Schedule S - Exclusion of Income From the International Operation of Ships or Aircraft Under Section 883

2010

Department of the Treasury
Internal Revenue Service

Instructions for Schedule S
(Form 1120-F)
Exclusion of Income From the International Operation of Ships or Aircraft Under
Section 883
Section references are to the Internal
Revenue Code unless otherwise noted.

What’s New
T.D. 9502 [insert cite] contains final
regulations under sections 883(a) and (c).
The final regulations include rules that
permit foreign corporations to take into
account ownership of bearer shares for
purposes of satisfying the stock
ownership tests of section 883(c) when
the bearer shares are maintained in a
dematerialized or immobilized book-entry
system. These new rules have been
included throughout the instructions and
are effective for tax years beginning on or
after September 17, 2010.

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 on pages 2, 3, and 4.
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,
Cat. No. 51665B

• 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.

Specific Instructions
Part I – Qualified Foreign
Corporation
Line 1a. Enter the name of the qualified
foreign country (defined on page 1) in
which the foreign corporation was
organized.
Line 1b. Type of Equivalent
Exemption. Check one (and only one) of
the boxes on line 1b to indicate the type
of equivalent exemption granted by the
foreign country listed in line 1a. For a
non-inclusive list of countries that grant
equivalent exemptions, see Rev. Rul.
2008-17.
Line 1c. Applicable Authority. Enter
the applicable authority of the equivalent
exemption. For example, enter a citation
of the statute in the country where the
corporation is organized, a diplomatic
note between the United States and such
country, or an income tax convention
between the United States and such
country.

Line 2. Gross Income from
Categories of Qualified Income
Line 2b. Enter the gross income the
foreign corporation derived from time or
voyage (full) charter income of a ship or
wet lease income of an aircraft. See
Regulations section 1.883-1(e)(5) for
definition of terms.
Line 2c. Enter the gross income the
foreign corporation derived from the
bareboat charter of a ship or dry lease
income of an aircraft. See Regulations
section 1.883-1(e)(5) for definition of
terms.
Lines 2d, 2e, and 2f. Enter on these
lines the gross amount the corporation
derived from the activities (specified on
these lines) that are incidental to the
international operation of ships or aircraft
(as defined in Regulations section

1.883-1(g)(1)). For types of activities that
are not considered incidental to the
international operation of ships or aircraft,
see Regulations section 1.883-1(g)(2).
Line 5. If the box on line 4 is checked,
check the box on line 5 if none of the
bearer shares were relied on to satisfy
any of the stock ownership tests
described in Regulations section
1.883-1(c)(2). However, for tax years
beginning on or after September 17,
2010, check the box on line 5 if none of
the bearer shares (other than such shares
maintained in a dematerialized or
immobilized book-entry system) were
relied on to satisfy any of the stock
ownership tests described in Regulations
section 1.883-1(c)(2).

Part II — Stock Ownership
Test for Publicly-Traded
Corporations
A foreign corporation satisfies the stock
ownership test of Regulations section
1.883-1(c)(2) if it is considered a
publicly-traded corporation and satisfies
the substantiation and reporting
requirements of Regulations sections
1.883-2(e) and (f). To be considered a
publicly traded corporation, the stock of
the foreign corporation must be primarily
and regularly traded (as defined below)
on one or more established securities
markets (as defined in Regulations
section 1.883-2(b)) in either the United
States or any qualified foreign country.
Primarily traded. Stock of a
corporation is primarily traded in a country
on one or more established securities
markets (as defined in Regulations
section 1.883-2(b)) if, with respect to each
class of stock described in item 1 under
Regularly traded below, the number of
shares in each such class that are traded
during the tax year on all established
securities markets in that country exceeds
the number of shares in each such class
that are traded during that year on
established securities markets in any
other single country.
Regularly traded. The stock of a
corporation is regularly traded on one or
more established securities markets if:
1. One or more classes of stock of the
corporation that, in the aggregate,
represent more than 50% of the total
combined voting power of all classes of
stock of such corporation entitled to vote
and the total value of the stock of such
corporation are listed on such market or
markets during the tax year, and
2. With respect to each class relied on
to meet the more than 50% requirement
above (a) trades in each such class are
effected, other than in de minimis
quantities, on such market or markets on
at least 60 days during the tax year
(or 1/6 of the number of days in a short
tax year); and (b) the aggregate number
of shares in each such class that are
traded on such market or markets during
the tax year are at least 10% of the

