is pursuant to an interline ticket.
    Commentators argued that this rule would give rise to inefficiency, 
inhibit economies of scale from developing within the airline industry, 
and limit services available to passengers desiring international 
travel.
    In recognition of these comments, Sec. 1.883-1(g)(1)(vi) of the 
reproposed regulations provides that the sale or issuance of an 
interline or code-sharing passenger ticket for the carriage of persons 
by air between the U.S. gateway and another U.S. city preceding or 
following international transportation is an activity incidental to the 
international operation of aircraft. This rule only applies, however, 
if all such flight segments are provided pursuant to the passenger's 
original invoice, ticket, or itinerary.
    4. Activities not incidental to international operation of ships or 
aircraft. i. Hotel accommodations. Under the 2000 proposed regulations, 
the sale or arranging for train travel, land tour packages and port 
city hotels is not an activity incidental to the international 
operation of ships or aircraft. Commentators suggested that an 
exception to that general rule be provided in the case of arranging for 
hotels for the one night before or after the international carriage of 
a passenger.
    The reproposed regulations adopt this suggestion. It is not always 
possible for a cruise ship passenger to arrive at the port city on the 
morning of the scheduled departure or to arrange for a return flight 
home on the evening of the arrival back in port. Arranging for one 
night's accommodation in such situations is an adjunct to the operation 
of the cruise business. Thus, arranging for one night in a hotel before 
or after a cruise is considered incidental to the international 
operation of ships under Sec. 1.883-1(g)(1)(vii) of the reproposed 
regulations.
    ii. Ground services and other services. Under Sec. 1.883-
1(g)(2)(vi) of the 2000 proposed regulations, services performed for 
parties other than passengers, consignors or consignees, such as ground 
services at ports or airports or ship or aircraft maintenance, are not 
considered incidental to the international operation of ships or 
aircraft.
    Several commentators suggested that income from services other than 
ground services provided by an operator, such as crewing, operating 
casinos, fleet management, operating reservations systems, and 
marketing or administrative services to consignors, consignees, as well 
as to members of the same pool, partnership, strategic alliance, joint 
operating agreement, code-sharing or other joint venture or joint 
operating arrangement, should be considered incidental.
    The IRS and Treasury believe that no clear international norm or 
standard has developed regarding the appropriate treatment of such 
services. Accordingly, the reproposed regulations, in Sec. 1.883-
1(g)(3), reserve on the treatment of ground services, maintenance and 
catering, as well as other services not mentioned as included among 
incidental activities. The IRS and Treasury solicit comments on the 
appropriate rule.
    5. Activities incidental to the international operation of ships or 
aircraft performed by pool, partnership, strategic alliance, joint 
operating agreement, code-sharing arrangement or other joint venture. 
The 2000 proposed regulations do not address whether activities 
performed by a pool, partnership, strategic alliance, joint operating 
agreement, code-sharing arrangement or other joint venture can be 
considered incidental to the international operation of ships or 
aircraft.
    Commentators argued that activities a foreign corporation would 
perform for itself, absent such an arrangement or entity, should be 
incidental to the foreign corporation's international operation of 
ships or aircraft, within the meaning of Sec. 1.883-1(g).
    In response to these comments, Sec. 1.883-1(g)(4) of the reproposed 
regulations broadens the scope of incidental activities. An activity 
may be considered incidental to the international operation of ships or 
aircraft by a foreign corporation, and income derived by the foreign 
corporation with respect to such activity is deemed to be income 
derived from the international operation of ships or aircraft, if the 
activity is performed by or pursuant to a pool, partnership, strategic 
alliance, joint operating agreement, code-sharing arrangement or other 
joint venture in which such foreign corporation participates, if (i) 
the activity is incidental to the international operation of ships or 
aircraft by the pool, partnership, strategic alliance, joint operating 
agreement, code-sharing arrangement or other joint venture, provided 
the joint venture is itself engaged in the operation of ships or 
aircraft; or (ii) such activity would be incidental to the 
international operation of ships or

[[Page 50515]]

aircraft by the foreign corporation, if it performed such activity 
itself, and provided the foreign corporation is otherwise is engaged in 
the operation of ships or aircraft.
    6. Interaction with income tax conventions. i. Eligibility for 
benefits under both a treaty and this regulation. Section 1.883-1(h)(3) 
of the 2000 proposed regulations contains special rules regarding 
income tax conventions. Under the 2000 proposed regulations, if a 
corporation is organized in a foreign country that offers an exemption 
under an income tax convention and also some other means, such as a 
diplomatic note pursuant to section 883, the foreign corporation must 
choose annually whether to claim an exemption under section 894 and the 
income tax convention, or under section 883.
    Commentators objected to this rule, stating that there was no tax 
policy rationale for requiring a foreign corporation eligible for an 
exemption under both section 883 and an income tax convention to make 
an annual election to claim under one or the other.
    In response to these comments, Sec. 1.883-1(h)(3)(i) of the 
reproposed regulations provides that if the taxpayer is eligible to 
exempt income under both an applicable income tax convention and 
section 883, the taxpayer may claim an exemption under both the 
applicable income tax convention and section 883 with respect to such 
category of income. As under the 2000 proposed regulations, however, 
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 different categories of 
income.
    ii. Regulation not intended to be used for interpretation of U.S. 
income tax conventions. Many U.S. income tax conventions define the 
terms regarding international transport used therein, such as the term 
international traffic, but some conventions do not define such terms. 
In general, conventions provide that undefined terms have the meaning 
provided by the domestic laws of the contracting state from which 
treaty benefits are claimed. The 2000 proposed regulations do not state 
specifically whether the definitions and descriptions of terms used 
within those regulations should be used to interpret similar terms or 
concepts in income tax conventions or to delimit the scope of the 
exemption available under treaties for profits from shipping and air 
transport.
    Treasury and IRS have received a number of inquiries regarding 
whether terms used in the 2000 proposed regulations should be used to 
interpret terms and concepts in U.S. income tax conventions, most 
commonly with respect to the definition of international traffic and 
related terms and concepts in the shipping and air transport article 
(typically, Article 8 of the convention).
    In response to these inquiries, Sec. 1.883-1(h)(3)(iii) of the 
reproposed regulations clarifies that definitions provided in these 
regulations do not give meaning or provide guidance regarding similar 
terms in U.S. income tax conventions or the scope of any treaty 
exemption. For example, the definition of the term international 
operation of ships or aircraft will not control the meaning of the 
terms international traffic and international transport, as used in 
U.S. income tax conventions. See H.R. Conf. Rep. No. 99-841, 99th 
Cong., 2d Sess. 599 (1986), reprinted in 1986-3 C.B. vol. 4, at 599 
(``The conferees wish to clarify that the [conference] agreement's 
provisions do not deny any benefits available under present law in an 
income tax treaty between the United States and a foreign country.'').
    7. Substantiation and reporting requirements. For a foreign 
corporation to be considered a qualified foreign corporation under 
Sec. 1.883-1(c), the 2000 proposed regulations require that the 
corporation identify on its return each category of qualified income 
for which it claims an exemption and provide a reasonable estimate of 
the amount of qualified income for each such category.
    Commentators criticized this requirement on the ground that many 
foreign corporations, such as foreign airlines, do not keep books and 
records based on U.S. generally accepted accounting principles 
reflecting each separate item of income. Commentators also complained 
that foreign corporations could not determine without significant 
administrative burden how much income would be from sources within the 
United States under U.S. income tax principles.
    In response to these comments, Sec. 1.883-1(c)(3) of the reproposed 
regulations provides that a reasonable estimate of each category of 
qualified income for which an exemption is claimed must be provided to 
the extent such amounts are readily determinable. This standard is 
consistent with the general standards in Sec. 1.6012-2(g)(1)(i) for 
information included on returns filed by foreign corporations that 
claim an exemption from income tax by reason of U.S. domestic law or a 
U.S. income tax convention.
C. Comments Relating to Sec. 1.883-2: Treatment of Publicly-Traded 
Corporations
    Section 883(c)(1) provides that a foreign corporation shall not be 
eligible for the exclusion of income from the international operation 
of ships or aircraft if 50 percent or more of the value of its stock is 
owned by individuals who are not residents of a qualified foreign 
country. Section 883(c)(3) provides, however, that this rule shall not 
apply to any foreign corporation whose stock is primarily and regularly 
traded on an established securities market in either the United States 
or a qualified foreign country.
    Section 1.883-2 of the 2000 proposed regulations provides rules 
regarding section 883(c)(3). As explained more fully in the preamble to 
those regulations, the branch profits tax rules under Sec. 1.884-5(d) 
provide the framework for Sec. 1.883-2. Section 1.883-2(d) of the 2000 
proposed regulations defines the term regularly traded. For the stock 
of foreign corporation to be considered regularly traded, one or more 
classes of the corporation's stock 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 must be listed on an 
established securities market. In addition, the 2000 proposed 
regulations provide that a class of stock cannot be counted for 
purposes of meeting the regularly traded requirement if 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) own in the 
aggregate 50 percent of more of the value of stock in the class.
    As discussed below, in response to comments received, the 
reproposed regulations modify the 2000 proposed regulations rules 
regarding the 80 percent listing requirement and the rules for closely-
held classes of stock. The reproposed regulations do not, however, 
modify the rules regarding the reporting (on the corporation's Form 
1120F) of the names of any 5-percent shareholders upon which the 
foreign corporation intends to rely to satisfy section 883(c). 
Moreover, the reproposed regulations do not adopt a suggestion 
regarding the treatment for purposes of the stock ownership test of 
section 883(c)(1) of shareholders in a publicly-traded class of stock 
of a non-publicly traded corporation.
    1. Regularly traded listing threshold. Under the 2000 proposed 
regulations, in accordance with Section 883(c)(3)(A), the stock of a 
foreign corporation must be regularly traded for the foreign

