![\"Section](\"http:\/\/www.flottco.com\/doingbusinessacrossborders\/\/wp-content\/uploads\/2012\/02\/international-tax-consulting-300x199.jpg\" "\\"\\"")
This seventh in a series of articles on the US taxation of shipping income explains the \u201clook through\u201d rule that applies to exemptions from the tax available pursuant to Section 883.\u00a0 The next article will explain what must be done to comply with the filing requirements associated with Section 883 exemptions.<\/p>\n
The tax on USSGTI may be avoided, using one of two avenues: a reciprocal exemption provided for in Section 883 of the US Internal Revenue Code or the provisions of a US tax treaty. We have discussed\u00a0treaty exemptions<\/a>, and our last\u00a0article<\/a>\u00a0began the explanation of the exemptions available under Section 883. \u00a0This article describes the \u201clook through\u201d rule that applies to all Section 883 exemptions.<\/p>\n As explained earlier<\/a>, Section 883 sets out a two step qualification process.\u00a0 The first step relates to the country in which the registered owner of the vessel and its charterers that earn USSGTI are organized.\u00a0 Assuming the company with USSGTI meets the requirement of the first step \u2013 i.e., it is organized in a \u201cqualified foreign country\u201d \u2013, it must demonstrate that it is controlled by qualified shareholders.<\/p>\n Section 883 mandates that legal entities (e.g., corporations, trusts, limited liability companies, partnerships, etc.) be ignored.\u00a0 Ownership must be traced to the physical person or persons who ultimately control the company that seeks exemption under Section 883.\u00a0 With a very few exceptions, only human beings can be what the Section 883 Regulations call \u201cqualified shareholders\u201d also referred to as ultimate beneficial owners or UBO.<\/p>\n To be a qualified shareholder a UBO must \u201creside\u201d in a country which extends an equivalent exemption.\u00a0 The Section 883 Regulations refers to these as \u201cqualified countries\u201d.\u00a0 \u00a0The countries listed in Revenue Ruling 2008-17, Part I or Part II, are qualified countries.\u00a0 A person residing in any of these countries, regardless of the type of exemption (treaty, diplomatic note or domestic law) that the country has, can be a qualified shareholder, provided he or she meets the residency requirements specified in the Section 883 Regulations.<\/p>\n The Section 883 Regulations set out two residency requirements.\u00a0 The first specifies that the person is a resident of a qualified country only if he or she is \u201cfully liable\u201d to tax in that country and the person has a \u201ctax home\u201d there for at least 183 days in the tax year for which the company of which he or she is a UBO seeks exemption.\u00a0 The definition of \u201ctax home\u201d includes both a \u201cregular or principal\u201d place of business test and a \u201cplace of abode\u201d test.\u00a0 The Regulations specifically disqualify persons who reside in a country on a \u201cnon-domiciliary\u201d basis, that is, persons who pay tax only on income brought into a country, not on their worldwide income.<\/p>\n The Section 883 Regulations apply the \u201clook through\u201d rule by use of \u201cconstructive ownership\u201d or attribution rules, that is, the regulations stipulate how ownership of an entity shall be apportioned.\u00a0 In the simple case of a corporation, ownership is attributed based who owns its shares.\u00a0 There are constructive ownership rules for partnerships, trusts and estates, taxable non-stock corporations, mutual insurance companies, non-government pension funds, and non-profit organizations.<\/p>\n The Section 883 Regulations give particular attention to shares issued to bearer, commonly known as \u201cbearer shares\u201d.\u00a0 Essentially, notwithstanding the constructive ownership rules that attribute ownership of a corporation proportionally to the holders of its shares, the Section 883 Regulations specifically do not allow bearer shares to be attributed to anyone unless the shares are in an immobilized or dematerialized book entry system.\u00a0 Most off-shore jurisdictions that permit bearer shares (Liberia, Marshall Islands, Panama and Cayman Islands, to name four) do not have such systems in place.\u00a0 Thus, the recent amendments to the Section 883 Regulations permitting attribution of bearer shares in such systems are of no practical use to most companies that use bearer shares.\u00a0 Of course, countries that allow bearer shares also authorize companies to issue shares in the names of the shareholders.\u00a0 These are sometimes called \u201cregistered\u201d shares.<\/p>\n The look through rule tracks ownership up the chain to the UBO.\u00a0 Thus, when a company seeking exemption under Section 883 is wholly owned by a second company, the look through rule ignores the second company and looks to its shareholders.