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average number of shares outstanding in
that class during the tax year (or, in the
case of a short tax year, a percentage
that equals at least 10% of the average
number of shares outstanding in that
class during the tax year multiplied by the
number of days in the short tax year,
divided by 365).
A class of stock that is traded during
the tax year on an established securities
market located in the United States shall
be considered to meet the trading
requirement described in item 2 above if
the stock is regularly quoted by dealers
making a market in the stock.
A dealer makes a market in a stock
only if the dealer regularly and actively
offers to, and in fact does, purchase the
stock from, and sell the stock to,
customers who are not related persons
(as defined in section 954(d)(3)) with
respect to the dealer in the ordinary
course of a trade or business.
In general, a class of stock of a foreign
corporation that otherwise meets the
requirements of the “regularly traded”
rules described above shall not be treated
as meeting such requirements for a tax
year if, for more than half the number of
days during the tax year, one or more 5%
shareholders (defined on page 3) own in
the aggregate, 50% or more of the vote
and value of the outstanding shares of the
class of stock.
Note. If the general rule described in the
previous paragraph applies, the
corporation must check the “Yes” box on
line 9, and must complete lines 10a and
10b, to substantiate that the exception to
this general rule (described next) applies.
If the general rule described in the
previous paragraph does not apply, the
corporation checks the “No” box on line 9,
and is not required to complete lines 10a
and 10b.
Exception: The rules discussed in the
previous paragraph shall not apply to a
class of stock if the foreign corporation
can establish that qualified shareholders
(defined on page 3), applying the
attribution rules of Regulations section
1.883-4(c), own sufficient shares in the
closely-held block of stock to preclude
nonqualified shareholders in the
closely-held block of stock from owning
50% or more of the total value of the
class of stock of which the closely-held
block is a part for more than half the
number of days during the tax year. Any
shares that are owned, after application of
the attribution rules in Regulations section
1.883-4(c), by a qualified shareholder
shall not also be treated as owned by a
nonqualified shareholder in the chain of
ownership for purposes of the preceding
sentence. A foreign corporation must
obtain the documentation described in
Regulations section 1.883-4(d) from the
qualified shareholders relied upon to
satisfy this exception. However, for tax
years beginning on or after September
17, 2010, no person otherwise treated as
a qualified shareholder under Regulations

section 1.883-4(b) may be treated for
purposes of Regulations section
1.883-2(d)(3) as a qualified shareholder if
such person’s interest in the foreign
corporation, or in any intermediary
corporation, is held through bearer shares
that are not maintained in a
dematerialized or immobilized book-entry
system during the relevant period. See
Regulations section 1.883-2(d)(3)(ii).
For purposes of the above rules, a 5%
shareholder is a person who owns at
least 5% of the total vote and value of the
outstanding shares of a class of stock.
For these purposes, persons related
within the meaning of section 267(b) shall
be treated as one person. In determining
whether two or more corporations are
members of the same controlled group
under section 267(b)(3), a person is
considered to own stock owned directly
by such person, stock owned through the
application of section 1563(e)(1), and
stock owned through the application of
section 267(c). In determining whether a
corporation is related to a partnership
under section 267(b)(10), a person is
considered to own the partnership interest
owned directly by such person and the
partnership interest owned through the
application of section 267(e)(3).
Note. An investment company (as
defined in Regulations section
1.883-2(d)(3)(iii)(B)) shall not be treated
as a 5% shareholder.
Line 8. Enter on line 8 a description of
each class of stock the foreign
corporation relied upon to satisfy the
requirements of the “regularly traded” test
described on page 2. The description
must include:
• An indication as to whether the class
of stock was issued in registered or
bearer form and, for tax years beginning
on or after September 17, 2010, whether
such bearer shares were maintained in a
dematerialized or immobilized book-entry
system.
• The number of issued and outstanding
shares in that class of stock as of the
close of the tax year, and
• The value of each class of stock in
relation to the total value of all the
corporation’s shares outstanding as of the
close of the tax year.
Line 9. See Regularly traded on page
2 for instructions for completing this line
9.
Line 10. If the answer to line 9 is “Yes”
with respect to more than one class of the
corporation’s stock, the foreign
corporation must complete lines 10a and
10b with respect to each such class. To
do so, complete these lines as follows:
Complete line 10 of the actual schedule
for the class of stock with respect to
which 5% shareholders own the largest
percentage of the vote and value of the
outstanding shares of the class of stock.
For all other classes of stock, attach a
schedule that uses the same format as
lines 10a and 10b.