[[Page 50516]]

corporation to satisfy the publicly traded test. To determine whether 
the foreign corporation's stock is regularly traded, Sec. 1.883-2(d) of 
the 2000 proposed regulations generally adopts the threshold used in 
connection with the branch profits tax rules of Sec. 1.884-
5(d)(4)(i)(A). Under Sec. 1.883-2(d), the stock of a corporation is 
regularly traded if one or more classes of stock of the corporation are 
listed on an established securities market in the United States or in a 
qualified foreign country, and those classes, 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 (provided also that certain trading requirements are 
satisfied).
    Commentators objected to the 80 percent listing requirement. 
Commentators suggested that in cases where a corporation has an initial 
public offering of a new class of stock, or where a founding family 
retains voting control through a separate class of stock from the 
publicly traded class, the 80 percent listing requirement could make it 
impossible for the corporation to be regularly traded, even where the 
listed class or classes are widely held and actively traded. For 
example, commentators posited that a foreign government's minority 
interest of 25 percent held in a separate unlisted class over the time 
period required for privatization of a national airline would 
disqualify the airline, even if its stock were otherwise widely held 
and actively traded.
    In response to these comments, Sec. 1.883-2(d)(1) of the reproposed 
regulations reduces the 80 percent listing requirement to 50 percent. 
The lower percentage corresponds more closely with recent U.S. treaty 
policy regarding the publicly traded test contained in the Limitation 
on Benefits articles of certain U.S. income tax conventions. This 
modification of the general regularly traded test also mitigates some 
commentators' concerns regarding the closely-held test, as explained 
below in Part II.C.2.
    2. Closely-held classes of stock. Section 1.883-2(d)(3) of the 2000 
proposed regulations disqualifies a class of stock from being relied on 
to satisfy the publicly traded test if, at any time during the taxable 
year, one or more 5-percent shareholders of that class of stock 
(determined without regard to the attribution rules in Sec. 1.883-4) 
owns, in the aggregate, 50 percent or more of the total value of that 
class of stock. The 2000 proposed regulations, however, provide an 
exception to this disqualification. An otherwise qualifying closely-
held class of stock still can meet the regularly traded test if the 
foreign corporation can establish that more than 50 percent of the 
value of the outstanding shares of that class of stock are owned or 
treated as owned by persons who are qualified shareholders for more 
than half the number of days during the taxable year. These rules are 
based upon the closely-held test provided in Sec. 1.884-5(d)(4)(iii) 
with respect to the branch profits tax.
    Several commentators suggested that the legislative history of 
section 883 does not support the adoption of a closely-held test. 
Commentators pointed out a number of statutory distinctions between 
sections 883 and 884 in advocating deletion of the closely-held test in 
its entirety.
    Other commentators contended that the closely-held rules 
effectively eliminate the publicly traded test as a viable alternative 
to the qualified shareholder stock ownership test for closely-held 
corporations that otherwise meet the listing and trading requirements. 
These commentators felt it would be administratively impossible to 
identify and document that qualified shareholders hold more than 50 
percent of the value of the outstanding shares of a class of stock 
because the corporation would not be able to collect sufficient 
information from individuals owning shares through the widely-held 
block of stock or from custodians such as financial institutions 
holding shares on behalf of customers. These commentators therefore 
requested that the closely-held test be deleted, or that the widely-
held block be treated as owned by qualified shareholders, such that the 
foreign corporation only would have to look to the qualified 5-percent 
shareholders of the closely-held block to prove up the difference 
between the percentage owned by the widely-held block and 50 percent.
    The reproposed regulations take into account the principal concerns 
of the commentators. While the reproposed regulations retain the 
closely-held test and do not change substantially the definition of a 
closely-held class of stock, the reproposed regulations broaden the 
exception in Sec. 1.883-2(d)(3)(ii). Under the reproposed regulations, 
a class of stock will not be treated as closely-held if the foreign 
corporation can establish that qualified shareholders, applying the 
attribution rules of Sec. 1.883-4(c), own enough shares of the closely-
held block of stock to preclude non-qualified shareholders in the 
closely-held block of stock from owning 50 percent or more of the total 
value of the class of stock for more than half the number of days 
during the taxable year. A foreign corporation may establish that a 
class of stock meets this exception if it obtains documentation 
described in Sec. 1.883-4(d) from those qualified shareholders owning 
shares in the closely-held block of stock whom the foreign corporation 
has relied upon to meet the exception. This change broadens the 
exception to the closely-held test by allowing a foreign corporation to 
prove that a class of shares is not closely-held using information 
solely from shareholders within the closely-held block of stock.
    In addition, Sec. 1.883-2(d)(3)(iii)(B) of the reproposed 
regulations provides that an investment company will not be treated as 
a 5-percent shareholder for purposes of the closely-held test if no 
person owning an interest in the investment company owns, after 
application of the attribution rules of Sec. 1.883-4(c), 5 percent or 
more of the value of the outstanding shares of the class of stock of 
the foreign corporation seeking qualified foreign corporation status. 
This rule prevents a corporation from having a closely-held class of 
stock simply because an investment company that meets the above 
requirements causes a class of stock of that corporation to be owned 
more than 50 percent in the aggregate by 5-percent shareholders.
    Finally, the reproposed regulations in Sec. 1.883-4(d)(3)(viii) 
adopt the suggestion of one commentator that an otherwise publicly-
traded foreign corporation seeking qualified foreign corporation status 
or a publicly-traded shareholder corporation that is traded on an 
established securities market in the United States may rely on its 
latest SEC Form 13G filing (Statement of Beneficial Ownership by 
Certain Persons) for the taxable year to determine if the class of 
stock being considered has a 5-percent shareholder. The IRS and 
Treasury believe these changes to the 2000 proposed regulations will 
facilitate compliance with the closely-held test.
    3. Publicly-traded classes of stock of a non-publicly traded 
corporation. Regulations under section 884 regarding the branch profits 
tax provide that a publicly traded class of stock is treated as owned 
by individuals who are residents of a qualified foreign country. Such a 
provision might be relevant as well in the context of section 883 if 
one or more classes of the corporation's stock are publicly traded but 
the corporation itself is not considered publicly traded. If these 
other classes were treated as owned by qualified shareholders, the 
foreign corporation might be more likely to satisfy section 883(c), as 
provided in Secs. 1.883-1(c)(2)

[[Page 50517]]

and 1.883-4. Commentators recommended that the reproposed regulations 
adopt the rule of the branch profit regulations.
    The reproposed regulations, however, do not adopt this suggestion. 
The IRS and Treasury believe that the reduction in the listing 
threshold from 80 percent to 50 percent and the change in the exception 
to the closely-held test provide sufficient latitude for foreign 
corporations seeking to comply with the publicly traded test. Moreover, 
as discussed below in Part II.E.1, the reproposed regulations adopt 
commentators' suggestions regarding the treatment of certain 
institutional 5-percent shareholders for purposes of Sec. 1.883-4 which 
should also ease compliance.
    4. Identification of 5-percent qualified shareholders on return. 
Sections 1.883-2(f) and 1.883-4(e) of the 2000 proposed regulations 
require that the foreign corporation identify on its Form 1120F, ``U.S. 
Income Tax Return of a Foreign Corporation,'' its qualified 
shareholders that own, or are treated as owning within the meaning of 
Sec. 1.883-4(c), 5 percent or more of the stock of the foreign 
corporation and upon which the foreign corporation intends to rely to 
satisfy the stock ownership test of Sec. 1.883-1(c)(2).
    Commentators were concerned that the identity of such qualified 
shareholders might be disclosed. Although the name of a 5-percent 
shareholder is return information that is not subject to disclosure 
under section 6110, commentators believed that such information might 
nevertheless become public, for example, in the context of taxpayer 
litigation. They also expressed concern that there could be spontaneous 
exchanges of information with treaty partners that do not have the same 
non-disclosure restrictions as the United States. Some commentators 
suggested that the documentation instead be made available to a third 
party for use by the Commissioner upon request.
    The reproposed regulations do not adopt these suggestions, in the 
interest of sound tax administration. The IRS and Treasury believe that 
there exist sufficient safeguards in our treaties and in the Internal 
Revenue Code to prevent the unintended disclosure of the identity of 
qualified 5-percent shareholders relied upon to satisfy the 
requirements of Secs. 1.883-2(f) and 1.883-4(e).
D. Comments Relating to Sec. 1.883-3--Treatment of Controlled Foreign 
Corporations
    Section 883(c)(2) provides that the stock ownership test of section 
883(c)(1) shall not apply to controlled foreign corporations (CFCs). 
Under the 2000 proposed regulations, a CFC is considered to satisfy the 
CFC exception of section 883(c)(1) if it meets the requirements of 
Sec. 1.883-3. To meet those requirements, a CFC must, among other 
things, pass the income inclusion test of Sec. 1.883-3(b). The income 
inclusion test contained in the 2000 proposed regulations requires that 
more than 50 percent of the subpart F income derived by the CFC from 
the international operation of ships or aircraft be includible in the 
gross income of one or more U.S. citizens, individual residents of the 
United States, or domestic corporations. For example, a CFC owned by a 
domestic partnership, the partners of which are residents of foreign 
countries, would not meet the income inclusion test.
    One commentator argued that the income inclusion test was too 
restrictive because it could deny qualified foreign corporation status 
to CFCs legitimately owned and controlled by U.S. shareholders. For 
example, a foreign corporation owned by U.S. citizens who are family 
members could be a CFC as a result of the constructive ownership rules 
of section 958(b), but fail the income inclusion test because not all 
the family members own directly or indirectly, under section 958(a), 10 
percent or more of the CFC's voting stock, and thus may not be required 
to include in their gross income the subpart F income of the CFC.
    The CFC exception of the 2000 proposed regulation has not been 
changed substantively in these reproposed regulations. The Conference 
report accompanying the legislation that added the CFC exception 
provides with respect to the exception that ``corporations are not 
considered residents of countries that exempt U.S. persons unless 50 
percent or more of the ultimate individual owners are U.S. shareholders 
of controlled foreign corporations''. H.R. Conf. Rep. No. 99-841, 99th 
Cong., 2d Sess. 598 (1986), reprinted in 1986-3 C.B. vol. 4, at 598 
(1986). The intent of the CFC exception therefore is for the general 
ownership requirement 883(c)(1) to apply unless the foreign corporation 
is a CFC and 50 percent or more of the subpart F income of that 
corporation derived from the international operation of ships or 
aircraft is includible by U.S. citizens, individual residents or 
domestic corporations.
    The reproposed regulations do clarify the operation of the income 
inclusion test by specifying with greater precision than the 2000 
proposed regulations that the income inclusion test only applies to 
subpart F income derived from the international operation of ships and 
aircraft.
E. Comments Relating to Sec. 1.883-4--Qualified Shareholder Stock 
Ownership Test
    As noted above, section 883(c)(1) provides that a foreign 
corporation shall not be eligible for the exclusion of income from the 
international operation of ships or aircraft if 50 percent or more of 
the value of its stock is owned by individuals who are not residents of 
a qualified foreign country. Section 1.882-4 of the 2000 proposed 
regulations provides detailed rules regarding this statutory 
requirement.
    In response to comments the IRS received regarding those provisions 
of the 2000 proposed regulations, the reproposed regulations modify the 
rules regarding the permissible categories of qualified shareholders, 
the requirements for establishing qualified shareholder status under an 
income tax convention, the attribution of ownership in the case of 
taxable non-stock corporations, and the preparation of ownership 
statements from foreign governments. As discussed below, however, the 
reproposed regulations generally do not modify the 2000 proposed 
regulations with respect to the treatment of bearer shares or with 
respect to the attribution of ownership of discretionary trusts.
    1. Qualified shareholders. Under the 2000 proposed regulations, a 
foreign corporation may satisfy the stock ownership test of Sec. 1.883-
1(c)(2) if it meets the qualified shareholder stock ownership test of 
Sec. 1.883-4. The qualified shareholder stock ownership test generally 
requires more than 50 percent ownership by qualified shareholders. 
Section 1.883-4(b) of the 2000 proposed regulations provides a list of 
persons who can be qualified shareholders.
    Several commentators requested the inclusion of additional 
categories of qualified shareholders. One commentator suggested that 
foreign airlines covered by a bilateral air services agreement between 
the United States and another country should be deemed to satisfy the 
ownership requirements of Sec. 1.883-4(a) because these agreements 
require substantial ownership and effective control by nationals of the 
other country. In response to this comment, the reproposed regulations 
add shareholders of such airlines to the list of qualified shareholders 
in Sec. 1.883-4(b)(1)(i)(F), subject to certain conditions.
    Other commentators suggested that the list of qualified 
shareholders include

