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Overview US Taxation of Shipping Company Income Compliance Challenges

Overview US Taxation of Shipping Company Income Compliance Challenges Taxation of US Investors in Shipping Opportunities for Deferral Cautions. “Look Through Rule” Ignores all intervening corporations or other entities between vessel owning corporation and ultimate beneficial owners

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Overview US Taxation of Shipping Company Income Compliance Challenges

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  1. Overview • US Taxation of Shipping Company Income • Compliance Challenges • Taxation of US Investors in Shipping • Opportunities for Deferral • Cautions

  2. “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

  3. Investors X Shipping Inc. Y Shipping Inc. Partnerships Z Shipping Inc. Look Through Rule

  4. 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)

  5. 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

  6. 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

  7. Ownership Statement Investors X Shipping Inc. Y Shipping Inc. Partnerships Z Shipping Inc. Statement must describe chain of ownership from individual to shipowning company

  8. 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

  9. 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

  10. 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

  11. Deferral Structure Shipowning company elects deregarded status in US; income flows through to CFC’s US Investors CFC CFC CFC CFC Foreign Shipping Co. Inc. Ship Holding Inc. Non-US Investors

  12. 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

  13. You may contact us as follows: Stephen Flott FLOTT & CO. PC 2009 N. 14th Street, Suite 600 Arlington, VA 22201-2514 [PO Box 17655, Arlington, VA 22216-7655] Tel: +1-703-525-5110 Fax: +1-703-525-5122 Email: sflott@flottco.com Web: www.flottco.com

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