General Instructions

Purpose of Schedule

Schedule S (Form 1120-F) is used by foreign corporations to claim an exclusion of income under section 883 and to provide reporting information required by the section 883 regulations.

Who Must File

Qualified foreign corporations engaged in the international operation of ships or aircraft that are claiming an exclusion of gross income under section 883 must complete Schedule S (Form 1120-F). See Definitions below.

When and Where to File

Attach Schedule S (Form 1120-F) to the foreign corporation's Form 1120-F income tax return. See the Instructions for Form 1120-F for the time, place, and manner for filing the corporation's income tax return.

Definitions

Qualified income is income derived from the international operation of ships or aircraft that is (a) properly includible in any of the income categories described on lines 2a through 2h of the schedule, and (b) the subject of an equivalent exemption (defined below) granted by the qualified foreign country (defined below) in which the corporation is organized.

A qualified foreign country is a foreign country or U.S. possession that grants to corporations organized in the United States an equivalent exemption (defined below) for the category of qualified income, 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.

A qualified foreign corporation is a corporation as defined in section 7701(a)(3) that is organized in a qualified foreign country and considered engaged in the international operation of ships or aircraft. Furthermore, to be a qualified foreign corporation, the corporation must satisfy one of the stock ownership tests described in the instructions for Parts II, III, and IV, later.

Note.

A corporation may be a qualified foreign corporation with respect to one category of qualified income but not with respect to another such category.

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:

  • Carriage of passengers or cargo for hire,

  • 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 Regulations section 1.883-1(e)(5)), provided the ship is used to carry passengers or cargo for hire, and

  • 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 Regulations section 1.883-1(e)(5)), provided the aircraft is used to carry passengers or cargo for hire. See Regulations sections 1.883-1(e)(1) and (2) for additional information.

Activities that do not constitute operation of ships or aircraft include, but are not limited to:

  • The activities of a non-vessel operating common carrier,

  • Ship or aircraft management,

  • Obtaining crews for ships or aircraft operated by another party,

  • Acting as a ship's agent,

  • Ship or aircraft brokering,

  • Freight forwarding,

  • The activities of travel agents and tour operators,

  • Rental by a container leasing company of containers and related equipment, and

  • The activities of a concessionaire.

The term international operation of ships or aircraft means the operation of ships or aircraft (as defined above) with respect to the carriage of passengers or cargo on voyages or flights that begin or end in the United States, as determined in Regulations section 1.883-1(f)(2). 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.

Equivalent Exemption. 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 listed on lines 2a through 2h of the schedule. See Regulations section 1.883-1(h)(2) for rules for determining equivalent exemptions for each category of income.

An equivalent exemption may be available for income derived from the international operation of ships even though income derived from the international operation of aircraft may not be exempt, and vice versa. For rules regarding foreign corporations organized in countries that provide exemptions only through an income tax convention, see Regulations section 1.883-1(h)(3).

An equivalent exemption may exist where the foreign country:

  • Generally imposes no tax on income, including income from the international operation of ships or aircraft,

  • Specifically provides a domestic law tax exemption for income derived from the international operation of ships or aircraft, either by statute, decree, income tax convention, or otherwise, or

  • 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.

Certain types of exemptions provided to corporations organized in the United States by foreign countries do not satisfy the equivalent exemption requirements of Regulations section 1.883-1(h). Examples of types of exemptions that do not qualify as equivalent exemptions include:

  • Reduced tax rate or time limited exemption,

  • Inbound or outbound freight tax,

  • Exemptions for limited types of cargo,

  • Territorial tax systems,

  • Countries that tax U.S. corporations that are not managed and controlled in that country on a residence basis, and

  • Exemptions within categories of income. See Regulations section 1.883-1(h)(4) for additional information.


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