[[Page 50518]]

a mutual fund, money market manager, regulated investment company, open 
and closed-end fund, investment partnership or other type of investment 
vehicle available to the public and subject to regulation by the 
Securities and Exchange Commission. Such entities have great difficulty 
in demonstrating that more than 50 percent of the value of their shares 
is owned, or treated as owned, by qualified shareholders.
    The reproposed regulations do not adopt these suggestions. The IRS 
and Treasury recognize the difficulty in proving ownership of such 
entities, but many owners of such entities may in fact be U.S. 
residents or other non-qualified shareholders. However, Sec. 1.883-
4(d)(3)(viii) of the reproposed regulations does permit a publicly 
traded corporation to rely on its Form 13G ``Statement of Beneficial 
Ownership by Certain Persons'' to identify 5-percent shareholders for 
purposes of the documentation requirements of Sec. 1.883-2(e). Certain 
of these entities may be able to rely upon this section without 
additional compliance burden because they are already required to file 
Form 13G and identify 5-percent shareholders.
    2. Bearer shares. Section 1.883-4(b)(1)(ii) of the 2000 proposed 
regulations provides that a shareholder is a qualified shareholder only 
if the shareholder does not own its interest in the foreign corporation 
through bearer shares, either directly or by applying the attribution 
rules of Sec. 1.883-4(c).
    Several commentators criticized this rule. They contended that the 
restriction on the use of bearer shares raises concerns of fundamental 
fairness and that the IRS should not attempt to regulate the personal 
property rights of nonresident alien individuals. These commentators 
suggested that the rule should be deleted or substantially modified to 
allow the use of bearer shares whose ownership can be substantiated to 
the satisfaction of the Commissioner.
    Due to the difficulty of reliably demonstrating the true ownership 
of such shares, the reproposed regulations do not adopt this 
suggestion, in the interest of sound tax administration.
    3. Certain limitation on benefits article restrictions in income 
tax conventions applied to shareholders. Under Sec. 1.883-4(b)(3)(i) of 
the 2000 proposed regulations, a shareholder resident in a treaty 
country is not a qualified shareholder by virtue of the treaty 
exemption unless the foreign corporation of which it is a shareholder 
would be able to satisfy, if it were organized in the treaty country, 
any additional requirement imposed by the shipping and air transport 
article or the limitation of benefits article of the treaty upon which 
the shareholder relies.
    Commentators objected to this rule because it effectively prevents 
many foreign corporations, especially airlines, from relying on 
ownership resident in a treaty country to obtain a section 883 
exemption. Commentators also argued that the provision would act as a 
significant and inappropriate barrier to joint venture corporations 
with owners or partners resident in treaty countries.
    In response to these comments, the reproposed regulations modify 
the 2000 proposed regulations, so that if a shareholder relies on an 
income tax convention to demonstrate residence in a qualified foreign 
country, the shareholder alone must satisfy the residence requirements 
and limitation on benefits requirements of the convention. The 
reproposed regulations thus eliminate the requirement that the 
corporation seeking qualified foreign corporation status itself must 
satisfy any additional requirements.
    4. Taxable non-stock corporations. The 2000 proposed regulations, 
in Sec. 1.883-4(c), provide for attribution of ownership through 
various entities for purposes of the closely-held test in Sec. 1.883-
2(d)(3)(ii) and the stock ownership test in Sec. 1.883-4(a).
    Several commentators called for additional guidance on attribution 
of ownership in the case of taxable non-stock corporations entitled to 
deduct amounts distributed for charitable purposes.
    The reproposed regulations address this request for guidance in 
Sec. 1.883-4(c)(5). Under this provision, if a taxable non-stock 
corporation is entitled in its country of organization to deduct from 
its taxable income amounts distributed for charitable purposes, the 
corporation may deem a recipient of such charitable distributions to be 
a shareholder owning stock in the same proportion as the amount 
received in the taxable year bears to the total income of the 
corporation in that taxable year. Whether each such recipient is a 
qualified shareholder then may be determined under Sec. 1.883-4(b) or 
under the special rules of Sec. 1.883-4(d)(3)(vii).
    5. Discretionary trusts. The 2000 proposed regulations, in 
Sec. 1.883-4(c)(3)(i), adopt the attribution rules for discretionary 
trusts contained in the branch profits tax regulations under 
Sec. 1.884-5(b)(2)(iii)(A). If a beneficiary's actuarial interest in a 
nongrantor trust cannot be determined, then stock held by the trust 
will not be attributed to any beneficiary unless all beneficiaries with 
an interest in the stock are qualified shareholders.
    One commentator recommended that the regulations instead follow 
Notice 97-19 (1997-1 C.B. 394), which provides guidance for purposes of 
section 877 in determining the net worth of an individual beneficiary 
of a trust. Notice 97-19 generally attributes all interests in a trust 
based on relevant facts and circumstances, in order to assure that an 
individual will not avoid the application of section 877 by alleging he 
or she has no actuarially determinable interest in a trust.
    The reproposed regulations do not adopt this suggestion because of 
the substantially different purpose of the trust attribution rules 
under section 877 as opposed to section 883. The purpose of those rules 
is to attribute trust income to United States persons using 
constructive attribution. The purpose of the trust attribution rules 
under section 883 is to determine whether a foreign corporation is a 
qualified foreign corporation by virtue of the residence of its 
shareholders. This difference in purpose prevents effective use of the 
section 877 methodology.
    6. Substantiation of stock ownership. Section 1.883-4(b)(1)(iii) of 
the 2000 proposed regulations provides that a shareholder is a 
qualified shareholder only if the shareholder provides to the foreign 
corporation the documentation required in Sec. 1.883-4(d), and the 
foreign corporation meets the reporting requirements of Sec. 1.883-4(e) 
with respect to such shareholder.
    Several commentators argued that the requirement that the foreign 
corporation obtain ownership statements was excessive, at least with 
respect to foreign corporations that do not have U.S. branches. Other 
commentators suggested that certain qualified professionals and 
financial institutions be authorized to provide ownership statements on 
behalf of foreign governments. They noted that, as drafted, practical 
compliance with the procedures may be difficult in countries where 
ownership of a shipping company, for example, is held by several state 
enterprises, some of which have begun the privatization process or are 
in transition to privatization and where any state supervision or 
control may be remote from the shipping company.
    The reproposed regulations under Sec. 1.883-4(d) generally retain 
the structure and substance of the 2000 proposed regulations with 
respect to the substantiation of stock ownership. However, Sec. 1.883-
4(d)(4)(ii) of the reproposed regulations, regarding ownership 
statements from foreign

[[Page 50519]]

governments, permits foreign corporations with shareholders that are 
foreign governments to engage accounting or law firms or financial 
institutions to prepare certificates as to ultimate beneficial interest 
with respect to the aggregate government investment in the stock of the 
foreign corporation.
F. Comments Related to Sec. 1.883-5--Effective Date
    Section 1.883-5 of the 2000 proposed regulations provides that the 
regulations will apply to taxable years of the foreign corporation 
ending 30 days or more after the date the regulations are published as 
final regulations in the Federal Register.
    A number of commentators argued that compliance with the 2000 
proposed regulations would require foreign corporations to develop new 
accounting and record-keeping conventions and procedures. Some 
commentators therefore suggested that the effective date be extended to 
taxable years beginning 30 days or more after the date these 
regulations are published as final regulations in the Federal Register. 
Other commentators suggested that the regulations should not be 
effective earlier than six months or one year after the publication 
date of the final regulations.
    In response to these suggestions, the reproposed regulations 
provide that they will apply to taxable years of a foreign corporation 
beginning 30 days or more after the date these regulations are 
published as final regulations in the Federal Register.
    In addition, when the reproposed regulations are published as 
final, taxpayers will be permitted to elect to apply the provisions of 
Secs. 1.883-1 through 1.883-4, as finalized, to any open taxable year 
beginning after 1986. Such election shall apply to the taxable year of 
the election and to all subsequent taxable years. Notwithstanding this 
election, the substantiation and reporting requirements of Sec. 1.883-
1(c)(3) (relating to the substantiation and reporting required to be 
treated as a qualified foreign corporation) and 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 the stock ownership test) will not apply to any years 
beginning before the effective date of the final regulations. However, 
if a foreign corporation complies with the proposed regulations, 
including the substantiation and reporting rules, such compliance will 
be considered substantial evidence that the foreign corporation is a 
qualified foreign corporation.

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. It has also 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations, and because 
this notice of proposed rulemaking does not impose a collection of 
information on U.S. small entities, the regulatory Flexibility Act (5 
U.S.C. chapter 6) does not apply. 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.

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 November 12, 2002, at 10 
a.m., in room 4718, Internal Revenue Building, 1111 Constitution Ave., 
NW., Washington, DC. All visitors must present photo identification to 
enter the building at the Constitution Avenue entrance. Because of 
access restrictions, visitors will not be admitted beyond the immediate 
entrance area more than 30 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 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 
October 22, 2002. 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.

Withdrawal of Proposed Amendments

    Accordingly, under the authority of 26 U.S.C. 7805, the proposed 
amendment to 26 CFR Part 1 that was published in the Federal Register 
on Tuesday, February 8, 2000, (65 FR 6065) is withdrawn.

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 test.
    (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) Pool, partnership, strategic alliance, joint operating 
agreement,

[[Page 50520]]

code-sharing arrangement or other joint venture.
    (3) Activities not considered operation of ships or aircraft.
    (4) Examples.
    (5) Definitions.
    (i) Bareboat charter.
    (ii) Code-sharing arrangement.
    (iii) Dry lease.
    (iv) Entity.
    (v) Fiscally transparent entity under the income tax laws of the 
United States.
    (vi) Full charter.
    (vii) Nonvessel operating common carrier.
    (viii) Space or slot charter.
    (ix) Time charter.
    (x) Voyage charter.
    (xi) Wet lease.
    (f) International operation of ships or aircraft.
    (1) General rule.
    (2) Determining whether income is derived from international 
operation of ships or aircraft.
    (i) International carriage of passengers.
    (A) General rule.
    (B) Round trip travel on ships.
    (ii) International carriage of cargo.
    (iii) Bareboat charter of ships or dry lease of aircraft used in 
international operation of ships or aircraft.
    (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.
    (3) Services.
    (i) Ground services, maintenance, and catering.
    (ii) Other services.
    (4) Activities involved in a pool, partnership, strategic alliance, 
joint operating agreement, code-sharing arrangement or other joint 
venture.
    (h) Equivalent exemption.
    (1) General rule.
    (2) Determining equivalent exemptions for each category of income.
    (3) Special rules with respect to income tax conventions.
    (i) General rule.
    (ii) Participation in certain joint ventures.
    (iii) Independent interpretation of 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 qualified income.