\u00a0 If qualified shareholders own less than a controlling interest in the second company, that company\u2019s wholly owned subsidiary will not qualify for exemption under Section 883.\u00a0 The same is true no matter how many layers of ownership exist above the company seeking exemption under Section 883.\u00a0 The UBO must have control of the company seeking exemption.<\/p>\n Publicly-Traded Companies<\/strong><\/p>\n The Section 883 Regulations contain a significant carve out from the look through rule for publicly traded companies.\u00a0 That is, the regulations recognize some publicly traded companies as UBO\u2019s.\u00a0 It is very important to note that \u201cpublicly listed\u201d does not equal \u201cpublicly traded\u201d for Section 883 exemption purposes.\u00a0 To be considered \u201cpublicly traded\u201d under the Section 883 Regulations, a corporation must not only be listed on a recognized stock exchange, but its shares must be primarily and regularly traded.\u00a0 Furthermore, more than 50% of its shares must be owned by shareholders none of whom own 5% or more of the shares.\u00a0 In other words, if a shareholder of a publicly listed company owns 50% or more of the shares of that company, it will be treated as a private company under the Section 883 Regulations.<\/p>\n The next article will discuss the substantiation and documentation of ownership requirements associated with Section 883 compliance.<\/p>\n IMPORTANT NOTICE TO READERS<\/strong><\/p>\n The information contained on this blog is not legal advice. \u00a0It is provided only as general information, and may or may not reflect the most up-to-date legal developments. \u00a0This information is not provided in the course of, and receipt of it does not constitute, an attorney-client relationship.\u00a0 It certainly does not substitute for obtaining legal advice from a licensed attorney. \u00a0Legal advice should take into account the specific facts and circumstances applicable to each individual situation. \u00a0Viewing this site and reading this blog does not create an attorney-client relationship between you and our firm.\u00a0 Likewise, sending us an email does not create an attorney-client relationship between you and the firm.\u00a0\u00a0 While we would be happy to hear from you, Flott & Co. PC cannot represent you until we have determined that doing so will not be a conflict of interest. \u00a0The only way for you to initiate legal representation with the firm is to call us at\u00a0(703) 525-5110. \u00a0If and when Flott & Co. PC enters into an engagement agreement with you, you will be a client of the firm, at which time we will be able to exchange information freely.<\/p>\n Unless otherwise indicated by Flott & Co. PC in writing, any US federal tax advice contained in this blog is not intended or written to be used, and cannot be used, for either (i) avoiding penalties under the US Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matter addressed within. For further information regarding this notice, please see\u00a0http:\/\/www.flottco.com\/ This seventh in a series of articles on the US taxation of shipping income explains the \u201clook through\u201d rule that applies to exemptions from the tax available pursuant to Section 883.\u00a0 The next article will explain what must be done to comply with the filing requirements associated with Section 883 exemptions. The tax on USSGTI…<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14,17],"tags":[15],"class_list":["post-141","post","type-post","status-publish","format-standard","hentry","category-shiptax","category-us-taxation","tag-the-associates-at-flott-co-pc"],"_links":{"self":[{"href":"https:\/\/www.flottco.com\/doingbusinessacrossborders\/wp-json\/wp\/v2\/posts\/141","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.flottco.com\/doingbusinessacrossborders\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.flottco.com\/doingbusinessacrossborders\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.flottco.com\/doingbusinessacrossborders\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.flottco.com\/doingbusinessacrossborders\/wp-json\/wp\/v2\/comments?post=141"}],"version-history":[{"count":1,"href":"https:\/\/www.flottco.com\/doingbusinessacrossborders\/wp-json\/wp\/v2\/posts\/141\/revisions"}],"predecessor-version":[{"id":1742,"href":"https:\/\/www.flottco.com\/doingbusinessacrossborders\/wp-json\/wp\/v2\/posts\/141\/revisions\/1742"}],"wp:attachment":[{"href":"https:\/\/www.flottco.com\/doingbusinessacrossborders\/wp-json\/wp\/v2\/media?parent=141"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.flottco.com\/doingbusinessacrossborders\/wp-json\/wp\/v2\/categories?post=141"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.flottco.com\/doingbusinessacrossborders\/wp-json\/wp\/v2\/tags?post=141"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}