Doing Business Across Borders | US Taxation of International Shipping Income: TRA86 and Treaty Exemptions (2024)

Doing Business Across Borders | US Taxation of International Shipping Income: TRA86 and Treaty Exemptions (1)This is the third in a series of articles on the US taxation of shipping income, and explains treaty exemptions from the tax, what they are, how companies qualify and what must be done to comply with the filing requirements associated with the treaty exemption.

As the first two articles in this series explained, the Tax Reform Act of 1986 (“TRA86”) substantially altered the US taxation of international shipping income. It changed the “source” rules for international shipping income, (1) deeming 50% of such income to be “US source”; (2) imposing a 4% tax on that income; and (3) creating an exemption regime that permits foreign corporations that meet certain criteria to claim exemption from tax.

As a result of TRA86, every foreign corporation that has US source gross transportation income (“USSGTI”) in any tax year has a US taxfiling obligation, even if the foreign corporation qualifies for exemption from the tax. Thus, any foreign corporation that received USSGTI income during 2011 must file a US tax return on Form 1120-F by 15 June 2012. There are no exceptions to this rule.

Foreign companies earn USSGTI when they receive any form of hire (bareboat, time charter, voyage charter/freight) for the use of a vessel, which transports cargo to or from theUnited States. The only parties not subject to the US tax are those who pay the ultimate freight bill.

The tax imposed by Section 887 on USSGTI may be avoided, using one of two avenues: the reciprocal exemption provided for in Section 883 of the US Internal Revenue Code or the provisions of a US tax treaty. These articles will deal solely with exemptions available under US tax treaties. A list of countries which have tax treaties with the United States can be found in IRS Revenue Ruling 2008-17. Only those countries which are listed in Part II of Revenue Ruling 2008-17 have treaties that can be used to claim exemption from the Section 887 tax. There are other international agreements that exist between the United States and foreign countries, but only those that are considered “comprehensive tax treaties” qualify. Diplomatic notes exchanged between the United States and other countries or agreements regarding information exchanges are not treaties.

Treaties contain different requirements depending upon the specific negotiations between the United States and the partner country. For example, the US-Greece tax treaty requires that a Greek company seeking to use Article 5 (Transportation Income) to escape the Section 887 tax must be organized in Greece and its vessel must fly the Greek flag. A Greek corporation that owns a vessel that does not fly the Greek flag does not qualify for treaty benefits. Non-Greek companies, owned by Greek nationals resident in Greece, whose vessels fly the Greek flag, do not qualify for treaty benefits because they are not organized in Greece.

Each tax treaty is the product of a bilateral negotiation between the United States and its treaty partner, and is intended to benefit persons who are subjects of the contracting countries, not those of third countries. Individual citizens and residents of a country are generally easy to identify and separate from citizens and residents of third countries. In a globalized word, it is far less straightforward to identify the “true identity” of legal persons. Thus, one of the primary objectives of modern treaty negotiators is to prevent “treaty shopping”, that is, the use of a treaty by persons who are residents of third countries.


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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

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Doing Business Across Borders |   US Taxation of International Shipping Income: TRA86 and Treaty Exemptions (2024)


What is the income tax treaty exemption? ›

The United States has income tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries may be eligible to be taxed at a reduced rate or exempt from U.S. income taxes on certain items of income they receive from sources within the United States.

How are foreign companies doing business in the US taxed? ›

A foreign corporation is subject to the branch profits tax if it owns an interest in a partnership, or a trust, or an estate that is engaged in a US trade or business or has income treated as effectively connected with the conduct of a trade or business in the US.

Do US citizens have to pay taxes on foreign income? ›

U.S. citizens and resident aliens are taxed on their worldwide income. You must report your wages and other earned income, both domestic and foreign-sourced, on the correct lines of your Form 1040.

What are the benefits of the w8ben treaty? ›

The W-8BEN form lets you benefit from the US Internal Revenue Service (IRS) treaty rate with the UK. This lowers the withholding tax for qualifying dividends and interest from US shares from 30% to 15%.

How do I know if I qualify for US tax treaty benefits? ›

To qualify for treaty exemption, you must be a citizen or a permanent resident (generally, a noncitizen who files a resident income tax return) of the "treaty country," and the type of payment must be exempt under that specific treaty.

Who needs to fill out form w-8BEN? ›

You must give Form W-8BEN to the withholding agent or payer if you are a nonresident alien who is the beneficial owner of an amount subject to withholding, or if you are an account holder of an FFI documenting yourself as a nonresident alien.

How much do US multinational corporations pay foreign income taxes? ›

Under current law, U.S. multinational corporations face only a 10.5% minimum tax on their foreign earnings, half the rate that they pay on their domestic earnings, incentivizing them to operate and shift profits abroad.

How do I file taxes if I work for a foreign company? ›

If you earned foreign income abroad, you report it to the U.S. on IRS Form 1040. In addition, you may also have to file a few other international tax forms relating to foreign earnings, like your FBAR (FinCEN Form 114) and FATCA Form 8938.

Do US corporations pay taxes on foreign income? ›

The United States' worldwide system of corporate taxation requires multinational corporations to pay taxes twice, first to the foreign country in which they do business and then to the IRS after they repatriate their profits.

Can IRS find out about foreign income? ›

One of the main catalysts for the IRS to learn about foreign income which was not reported is through FATCA, which is the Foreign Account Tax Compliance Act.

How to avoid double taxation on foreign income? ›

Expats can use the Foreign Earned Income Exclusion (FEIE) to exclude a certain amount of foreign income from US taxation. The maximum exclusion amount changes each year. For the 2023 tax year, the FEIE exclusion limit is $120,000 and will increase to $126,500 for the 2024 tax year.

Do I have to pay tax in USA if I receive money from abroad? ›

Recipients of foreign inheritances typically don't have a tax liability in the United States. And, if you're sending your own money from a foreign bank account to a domestic one, you won't have to pay taxes on the transfer.

Why did I receive a W-8BEN? ›

The W-8BEN establishes that you are a non-US taxpayer who has received US-sourced income. It allows you to claim exemption from the mandatory withholding, which can be up to 30% of interest earned.

What is the difference between w8 and W8BEN? ›

What is the difference between a W-8 and a W-8 BEN? W-8 refers to a series of five forms that foreign individuals and businesses use to claim exemptions. The W-8 BEN addressed in this article is the specific form for individuals to establish foreign status for the purposes of taxation.

Who uses a W8BEN? ›

W-8BEN is an IRS form used by individual nonresident aliens (NRA) to report information to withholding agents, payers, or FFIs if they are the beneficial owner of an amount from U.S. sources subject to income tax withholding or the NRA account holder at a foreign financial institution (FFI).

What is the $5000 tax treaty? ›

A tax treaty that covers wages will either exempt a specific amount of wages received in the calendar year (for example, the first $5,000 in wages received after the tax treaty is signed) or all wages received in a specific period of time (for example, all wages earned in the first three years from the date the ...

What are the two types of tax exemption? ›

There are two types of exemptions-personal and dependency. Each exemption reduces the income subject to tax.

What is the tax-exempt income? ›

Tax-exempt income is income from any source which the Federal, state, or local government does not include when implementing its income tax. Individuals and organizations may have to report this income on a tax return, but the income will not be considered when determining their tax liability.

Which states do not follow the Federal tax treaty? ›

Some of the states that do not allow treaty benefits are: Alabama, Arkansas, California, Connecticut, Hawaii, Kansas, Kentucky, Maryland, Mississippi, Montana, New Jersey, North Dakota, and Pennsylvania.


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