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) Five-percent shareholders.
    (A) Related persons.
    (B) Investment companies.
    (4) Anti-abuse rule.
    (5) Example.
    (e) Substantiation that a foreign corporation is publicly-traded.
    (1) General rule.
    (2) Availability and retention of documents for inspection.
    (f) Reporting requirements.


Sec. 1.883-3  Treatment of controlled foreign corporations.

    (a) General rule.
    (b) Income inclusion test.
    (1) General rule.
    (2) Examples.
    (c) Substantiation of CFC stock ownership.
    (1) General rule.
    (2) Documentation from certain United States shareholders.
    (i) General rule.
    (ii) 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.
    (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 the same country.
    (iii) Examples.
    (3) Trusts and estates.
    (i) Beneficiaries.
    (ii) Grantor trusts.
    (4) Corporations that issue stock.
    (5) Taxable non-stock corporations.
    (6) Mutual insurance companies and similar entities.
    (7) 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) Substantiating 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.
    (v) Special rule for not-for-profit organizations.
    (vi) Special rule for a foreign airline covered by an air services 
agreement.
    (vii) Special rule for taxable non-stock corporations.
    (viii) Special rule for closely-held corporations traded in the 
United States.
    (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.

[[Page 50521]]

    (2) Ownership statements from non-government pension funds.
    (3) Time for making determinations.
    (D) Ownership statements from taxable non-stock corporations.
    (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) Transitional information reporting rule.
    Par. 3. Sec. 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. Qualified income derived by a qualified foreign 
corporation from its international operation of ships or aircraft is 
excluded from gross income and exempt from United States Federal income 
tax. Paragraph (b) of this section defines the term qualified income. 
Paragraph (c) of this section defines the term qualified foreign 
corporation. Paragraph (f) of this section defines the term 
international operation of ships or aircraft.
    (b) Qualified income. Qualified income is income derived 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 defined in 
paragraph (h) of this section, granted by the qualified foreign 
country, as defined in paragraph (d) of this section, in which the 
foreign corporation seeking qualified foreign corporation status is 
organized.
    (c) Qualified foreign corporation--(1) General rule. A qualified 
foreign corporation is a corporation that is organized in a qualified 
foreign country and considered engaged in the international operation 
of ships or aircraft. The term corporation is defined in section 
7701(a)(3) and the regulations thereunder. Paragraph (d) of this 
section defines the term qualified foreign country. Paragraph (e) of 
this section defines the term operation of ships or aircraft, and 
paragraph (f) of this section defines the term international operation 
of ships or aircraft. To be a qualified foreign corporation, the 
corporation must satisfy the stock ownership test of 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 not with respect to another such 
category. See paragraph (h)(2) of this section for a discussion of the 
categories of qualified income.
    (2) Stock ownership test. To be a qualified foreign corporation, a 
foreign corporation must satisfy the publicly-traded test of 
Sec. 1.883-2(a), the CFC stock ownership test of Sec. 1.883-3(a), or 
the qualified shareholder stock ownership test of Sec. 1.883-4(a).
    (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 prescribed by such form and 
its accompanying instructions--
    (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, for 
example, citation of a statute in the country where the corporation is 
organized, a diplomatic note between the United States and such 
country, Rev. Rul. 2001-48 (2001-42 I.R.B. 324, October 15, 2001) as 
amended from time to time (see Sec. 601.601(d)(2) of this chapter), or, 
in the case of a corporation described in paragraph (h)(3)(ii) of this 
section, an income tax convention between the United States and such 
country;
    (E) The category or categories of qualified income for which an 
exemption is being claimed;
    (F) A reasonable estimate of the amount of income in each category 
of qualified income for which the exemption is claimed, to the extent 
such amounts are readily determinable;
    (G) Any other information required under Secs. 1.883-2(f), 1.883-
3(d), or 1.883-4(e), as applicable; and
    (H) Any other relevant information specified by the Form 1120F and 
its accompanying instructions.
    (ii) Further documentation. If the Commissioner requests in writing 
that the foreign corporation document or 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 documentation or substantiation within 60 days following the 
written request. If the foreign corporation does not provide the 
documentation and substantiation 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 documentation or substantiation. 
Whether a failure to obtain the documentation or substantiation in a 
timely manner was due to reasonable cause and not willful neglect 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, as described in 
paragraph (h)(2) of this section, derived by the foreign corporation 
seeking qualified foreign corporation status. A foreign country may be 
a qualified foreign country with respect to one category of qualified 
income but not with respect to another such category.
    (e) Operation of ships or aircraft--(1) General rule. Except as 
provided in paragraph (e)(2) of this section, a foreign corporation is 
considered engaged in the operation of ships or aircraft only during 
the time it is an owner or lessee of one or more entire ships or 
aircraft and uses such ships or aircraft in one or more of the 
following activities--
    (i) Carriage of passengers or cargo for hire;
    (ii) In the case of a ship, the leasing out of the ship under a 
time or voyage charter (full charter), space or slot charter, or 
bareboat charter, as those terms are defined in paragraph (e)(5) of 
this section, provided the ship is used to carry passengers or cargo 
for hire; and
    (iii) In the case of aircraft, the leasing out of the aircraft 
under a wet lease (full charter), space, slot, or block-seat charter, 
or dry lease, as those terms are defined in paragraph (e)(5) of this 
section, provided the aircraft is used to carry passengers or cargo for 
hire.
    (2) Pool, partnership, strategic alliance, joint operating 
agreement, code-sharing arrangement or other joint venture. A foreign 
corporation is considered engaged in the operation of ships or aircraft 
with respect to its participation in a pool, partnership, strategic 
alliance, joint operating agreement, code-sharing arrangement or other 
joint venture that is either--
    (i) An entity, as defined in paragraph (e)(5)(iv) of this section, 
that is a fiscally transparent entity under the income tax

[[Page 50522]]

laws of the United States, as defined in paragraph (e)(5)(v) of this 
section, with respect to the category of income derived from such 
operation, and that would be considered engaged in the operation of 
ships or aircraft under paragraph (e)(1) of this section if it were a 
foreign corporation; or
    (ii) A pool, strategic alliance, joint operating agreement, code-
sharing arrangement or other joint venture that is not an entity, as 
defined in paragraph (e)(5)(iv) of this section, involving one or more 
activities described in paragraphs (e)(1)(i) through (iii) of this 
section, but only if the foreign corporation is otherwise engaged in 
the operation of ships or aircraft under paragraph (e)(1) of this 
section.
    (3) Activities not considered operation of ships or aircraft. 
Activities that do not constitute operation of ships or aircraft 
include, but are not limited to--
    (i) The activities of a nonvessel-operating common carrier, as 
defined in paragraph (e)(5)(vii) of this section;
    (ii) Ship or aircraft management;
    (iii) Obtaining crews for ships or aircraft operated by another 
party;
    (iv) Acting as a ship's agent;
    (v) Ship or aircraft brokering;
    (vi) Freight forwarding;
    (vii) The activities of travel agents and tour operators;
    (viii) Rental by a container leasing company of containers and 
related equipment; and
    (ix) The activities of a concessionaire.
    (4) Examples. The rules of paragraphs (e)(1) through (3) of this 
section are illustrated by the following examples:

    Example 1. Three tiers of charters--(i) Facts. A, B, and C are 
foreign corporations. A purchases a ship. A and B enter into a 
bareboat charter of the ship for a term of 20 years, and B, in turn, 
enters into a time charter of the ship with C for a term of 5 years. 
Under the time charter, B is responsible for the complete operation 
of the ship, including providing the crew and maintenance. C uses 
the ship during the term of the time charter to carry its customers' 
freight between U.S. and foreign ports. C owns no ships. (ii) 
Analysis. Because A is the owner of the entire ship and leases out 
the ship under a bareboat charter to B, and because the sublessor, 
C, uses the ship to carry cargo for hire, A is considered engaged in 
the operation of a ship under paragraph (e)(1) of this section 
during the term of the time charter. B leases in the entire ship 
from A and leases out the ship under a time charter to C, who uses 
the ship to carry cargo for hire. Therefore, B is considered engaged 
in the operation of a ship under paragraph (e)(1) of this section 
during the term of the time charter. C time charters the entire ship 
from B and uses the ship to carry its customers' freight during the 
term of the charter. Therefore, C is also engaged in the operation 
of a ship under paragraph (e)(1) of this section during the term of 
the time charter.
    Example 2. Partnership with contributed shipping assets--(i) 
Facts. X, Y, and Z, each a foreign corporation, enter into a 
partnership, P. P is a fiscally transparent entity under the income 
tax laws of the United States, as defined in paragraph (e)(5)(iv) 
and (v) of this section, with respect to all relevant categories of 
income. Under the terms of the partnership agreement, each partner 
contributes all of the ships in its fleet to P in exchange for 
interests in the partnership and shares in the P profits from the 
international carriage of cargo. The partners share in the overall 
management of P, but each partner, acting in its capacity as 
partner, continues to crew and manage all ships previously in its 
fleet.
    (ii) Analysis. P owns the ships contributed by the partners and 
uses these ships to carry cargo for hire. Therefore, if P were a 
foreign corporation, it would be considered engaged in the operation 
of ships within the meaning of paragraph (e)(1) of this section. 
Accordingly, because P is a fiscally transparent entity under the 
income tax laws of the United States, as defined in paragraph 
(e)(5)(v) of this section, X, Y, and Z are each considered engaged 
in the operation of ships through P, within the meaning of paragraph 
(e)(2)(i) of this section, with respect to their distributive share 
of income from P's international carriage of cargo.
    Example 3. Joint venture with chartered in ships--(i) Facts. 
Foreign corporation A owns a number of foreign subsidiaries involved 
in various aspects of the shipping business, including S1, S2, S3, 
and S4. S4 is a foreign corporation that provides cruises but does 
not own any ships. S1, S2, and S3 are foreign corporations that own 
cruise ships. S1, S2, S3, and S4 form joint venture JV, in which 
they are all interest holders, to conduct cruises. JV is fiscally 
transparent under the income tax laws of the United States, as 
defined in paragraph (e)(5)(v) of this section, with respect to its 
income from the carriage of passengers. Under the terms of the joint 
venture, S1, S2, and S3 each enter into time charter agreements with 
JV, pursuant to which S1, S2, and S3 retain control of the 
navigation and management of the individual ships, and JV will use 
the ships to carry passengers for hire. The overall management of 
the cruises line will be provided by S4.
    (ii) Analysis. S1, S2, and S3 each owns ships and time charters 
those ships to JV, which uses the ships to carry passengers for 
hire. Accordingly, S1, S2, and S3 are each considered engaged in the 
operation of ships under paragraph (e)(1) of this section. JV leases 
in entire ships by means of the time charters, and JV uses those 
ships to carry passengers on cruises. Thus, JV would be engaged in 
the operation of ships within the meaning of paragraph (e)(1) of 
this section if it were a foreign corporation. Therefore, although 
S4 does not directly own or lease in a ship, S4 also is engaged in 
the operation of ships, within the meaning of paragraph (e)(2)(i) of 
this section, with respect to its participation in JV.

