1 us taxation of international shipping 2nd annual marine money london ship finance forum thursday,...

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US TAXATION OF INTERNATIONAL SHIPPING

2nd Annual Marine Money London Ship Finance Forum

Thursday, 20 January 2011, The Dorchester, Park Lane

FLOTT & CO. PCATTORNEYS

2©2011 - #2

FLOTT & CO. PC - ATTORNEYS


Overview US Taxation of Shipping Company

Income

Compliance Challenges

Taxation of US Investors in Shipping

Opportunities for Deferral

Cautions

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“Look Through Rule” Ignores all intervening corporations or

other entities between vessel owning corporation and ultimate beneficial owners

More than 50% of the shares (by value) of the vessel corporation must be owned by persons who reside in “good” countries

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Investors

X Shipping Inc.

Z Shipping Inc. Partnerships

Look Through Rule

Y Shipping Inc.

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Stock Ownership Tests Publicly-traded test of §1.883-2(a) CFC (controlled foreign corporation)

test of §1.883-3(a)

• Companies owned/controlled by US citizens

Qualified shareholder test of §1.883-4(a)

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Stock Ownership Tests Publicly-traded test of §1.883-2(a)

More than 50% of the stock of the corporation must be controlled by shareholders none of whom owns 5% or more of the shares

If shareholders holding 5% of more of the shares control 50% or more of the shares, the public corporation is treated as a private company for purposes of exemption

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Qualified Shareholder Constructive ownership

• Stock owned by or for a corporation, partnership, trust, estate, or similar entity shall be treated as owned proportionately by its shareholders, partners, beneficiaries, grantors or other interest holders as provided in §1.883-4(c)(2)-(7)

• No attribution will apply to an interest held directly or indirectly through bearer shares

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Investors

X Shipping Inc.

Y Shipping Inc. Z Shipping Inc. Partnerships

Statement must describe chain of ownership from individual to shipowning company

Ownership Statement

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Opportunities for Deferral The JOBS Act (2003) removed

shipping income from Subpart F

Prior to the JOBS Act, the US taxed Income from Foreign Shipping Investments on a current basis

The IRS treats time charter income as active income; bareboat income is considered passive income

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Controlled Foreign Corporation A CFC is a foreign corporation in

which a US person owns (or is deemed to own) more than 50% of the shares or US persons, each of whom owns (or is deemed to own) at least 10% of the shares, collectively own more than 50% of the shares of the corporation

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Prior to the JOBS Act, US persons who wished to invest in shipping would try to avoid being part of a CFC to avoid the Subpart F tax regime

Post JOBS Act, US persons can use CFC’s to enjoy deferral of shipping income indefinitely until it is repatriated to the United States

CFC’s also enjoy exemption from the 4% tax under Section 887

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US Investors

Foreign Shipping Co. Inc.

Ship Holding Inc.

CFC CFC CFC

Non-US Investors

CFC

Deferral StructureShipowning company elects deregarded status in US; income flows through to CFC’s

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Beware of the PFIC Rules Passive Foreign Investment Company

rules apply when at least 75% of a company’s income is passive income or at least 50% of its assets produce passive income

IRS treats bareboat hire as passive income; timecharter hire is treated as services income

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You may contact us as follows:

Stephen FlottFLOTT & CO. PC

2009 N. 14th Street, Suite 600Arlington, VA 22201-2514[PO Box 17655, Arlington, VA 22216-7655]Tel: +1-703-525-5110 Fax: +1-703-525-5122Email: [email protected]: www.flottco.com

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