    (5) Definitions--(i) Bareboat charter. A bareboat charter is a 
contract for the use of a ship or aircraft whereby the lessee is in 
complete possession, control, and command of the ship or aircraft. For 
example, in a bareboat charter, the 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 
lessor of the ship bears none of the expense or responsibility of 
operation of the ship or aircraft.
    (ii) Code-sharing arrangement. A code-sharing arrangement is an 
arrangement in which one air carrier puts its identification code on 
the flight of another carrier. This arrangement allows the first 
carrier to hold itself out as providing service in markets where it 
does not otherwise operate or where it operates infrequently. Code-
sharing arrangements can range from a very limited agreement between 
two carriers involving only one market to agreements involving multiple 
markets and alliances between or among international carriers which 
also include joint marketing, baggage handling, one-stop check-in 
service, sharing of frequent flyer awards, and other services. For 
rules involving the sale of code-sharing tickets, see paragraph 
(g)(1)(vi) of this section.
    (iii) Dry lease. A dry lease is the bareboat charter of an 
aircraft.
    (iv) Entity. For purposes of this paragraph (e), an entity is any 
person that is treated by the United States as other than an individual 
for U.S. Federal income tax purposes. The term includes disregarded 
entities.
    (v) Fiscally transparent entity under the income tax laws of the 
United States. For purposes of this paragraph (e), an entity is 
fiscally transparent under the income tax laws of the United States 
with respect to a category of income if the entity would be considered 
fiscally transparent under the income tax laws of the United States for 
purposes of Sec. 1.894-1 with respect to an item of income within that 
category of income.
    (vi) 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 but 
during which the full crew and management are provided by the lessor.
    (vii) Nonvessel operating common carrier. A nonvessel operating 
common carrier is an entity that does not exercise control over any 
part of a vessel, but holds itself out to the public as providing 
transportation for hire, issues bills of lading, assumes responsibility 
or is liable by law as a common carrier for safe transportation of 
shipments, and

[[Page 50523]]

arranges in its own name with other common carriers, including those 
engaged in the operation of ships, for the performance of such 
transportation.
    (viii) 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 sort of charter may be 
referred to as the sale of block seats.
    (ix) 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 lessor 
of the ship or aircraft retains control of the navigation and 
management of the ship or aircraft (i.e., the 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).
    (x) 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.
    (xi) Wet lease. A wet lease is the time or voyage charter of an 
aircraft.
    (f) International operation of ships or aircraft--(1) General rule. 
The term international operation of ships or aircraft means the 
operation of ships or aircraft, as defined in paragraph (e) of this 
section, with respect to the carriage of passengers or cargo on voyages 
or flights that begin or end in the United States, as determined under 
paragraph (f)(2) of this section. The term does not include the 
carriage of passengers or cargo on 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, 
unless the passenger disembarks or the cargo is unloaded outside the 
United States. Operation of ships or aircraft beyond the territorial 
limits of the United States does not constitute in itself international 
operation of ships or aircraft.
    (2) Determining whether income is derived from international 
operation of ships or aircraft. Whether income is derived from 
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 on an 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 for a particular period is derived from international 
operation of ships or aircraft is determined by reference to how the 
ship or aircraft is used by the lowest-tier lessee in the chain of 
lessees (as provided in paragraph (f)(2)(iii) of this section).
    (i) International carriage of passengers--(A) General rule. Except 
in the case of a round trip described in paragraph (f)(2)(i)(B) of this 
section, income derived from the carriage of a passenger will be income 
from international operation of ships or aircraft if the passenger is 
carried between a beginning point in the United States and an ending 
point outside the United States, or 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 ships or aircraft 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, provided the passenger does not change ships or 
aircraft 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 ships or aircraft at that intermediate point.
    (B) Round trip travel on ships. In the case of income from the 
carriage of a passenger on a ship that begins its voyage in the United 
States, calls on one or more foreign intermediate ports, and returns to 
the same or another U.S. port, such income from carriage of a passenger 
on the entire voyage will be treated as income derived from 
international operation of ships or aircraft under paragraph 
(f)(2)(i)(A) of this section. This result obtains even if such carriage 
includes one or more intermediate stops at a U.S. port or ports and 
even if the passenger does not disembark at the foreign intermediate 
point.
    (ii) International carriage of cargo. Income from the carriage of 
cargo will be income derived from international operation of ships or 
aircraft if the cargo is carried between a beginning point in the 
United States and an ending point outside the United States, 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 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 the cargo is transported to its ultimate destination on the 
same ship or aircraft. If the cargo is transferred to another ship or 
aircraft at the U.S. intermediate point, 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 does not change these results, 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. A 
lighter vessel that carries cargo to, or picks up cargo from, a vessel 
located beyond the territorial limits of the United States and 
correspondingly loads or unloads that cargo at a U.S. port, carries 
cargo between a point in the United States and a point outside the 
United States. However, a lighter vessel that carries cargo to, or 
picks up cargo from, a vessel located within the territorial limits of 
the United States, and correspondingly loads or unloads that cargo at a 
U.S. port, is not engaged in international operation of ships or 
aircraft. Income from the carriage of military cargo on a voyage that 
begins in the United States, stops at a foreign intermediate port or a 
military prepositioning location, and returns to the same or another 
U.S. port without unloading its cargo at the foreign intermediate 
point, will nevertheless be treated as derived from international 
operation of ships or aircraft.
    (iii) Bareboat charter of ships or dry lease of aircraft used in 
international operation of ships or aircraft. If a qualified foreign 
corporation bareboat charters a ship or dry leases an aircraft to a 
lessee, and the lowest tier lessee 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, then the amount of charter income attributable to the period 
the ship or aircraft is used by the lowest

[[Page 50524]]

tier lessee is income from international operation of ships or 
aircraft. The foreign corporation must adopt a reasonable method 
consistently applied for determining the amount of the charter income 
that is attributable to such international operation of ships or 
aircraft. Two reasonable methods for determining the amount of charter 
income attributable to international operation of ships or aircraft are 
the following:
    (A) Ratio based on use. Multiply the amount of charter income by a 
fraction, 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 during the smaller of the taxable year or the particular 
charter period, 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), are not included in the numerator of the fraction. 
For example, the numerator of the fraction does not include days during 
which the ship or aircraft is out of service while being repaired or 
maintained or days during which the ship is not being used to carry 
cargo or persons for hire.
    (B) Ratio based on gross income. Multiply the amount of charter 
income by a fraction, the numerator of which is the U.S. source gross 
transportation income, as that term is defined in section 887(b), 
earned from the operation of the vessel or aircraft by the lowest tier 
lessee during the smaller of the taxable year or the particular charter 
period, and the denominator of which is the total gross income of the 
lessee from the operation of the ship or aircraft during the smaller of 
the taxable year or the particular charter period. An allocation based 
on the net income of such lessee, however, will not be considered 
reasonable for purposes of this paragraph (f)(2)(iii)(B).
    (g) Activities incidental to the international operation of ships 
or aircraft--(1) General rule. Certain activities of a foreign 
corporation engaged in the international operation of ships or aircraft 
are so closely related to the international operation of ships or 
aircraft that they are considered incidental to such operation, and 
income derived by the foreign corporation from its performance of these 
incidental activities is deemed to be income derived from the 
international operation of ships or aircraft. Examples of such 
activities include--
    (i) Temporary investment of working capital funds to be used in the 
international operation of ships or aircraft by the foreign 
corporation;
    (ii) Sale of tickets by the foreign corporation engaged in the 
international operation of ships for the international carriage of 
passengers by ship on behalf of another corporation engaged in the 
international operation of ships;
    (iii) Sale of tickets by the foreign corporation engaged in the 
international operation of aircraft for the international carriage of 
passengers by air on behalf of another corporation engaged in the 
international operation of aircraft;
    (iv) Contracting with concessionaires for performance of services 
onboard during the international operation of the foreign corporation's 
ships or aircraft;
    (v) Providing through a related or unrelated corporation (either by 
subcontracting or otherwise) for the carriage of cargo preceding or 
following the international carriage of cargo under a through bill of 
lading, airway bill or similar document;
    (vi) To the extent not described in paragraph (g)(1)(iii) of this 
section, the sale or issuance by the foreign corporation engaged in the 
international operation of aircraft of interline or code-sharing 
tickets for the carriage of persons by air between a U.S. gateway and 
another U.S. city preceding or following international carriage of 
passengers, provided that all such flight segments are provided 
pursuant to the passenger's original invoice, ticket or itinerary;
    (vii) Arranging for port city hotel accommodations within the 
United States for a passenger for the one night before or after the 
international carriage of that passenger by the foreign corporation 
engaged in the international operation of ships;
    (viii) Bareboat charter of ships or dry lease of aircraft normally 
used by the foreign corporation in international operation of ships or 
aircraft but currently not needed, if the ship or aircraft is used by 
the lessee for international carriage of cargo or passengers;
    (ix) Arranging by means of a space or slot charter for the carriage 
of cargo listed on a bill of lading or airway bill or similar document 
issued by the foreign corporation on the ship or aircraft of another 
corporation engaged in the international operation of ships or 
aircraft; and
    (x) Rental of containers by the foreign corporation for use in the 
United States for a period not exceeding five days beyond the original 
delivery date by the foreign corporation to the consignee as stated on 
the bill of lading, provided that--
    (A) The consignee takes delivery in the United States;
    (B) The container is owned by or leased to the foreign corporation; 
and
    (C) The container is identified (for example, by a 4 digit alpha 
code and serial number) on a bill of lading or attached manifest or 
similar document issued by the foreign corporation that provides for 
the transportation of cargo between points not solely within the United 
States.
    (2) Activities not considered incidental to the international 
operation of ships or aircraft. Examples of activities that are not 
considered incidental to the international operation of ships or 
aircraft include--
    (i) The sale of or arranging for train travel, bus transfers, or 
land tour packages;
    (ii) Arranging for port city hotel accommodations within the United 
States other than as provided in paragraph (g)(1)(vii) of this section;
    (iii) The sale of airline tickets or cruise tickets other than as 
provided in paragraph (g)(1)(ii), (iii), or (vi) of this section;
    (iv) The sale or rental of real property;
    (v) Treasury activities involving the investment of excess funds or 
funds awaiting repatriation, even if derived from the international 
operation of ships or aircraft;
    (vi) The carriage of passengers or cargo on ships or aircraft on 
domestic legs of transportation not treated as either international 
operation of ships or aircraft under paragraph (f) of this section or 
as an activity that is incidental to such operation under paragraph 
(g)(1) of this section;
    (vii) The carriage of cargo by bus, truck or rail by a foreign 
corporation between a U.S. inland point and a U.S. gateway port or 
airport preceding or following the international carriage of such cargo 
by the foreign corporation; and
    (viii) Rental of containers attributable to the use of a container 
within the United States other than as provided in paragraph (g)(1)(x) 
of this section.
    (3) Services--(i) Ground services, maintenance and catering. 
[Reserved]
    (ii) Other services. [Reserved]
    (4) Activities involved in a pool, partnership, strategic alliance, 
joint operating agreement, code-sharing arrangement or other joint 
venture. Notwithstanding paragraph (g)(1) of this section, an activity 
is considered incidental to the international operation of ships or 
aircraft by a foreign

[[Page 50525]]

corporation, and income derived by the foreign corporation with respect 
to such activity is deemed to be income derived from the international 
operation of ships or aircraft, if the activity is performed by or 
pursuant to a pool, partnership, strategic alliance, joint operating 
agreement, code-sharing arrangement or other joint venture in which 
such foreign corporation participates, provided that--
    (i) Such activity is incidental to the international operation of 
ships or aircraft by the pool, partnership, strategic alliance, joint 
operating agreement, code-sharing arrangement or other joint venture, 
and provided that it is described in paragraph (e)(2)(i) of this 
section; or
    (ii) Such activity would be incidental to the international 
operation of ships or aircraft by the foreign corporation, if it 
performed such activity itself, and provided the foreign corporation is 
engaged in the operation of ships or aircraft under paragraph (e)(1) of 
this section.
    (h) Equivalent exemption--(1) General rule. A foreign country 
grants an equivalent exemption when it exempts from taxation income 
from the 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. 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 foreign corporations organized in 
countries that provide exemptions only through an income tax 
convention, see paragraph (h)(3) of this section. 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 for purposes of section 883.
    (2) Determining equivalent exemptions for each category of income. 
Whether a foreign country grants an equivalent exemption must be 
determined separately with respect to income from the international 
operation of ships and income from the international operation of 
aircraft for each category of income listed in (i) through (viii) of 
this section paragraph (h)(2). If an exemption is unavailable in the 
foreign country for a particular category of income, the foreign 
country is not considered to grant an equivalent exemption with respect 
to that category of income. Income in that category is not considered 
to be the subject of an equivalent exemption and thus is not eligible 
for exemption from income tax in the United States, even though the 
foreign country may grant an equivalent exemption for other categories 
of income. The following categories of income derived from the 
international operation of ships or aircraft may be exempt from United 
States income tax if an equivalent exemption is available--
    (i) Income from the carriage of passengers and cargo;
    (ii) Time or voyage (full) charter income of a ship or wet lease 
income of an aircraft;
    (iii) Bareboat charter income of a ship or dry charter income of an 
aircraft;
    (iv) Incidental bareboat charter income or incidental dry lease 
income;
    (v) Incidental container-related income;
    (vi) Income incidental to the international operation of ships or 
aircraft other than incidental income described in paragraph (h)(2)(iv) 
and (v) of this section;
    (vii) Capital gains derived by a qualified foreign corporation 
engaged in the international operation of ships or aircraft from the 
sale, exchange or other disposition of a ship, aircraft, container or 
related equipment or other moveable property used by that qualified 
foreign corporation in the international operation of ships or 
aircraft; and
    (viii) Income from participation in a pool, partnership, strategic 
alliance, joint operating agreement, code-sharing arrangement, 
international operating agency, or other joint venture described in 
paragraph (e)(2) of this section.
    (3) Special rules with respect to income tax conventions--(i) 
General rule. Except as provided in paragraph (h)(3)(ii) of this 
section, if a corporation is organized in a foreign country that 
provides an exemption only through an income tax convention with the 
United States, the foreign corporation is not organized in a foreign 
country that grants an equivalent exemption. Rather, the foreign 
corporation must satisfy the terms of that convention to receive a 
benefit under the convention, and the foreign corporation may not claim 
an exemption under section 883. If the corporation is organized in a 
foreign country that offers an exemption under an income tax convention 
and also by some other means, such as by diplomatic note or domestic 
statutory law, the foreign corporation may choose annually whether to 
claim an exemption under section 883 based upon the equivalent 
exemption provided by such other means, under the income tax 
convention, or under both the income tax convention and section 883. 
Any such choice will apply with respect to all qualified income of the 
corporation from the international operation of ships or aircraft and 
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, the foreign corporation must satisfy all of the 
requirements of this section to qualify for an exemption from U.S. 
income tax. See Sec. 1.883-4(b)(3) for rules regarding satisfying the 
ownership test of paragraph (c)(2) of this section using shareholders 
resident in a foreign country that offers an exemption under an income 
tax convention.
    (ii) Participation in certain joint ventures. Notwithstanding 
paragraph (h)(3)(i) of this section, if a corporation is organized in a 
foreign country that provides an exemption only through an income tax 
convention with the United States, the foreign corporation will be 
treated as organized in a foreign country that grants an equivalent 
exemption under section 883 with respect to a category of income 
derived through participation in a pool, partnership, strategic 
alliance, joint operating agreement, code-sharing arrangement or other 
joint venture described in paragraph (e)(2) of this section, but only 
where treaty benefits would be available under the treaty but for the 
treatment of the pool, partnership, strategic alliance, joint operating 
agreement, code-sharing arrangement or other joint venture as not 
fiscally transparent with respect to that category of income under the 
income tax laws of the foreign country in which the foreign corporate 
interest holder is organized for purposes of Sec. 1.894-
1(d)(3)(iii)(A).
    (iii) Independent interpretation of income tax conventions. Nothing 
in this section and Secs. 1.833-2 through 1.883-5 affects the rights or 
obligations under any income tax convention. The definitions provided 
in this section and Secs. 1.833-2 through 1.883-5 shall neither give 
meaning to similar terms used in income tax conventions nor provide 
guidance regarding the scope of any exemption provided by such 
conventions.

[[Page 50526]]

    (4) Exemptions not qualifying as equivalent exemptions--(i) General 
rule. Certain types of exemptions provided to corporations organized in 
the United States by foreign countries do not satisfy the equivalent 
exemption requirements of this section. The following paragraphs 
provide descriptions of some of the types of exemptions that do not 
qualify as equivalent exemptions for purposes 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 the income of corporations 
organized in the United States derived from the international operation 
of ships or aircraft or a temporary reduction to a zero rate of tax, 
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. For 
example, 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 types of 
cargo. For example, if a foreign country were generally to impose tax 
on income from the international carriage of cargo but were 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, including agricultural products.
    (v) Territorial tax systems. A foreign country with a territorial 
tax system will be treated as granting an equivalent exemption if it 
treats all income derived from the international operation of ships or 
aircraft derived by a U.S. corporation as entirely foreign source and 
therefore not subject to tax, including income 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 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 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. For purposes of this section, a 
possession of the United States will be treated as a foreign country. 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 applies a mirror system of taxation. If a possession does not 
apply a mirror system of taxation, the possession may nevertheless be a 
qualified foreign country if, for example, it provides for an 
equivalent exemption through its internal law. A possession applies the 
mirror system of taxation if the United States Internal Revenue Code of 
1986, as amended, applies in the possession with the name of the 
possession used instead of ``United States'' where appropriate.
    (j) Expenses related to qualified income. If a qualified foreign 
corporation derives qualified income from the international operation 
of ships or aircraft as well as income that is not qualified income, 
and the non-qualified income is effectively connected with the conduct 
of a trade or business within the United States, the foreign 
corporation may not deduct from such non-qualified income any amount 
otherwise allowable as a deduction from qualified income, if that 
qualified income is excluded under this section. 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 satisfies 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, as defined 
in paragraphs (c) and (d) of this section, respectively, on one or more 
established securities markets, as defined in paragraph (b) of this 
section, in either 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 qualified 
foreign 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

[[Page 50527]]

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 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 in a country 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 
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 more than 50 percent 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 more than 50 
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 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 
requirements--(i) General rule. Except as provided in paragraph 
(d)(3)(ii) of this section, a class of stock of a foreign corporation 
that otherwise meets the requirements of paragraph (d)(1) or (2) of 
this section shall not be treated as meeting such requirements for a 
taxable year if, at any time during the taxable year, one or more 
persons who own at least 5 percent of the vote and value of the 
outstanding shares of the class of stock, as determined under paragraph 
(d)(3)(iii) of this section (each a 5-
percent shareholder), own, in the aggregate, 50 percent or more of the 
vote and value of the outstanding shares of the class of stock. If one 
or more 5-
percent shareholders own, in the aggregate, 50 percent or more of the 
vote and value of the outstanding shares of the class of stock, such 
shares held by the 5-percent shareholders will constitute a closely-
held block of stock.
    (ii) Exception. Paragraph (d)(3)(i) of this section shall not apply 
to a class of stock if the foreign corporation can establish that 
qualified shareholders, as defined in Sec. 1.883-4(b), applying the 
attribution rules of Sec. 1.883-4(c), own sufficient shares in the 
closely-held block of stock to preclude non-qualified shareholders in 
the closely-held block of stock from owning 50 percent or more of the 
total value of the class of stock of which the closely-held block is a 
part for more than half the number of days during the taxable year. Any 
shares that are owned, after application of the attribution rules in 
Sec. 1.883-4(c), by a qualified shareholder shall not also be treated 
as owned by a non-qualified shareholder in the chain of ownership for 
purposes of the preceding sentence. A foreign corporation must obtain 
the documentation described in Sec. 1.883-4(d) from the qualified 
shareholders relied upon to satisfy this exception. However, no person 
shall be treated for purposes of this paragraph (d)(3) as a qualified 
shareholder if such person holds an interest in the class of stock 
directly or indirectly through bearer shares.
    (iii) Five-percent shareholders--(A) 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 
through the application of section 1563(e)(1), and stock owned through 
the application of section 267(c). 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 through the application of 
section 267(e)(3).
    (B) Investment companies. For purposes of this paragraph (d)(3), an 
investment company registered under the Investment Company Act of 1940, 
as amended, shall not be treated as a 5-percent shareholder if no 
person owns both 5 percent or more of the value of the outstanding 
interests in the investment company (applying the attribution rules of 
Sec. 1.883-4(c)) and 5-
percent or more of the value of the shares of the class of stock of the 
foreign corporation seeking qualified foreign corporation status 
(applying the attribution rules of Sec. 1.883-4(c)).
    (4) Anti-abuse rule. Trades between or among 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 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 that paragraph. For example, trades between 
two persons

[[Page 50528]]

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 test in paragraph (d)(3) of this 
section is illustrated by the following example:

    Example. Closely-held exception--(i) Facts. X is a foreign 
corporation organized in a qualified foreign country and engaged in 
the international operation of ships. X has one class of stock, 
which is primarily traded on an established securities market in the 
qualified foreign country. The stock of X meets the regularly traded 
requirements of paragraph (d)(1)(ii) of this section without regard 
to paragraph (d)(3)(i) of this section. A, B, C and D are four 
members of the corporation's founding family who each own, during 
the entire taxable year, 25 percent of the stock of Hold Co, a 
company that issues registered shares. Hold Co, in turn, owns 60 
percent of the stock of X during the entire taxable year. The 
remaining 40 percent of the stock of X is not owned by any 5-percent 
shareholder, as determined under paragraph (d)(3)(iii) of this 
section. A, B, and C are not residents of a qualified foreign 
country, but D is a resident of a qualified foreign country. (ii) 
Analysis. Because Hold Co owns 60 percent of the stock of X for more 
than half the number of days during the taxable year, Hold Co is a 
5-percent shareholder that owns 50 percent or more of the value of 
the stock of X. Thus, the shares owned by Hold Co constitute a 
closely-held block of stock. Under paragraph (d)(3)(i) of this 
section, the stock of X will not be regularly traded within the 
meaning of paragraph (d)(1) of this section unless X can establish, 
under paragraph (d)(3)(ii) of this section, that qualified 
shareholders within the closely-held block of stock own sufficient 
shares in the closely-held block of stock to preclude non-qualified 
shareholders in the closely-held block of stock from owning 50 
percent or more of the value of the outstanding shares in the class 
of stock for more than half the number of days during the taxable 
year. A, B, and C are not qualified shareholders within the meaning 
of Sec. 1.883-4(b) because they are not residents of a qualified 
foreign country, but D is a resident of a qualified foreign country 
and therefore is a qualified shareholder. D owns 15 percent of the 
outstanding shares of X through Hold Co (25 percent  x  60 percent = 
15 percent) while A, B, and C in the aggregate own 45 percent of the 
outstanding shares of X through Hold Co. D, therefore, owns 
sufficient shares in the closely-held block of stock to preclude the 
non-qualified shareholders in the closely-held block of stock, A, B 
and C, from owning 50 percent or more of the value of the class of 
stock (60 percent - 15 percent = 45 percent) of which the closely-
held block is a part. Provided that X obtains from D the 
documentation described in Sec. 1.883-4(d), X's sole class of stock 
meets the exception in paragraph (d)(3)(ii) of this section and will 
not be disqualified from the regularly traded test by virtue of 
paragraph (d)(3)(i) of this section.

    (e) Substantiation that a foreign corporation is publicly traded--
(1) General rule. A foreign corporation that relies on the publicly 
traded test of this section to meet the stock ownership test of 
Sec. 1.883-1(c)(2) must substantiate that the stock of the foreign 
corporation is primarily and regularly traded on one or more 
established securities markets, as that term is defined in paragraph 
(b) of this section. 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 test, but only to the extent 
such statement would be required if the foreign corporation were 
relying on the qualified shareholder stock ownership 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 supporting its entitlement 
to an exemption under this section.
    (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 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 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 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;
    (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 described in paragraph (d)(3)(iii) 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--
    (i) The highest total percentage of the value of the class of stock 
that is owned by 5-percent shareholders, as described in paragraph 
(d)(3)(iii) of this section, at any time during the taxable year;
    (ii) For each qualified shareholder who owns or is treated as 
owning stock in the closely-held block upon whom the corporation 
intends to rely to satisfy the exception to the closely-held test of 
paragraph (d)(3)(ii) of this section--
    (A) The name of each such shareholder;
    (B) The percentage of the total value of the class of 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 corporation during which 
the stock was closely-held without regard to the exception in paragraph 
(d)(3)(ii) of this section; and
    (5) Any other relevant information specified by Form 1120F and its 
accompanying instructions.


Sec. 1.883-3  Treatment of controlled foreign corporations.

    (a) General rule. A foreign corporation satisfies the stock 
ownership test of Sec. 1.883-1(c)(2) if it is a controlled foreign 
corporation (CFC), as defined in section 957(a), and satisfies the 
income inclusion test in paragraph (b) of this section and the 
substantiation and reporting requirements of paragraphs (c) and (d) of 
this section, respectively. A CFC that fails the income inclusion test 
of paragraph (b) of this section will not be a qualified foreign 
corporation unless it meets either the publicly traded test of 
Sec. 1.883-2(a) or the qualified shareholder stock ownership test of 
Sec. 1.883-4(a).
    (b) Income inclusion test--(1) General rule. A CFC shall not be 
considered to satisfy the requirements of paragraph (a) of this section 
unless more than 50 percent of the CFC's adjusted net foreign base 
company income (as defined in Sec. 1.954-1(d) and as increased or 
decreased by section 952(c)) derived from the international operation 
of ships

[[Page 50529]]

or aircraft is includible in the gross income of one or more United 
States citizens, individual residents of the United States or domestic 
corporations, pursuant to section 951(a)(1)(A) or another provision of 
the Internal Revenue Code, for the taxable years of such persons in 
which the taxable year of the CFC ends.
    (2) Examples. The income inclusion test of paragraph (b)(1) of this 
section is illustrated in the following examples:

    Example 1. Ship Co is a CFC organized in a qualified foreign 
country. All of ship Co's income is foreign base company shipping 
income that is derived from the international operation of ships. 
All of its shares are owned by a domestic partnership that is a 
United States shareholder for purposes of section 951(b). All of the 
partners in the domestic partnership are citizens and residents of 
foreign countries. Ship Co fails the income inclusion test of 
paragraph (b)(1) of this section because no amount of Ship Co's 
subpart F income that is adjusted net foreign base company income 
derived from the international operation of ships is includible 
under any provision of the Internal Revenue Code in the gross income 
of one or more United States citizens, individual residents of the 
United States or domestic corporations. Therefore, Ship Co must 
satisfy the qualified shareholder stock ownership test of 
Sec. 1.883-4(a), in order to satisfy the stock ownership test of 
Sec. 1.883-1(c)(2) and to be considered a qualified foreign 
corporation.
    Example 2. Ship Co is a CFC organized in a qualified foreign 
country. All of ship Co's income is foreign base company shipping 
income that is derived from the international operation of ships. 
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 United States 
citizen is a partner owning a 10 percent income 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 55 percent (50 percent + 
(10 percent x 50 percent)) of the subpart F income that is adjusted 
net foreign base company income derived from the international 
operation of ships would be includible in the gross income of U.S. 
citizens, 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, it will meet 
the stock ownership test of Sec. 1.883-1(c)(2).

    (c) Substantiation of CFC stock ownership--(1) General rule. A 
foreign corporation that relies on this section to satisfy the stock 
ownership test of Sec. 1.883-1(c)(2) must substantiate all the facts 
necessary to satisfy the Commissioner that it qualifies under the 
income inclusion test of paragraph (b)(1) of this section. For purposes 
of the income inclusion test, if the CFC has one or more United States 
shareholders, as defined in section 951(b), that are domestic 
partnerships, estates, or trusts, the pro rata share of the subpart F 
income includible in the gross income of such shareholders will only be 
treated as includible in the income of any partner, beneficiary or 
other interest owner of such United States shareholder that is a United 
States citizen, resident of the United States or a domestic corporation 
if the CFC obtains the documentation described in paragraph (c)(2) of 
this section.
    (2) Documentation from certain United States shareholders--(i) 
General rule. A CFC only meets the documentation requirements of 
paragraph (c)(1) of this section if the CFC obtains the following 
documentation with respect to each United States shareholder, as 
defined in section 951(b), that is a partnership, estate or trust, for 
the taxable year of the shareholder 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,'' filed with the 
controlling United States shareholder's return;
    (B) A written statement, signed under penalties of perjury by a 
person authorized to sign the U.S. Federal tax return of each such 
United States shareholder, providing the following information with 
respect to each United States citizen, individual resident of the 
United States or domestic corporation that is a partner, beneficiary or 
other interest owner of each such United States 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 from the CFC's corporate records (that is a 
specific street address and 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 the interest 
owner;
    (2) The interest owner's proportionate interest in the United 
States 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 pursuant to the 
attribution rules in Sec. 1.883-4(c)(2)(i); and
    (C) Any other information as specified in guidance published by the 
Internal Revenue Service (see Sec. 601.601(d)(2) of this chapter).
    (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 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 from the CFC's corporate records (that is a 
specific street address and 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 United 
States shareholder, as defined in section 951(b), of the CFC;
    (2) The percentage of the vote and value of the shares of the CFC 
that is owned by each United States shareholder, as defined in section 
951(b);
    (3) If one or more of the United States 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 (as determined under Sec. 1.883-
4(c)(2)(i)) by each interest owner of each such United States 
shareholder that is a United States citizen, individual resident of the 
United States or a domestic corporation; and
    (4) Any other relevant information specified by Form 1120F and its 
accompanying instructions.


Sec. 1.883-4  Qualified shareholder stock ownership test.

    (a) General rule. A foreign corporation satisfies the stock 
ownership test of Sec. 1.883-1(c)(2) if more than 50 percent of the 
value of its outstanding shares 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, as defined

[[Page 50530]]

in paragraph (b) of this section. A shareholder may be a qualified 
shareholder with respect to one category of income while not being a 
qualified shareholder with respect to another. A foreign corporation 
will not be considered to satisfy the stock ownership test of A1.883-
1(c)(2) pursuant to this section unless the foreign corporation meets 
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) With respect to the category of income for which the foreign 
corporation is seeking an exemption, is--
    (A) An individual not described in paragraph (b)(1)(i)(E) or (F) of 
this section, who is a resident, as described in paragraph (b)(2) of 
this section, of a qualified foreign country, as defined in Sec. 1.883-
1(d);
    (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 test of Sec. 1.883-2(a);
    (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;
    (E) An individual beneficiary of a pension fund (as defined in 
paragraph (b)(5)(iv) of this section) that is administered in or by a 
qualified foreign country, who is treated as a resident under paragraph 
(d)(3)(iii) of this section, of a qualified foreign country; or
    (F) A shareholder of foreign corporation that is an airline covered 
by a bilateral Air Services Agreement in force between the United 
States and the qualified foreign country in which the airline is 
organized, provided the United States has not waived the ownership 
requirement in the Air Services Agreement, or that the ownership 
requirement has not otherwise been made ineffective;
    (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; and
    (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.
    (2) Residence of individual shareholders--(i) General rule. Except 
for an individual described in paragraph (b)(1)(i)(E) or (F) of this 
section, 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 (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 has a tax home, within the meaning of paragraph 
(b)(2)(ii) of this section, in 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. A foreign estate or trust, as defined in section 
7701(a)(31), does not have a tax home for purposes of this section. See 
paragraph (c)(3) of this section for alternative rules in the case of 
trusts or estates.
    (3) Certain income tax convention restrictions applied to 
shareholders. For purposes of paragraph (b)(1) of this section, a 
shareholder described in paragraph (b)(1) of this section may be 
considered a resident of, or organized in, a qualified foreign country 
if that foreign country provides an exemption by means of an income tax 
convention with the United States, but only if the shareholder 
demonstrates that it is treated as a resident of that country under the 
convention and qualifies for benefits under any Limitation on Benefits 
article, and that the convention provides an exemption for the relevant 
category of income. If 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, the shareholder 
is not required to demonstrate that the corporation seeking qualified 
foreign corporation status could satisfy any such additional 
requirement.
    (4) Not-for-profit organizations. The term not-for-profit 
organization means an organization that 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)(A) 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)(A) 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 paragraphs (b)(5)(ii) and 
(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

[[Page 50531]]

    (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)(7) 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 paragraph (a) of this section 
and the exception to the closely-held test in Sec. 1.883-2(d)(3)(ii), 
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 (7) 
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 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). No attribution will apply to an 
interest held directly or indirectly through bearer shares.
    (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 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, only 40 
percent of the Z stock is treated as owned by qualified 
shareholders.
    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 beneficiary 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).

[[Page 50532]]

    (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) Taxable non-stock corporations. A taxable non-stock corporation 
that is entitled in its country of organization to deduct from its 
taxable income amounts distributed for charitable purposes may deem a 
recipient of such charitable distributions to be a shareholder of such 
taxable non-stock corporation in the same proportion as the amount that 
such beneficiary receives in the taxable year bears to the total income 
of such taxable non-stock corporation in the taxable year. Whether each 
such recipient is a qualified shareholder may then be determined under 
paragraph (b) of this section or under the special rules of paragraph 
(d)(3)(vii) of this section.
    (6) 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.
    (7) 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 stock ownership 
test 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 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 a change of circumstance occurs that makes any information on 
the ownership statement incorrect.
    (3) Special rules--(i) Substantiating 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 substantiate the residence 
of certain shareholders, for purposes of paragraph (b)(2)(i)(B) of this 
section, under one of the following special rules in paragraphs 
(d)(3)(ii) through (viii) of this section, 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 shareholders, that is not a publicly-traded 
corporation, as described in Sec. 1.883-2 (a widely-held corporation), 
is not required to obtain an ownership statement from an individual 
shareholder owning less than one

[[Page 50533]]

percent of the widely-held corporation at all times during the taxable 
year if the requirements of paragraphs (d)(3)(ii)(A) and (B) are 
satisfied. If the 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 a specific street address 
and 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, may 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, may 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 corporation and copies of any relevant 
ownership statements from shareholders of the publicly-traded 
corporation relied on to satisfy the exception to the closely-held test 
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 of 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.
    (vi) Special rule for a foreign airline covered by an air services 
agreement. A foreign airline that is covered by a bilateral Air 
Services Agreement in force between the United States and the qualified 
foreign country in which the airline is organized may rely exclusively 
on the Air Services Agreement currently in effect and will not have to 
otherwise substantiate its ownership under this section, provided that 
the United States has not waived the ownership requirements in the 
agreement or that the ownership requirements have not otherwise been 
made ineffective. Such an airline will be treated as owned by qualified 
shareholders resident in the country where the foreign airline is 
organized.
    (vii) Special rule for taxable non-stock corporations. Any stock in 
a foreign corporation seeking qualified foreign corporation status that 
is owned by a taxable non-stock corporation will be treated as owned, 
in any taxable year, by the recipients of distributions made during 
that taxable year, as set out in paragraph (c)(5) of this section. The 
taxable non-stock corporation may treat the address of record in its 
distribution records as the residence of any recipient if--
    (A) An individual recipient's address is in a qualified foreign 
country and is a specific street address and not a non-residential 
address, such as a post office box or in care of a financial 
intermediary or stock transfer agent;
    (B) The address of a non-individual recipient's principal place of 
business is in a qualified foreign country;
    (C) The officers and directors of the taxable non-stock corporation 
neither know nor have reason to know that the recipients do not reside 
or have their principal place of business at such addresses; and
    (D) The foreign corporation receives the statement described in 
paragraph (d)(4)(v)(D) of this section from the taxable non-stock 
corporation intermediary.
    (viii) Special rule for closely-held corporations traded in the 
United States. To demonstrate that a class of stock is not closely-held 
for purposes of Sec. 1.883-2(d)(3)(i), a foreign corporation whose 
stock is traded on an established securities market in the United 
States may rely on its most current SEC Form 13G filing (Statement of 
Beneficial Ownership by Certain Persons) for the taxable year to 
identify its 5-percent shareholders in each class of stock relied upon 
to meet the regularly traded test, without having to make any 
independent investigation to determine the identity of the 5-percent 
shareholder. However, if any class of stock is determined to be 
closely-held within the meaning of Sec. 1.883-2(d)(3)(i), the publicly 
traded corporation cannot satisfy the requirements of Sec. 1.883-2(e) 
unless it obtains sufficient documentation described in this paragraph 
(d) to demonstrate that the requirements of Sec. 1.883-2(d)(3)(ii) are 
met with respect to the 5-percent shareholders.
    (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, 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

[[Page 50534]]

period of time during the taxable year of 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 information as specified in guidance published by the 
Internal Revenue Service (see Sec. 601.601(d)(2) of this chapter).
    (ii) Ownership statements from foreign governments. An ownership 
statement from a foreign government that is a qualified shareholder is 
a written statement--
    (A) Signed by any one of the following--
    (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); or
    (3) An income tax return preparer that, for purposes of this 
paragraph (d)(4)(ii) only, shall mean a firm of licensed or certified 
public accountants, a law firm whose principals or members are admitted 
to practice in one or more states, territories or possessions of the 
United States or the country of such government, or a bank or other 
financial institution licensed to do business in such foreign country 
and having assets at least equivalent to 50 million U.S. dollars and 
who is authorized to represent the government or governmental 
authority; and
    (B) That provides--
    (1) The title of the official or other person signing the 
statement;
    (2) The name and address of the government authority, agency or 
office that has supervisory authority and, if applicable, the income 
tax preparer which has prepared such ownership statement;
    (3) The information described in paragraphs (d)(4)(i)(C) through 
(F) of this section (as if the language applied ``government'' instead 
of ``individual'') with respect to the government's direct or indirect 
ownership of stock in the corporation seeking qualified resident 
status;
    (4) In the case of an ownership statement prepared by an income tax 
return preparer, a statement under penalties of perjury identifying the 
documentation relied upon in the conduct of due diligence for the 
taxable year to determine the aggregate government investment in the 
stock of the shipping or aircraft company in preparation of such 
ownership statement attached to a valid power of attorney to represent 
the taxpayer for the taxable year; and
    (5) Any other information as specified in guidance published by the 
Internal Revenue Service (see Sec. 601.601(d)(2) of this chapter).
    (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 highest total percentage of the value of the class of stock 
that is owned by such 5-percent shareholders;
    (2) For each qualified shareholder who owns or is treated as owning 
stock in the closely-held block upon whom the corporation intends to 
rely to satisfy the exception to the closely-held test of Sec. 1.883-
2(d)(3)(ii)--
    (i) The name of each such shareholder;
    (ii) The percentage of the total value of the class of stock held 
by each such shareholder;
    (iii) The address of record of each such shareholder;
    (iv) The country of residence of each such shareholder, determined 
under paragraph (b)(2) or (d)(3) of this section; and
    (E) The portion of the taxable year of the corporation during which 
the stock was closely-held without regard to the exception in 
Sec. 1.883-2(d)(3)(ii);
    (F) The information described in paragraphs (d)(4)(i)(C) through 
(F) of this section (as if the language applied ``publicly-traded 
corporation'' instead of ``individual'') with respect to the publicly-
traded corporation's direct or indirect ownership of stock in the 
corporation seeking qualified resident status; and
    (G) Any other information as specified in guidance published by the 
Internal Revenue Service (see Sec. 601.601(d)(2) of this chapter).
    (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 (as if it the language applied ``not-for-profit 
organization'' instead of ``individual'');
    (C) A representation that the not-for-profit organization satisfies 
the requirements of paragraph (b)(4) of this section; and
    (D) Any other information as specified in guidance published by the 
Internal Revenue Service (see Sec. 601.601(d)(2) of this chapter).
    (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

[[Page 50535]]

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 if the intermediary is a pension fund, the name and 
permanent address of place of administration of the intermediary;
    (2) The information described in paragraphs (d)(4)(i)(C) through 
(F) of this section (as if the language applied ``intermediary'' 
instead of ``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), on which the foreign corporation 
seeking qualified foreign corporation status intends to rely to satisfy 
the requirements of paragraph (a) of this section. In addition, such 
intermediary must obtain from all such persons an ownership statement 
that includes 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 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;
    (7) If the intermediary is a taxable non-stock corporation, within 
the meaning of paragraph (c)(5) of this section, the statement set out 
in paragraph (d)(4)(v)(D) of this section, relating to ownership 
statements from intermediaries that are taxable non-stock corporations; 
and
    (8) Any other information as specified in guidance published by the 
Internal Revenue Service (see Sec. 601.601(d)(2) of this chapter).
    (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 registered 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 a specific street address 
and 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 information as specified in guidance published by the 
Internal Revenue Service (see Sec. 601.601(d)(2) of this chapter).
    (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 information as specified in guidance published by 
the Internal Revenue Service (see Sec. 601.601(d)(2) of this chapter).
    (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 paragraph (d)(4)(v)(A) of 
this section. In addition, the non-government pension fund must also 
provide the following information--
    (i) The name 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

[[Page 50536]]

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' actuarial interest in the pension fund, the 
actuarial interests computed by reference to the beneficiaries' 
actuarial interest in the stock);
    (viii) A representation that 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 that 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 that the pension fund is maintained to 
provide benefits to employees in a particular industry, profession, or 
group of industries or professions, and that 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 information as specified in guidance published by 
the Internal Revenue Service (see Sec. 601.601(d)(2) of this chapter).
    (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 taxable year to which the determination is 
relevant.
    (D) Ownership statements from taxable non-stock corporations. An 
ownership statement from an intermediary that is a taxable non-stock 
corporation must provide the following information in addition to the 
information required in paragraph (d)(4)(v)(A) of this section--
    (1) With respect to paragraph (d)(4)(v)(A)(7) of this section, for 
each beneficiary that is treated as a qualified shareholder, the name, 
address of residence (in the case of an individual beneficiary, the 
address must be a specific street address and not a non-residential 
address, such as a post office box or in care of a financial 
intermediary; in the case of a non-individual beneficiary, the address 
of the principal place of business) and percentage that is the same 
proportion as the amount that the beneficiary receives in the tax year 
bears to the total net income of the taxable non-stock corporation in 
the tax year;
    (2) A representation that the officers and directors of the taxable 
non-stock corporation neither know nor have reason to know that the 
individual beneficiaries do not reside at the address listed in 
paragraph (d)(4)(v)(D)(1) of this section or that any other non-
individual beneficiary does not conduct its primary activities at such 
address or in such country of residence; and
    (3) Any other information as specified in guidance published by the 
Internal Revenue Service (see Sec. 601.601(d)(2) of this chapter).
    (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 stock ownership test of this section to meet 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, ``U.S. Income Tax Return of a 
Foreign Corporation'' 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 
each 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 
street 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 relevant information specified by the Form 1120F and 
its accompanying instructions.


Sec. 1.883-5  Effective dates.

    (a) General rule. Sections 1.883-1 through 1.883-4 apply to taxable 
years of a foreign corporation seeking qualified foreign corporation 
status beginning 30 days or more after the date these regulations are 
published as final regulations in the Federal Register.
    (b) Election for retroactive application. When these regulations 
are published as final regulations, taxpayers will be permitted to 
elect to apply Secs. 1.883-1 through 1.883-4, as finalized, for any 
open taxable year of the foreign corporation beginning after December 
31, 1986, except that the substantiation and reporting requirements of 
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 the stock ownership test) will not apply 
to any year beginning before the applicable date of the final 
regulations. Such election shall apply to the taxable year of the 
election and to all subsequent

[[Page 50537]]

taxable years prior to the effective date of this regulation. Pending 
finalization of these regulations, if a foreign corporation complies 
with the proposed regulations, it will be considered substantial 
evidence that the foreign corporation is a qualified foreign 
corporation.
    (c) Transitional information reporting rule. For taxable years of 
the foreign corporation beginning 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. 02-19127 Filed 7-31-02; 8:45 am]
BILLING CODE 4830-01-P