Line 10b(ii). Enter the applicable
two-letter codes from the list of country
codes at http://www.irs.gov/efile/article/
0,,id=175595,00.html.

Part III — Stock
Ownership
Test for Controlled
Foreign Corporations
A foreign corporation satisfies the stock
ownership test of Regulations section
1.883-1(c)(2) if it satisfies the qualified
U.S. person ownership test (see below)
and it satisfies the substantiation
requirements of Regulations section
1.883-3(c).
Qualified U.S. person ownership test.
This test is met only if:
1. The foreign corporation is a CFC
(as defined in section 957(a)) for more
than half the days in the corporation’s tax
year, and
2. More than 50% of the total value of
its outstanding stock is owned (within the
meaning of section 958(a) and
Regulations section 1.883-3(b)(4)) by one
or more qualified U.S. persons (defined
below) for more than half the days of the
CFC’s tax year, provided such days of
ownership are concurrent with the time
period during which the foreign
corporation was a CFC (as defined in
item 1 above).
A qualified U.S. person is a U.S. citizen,
resident alien, domestic corporation, or
domestic trust described in section
501(a), but only if the person provides the
CFC with an ownership statement as
described in Regulations section
1.883-3(c)(2), and the CFC meets the
reporting requirements of Regulations
section 1.883-3(d) with respect to that
person.
Line 11. Enter the percentage of the
value of the shares of the CFC that is
owned by all qualified U.S. persons
identified in the qualified ownership
statements. In determining the
percentage to enter on line 11, the
numerator is the total value of the CFC’s
outstanding stock that is owned (within
the meaning of section 958(a) and
Regulations section 1.883-3(b)(4)) by all
qualified U.S. persons, not including the
value of any bearer shares. However, for
tax years beginning on or after
September 17, 2010, the rule stated in
the preceding sentence is amended to
read, in part, “not including the value of
any bearer shares, unless such shares
are maintained in a dematerialized or
immobilized book-entry system.” The
denominator is the total value of the
CFC’s outstanding stock, including the
value of any bearer shares.
Line 12. Specify the days of the foreign
corporation’s tax year during which more
than 50% of the total value of its
outstanding stock was owned (within the
meaning of section 958(a) and

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Regulations section 1.883-3(b)(4)) by
qualified U.S. persons.
Line 13. Specify the days of the foreign
corporation’s tax year during which it was
a CFC (as defined in section 957(a)).

Part IV — Qualified
Shareholder Stock
Ownership Test
A foreign corporation satisfies the stock
ownership test of Regulations section
1.883-1(c)(2) if more than 50% of the
value of its outstanding shares is owned,
or treated as owned, by applying the
attribution rules of Regulations section
1.883-4(c), for at least half of the number
of days in the foreign corporation’s tax
year by one or more qualified
shareholders, as defined below. A
shareholder may be a qualified
shareholder with respect to one category
of income while not being a qualified
shareholder with respect to another. A
foreign corporation will not be considered
to satisfy the qualified shareholder stock
ownership test unless the foreign
corporation meets the substantiation and
reporting requirements described in
Regulations section 1.883-4(d) and (e).
A shareholder is a qualified
shareholder only if the shareholder:
1. With respect to the category of
income for which the foreign corporation
is seeking an exemption, is:
(A) An individual who is a resident of a
qualified foreign country. An individual
is a resident of a qualified foreign
country only if the individual is fully
liable to tax as a resident in such
country (e.g., an individual who is
liable to tax on a remittance basis in a
foreign country will not be treated as a
resident of that country unless all
residents of that country are taxed on
a remittance basis only) and, in
addition (1) the individual has a tax
home, within the meaning of
Regulations section 1.883-4(b)(2)(ii), in
that qualified foreign country for 183
days or more of the tax year or (2) the
individual is treated as a resident of a
qualified foreign country based on
special rules pursuant to Regulations
section 1.883-4(d)(3).
(B) The government of a qualified
foreign country (or a political
subdivision or local authority of such
country).
(C) A foreign corporation that is
organized in a qualified foreign country
and meets the publicly traded test of
Regulations section 1.883-2(a).
(D) A not-for-profit organization
described in Regulations section
1.883-4(b)(4) that is not a pension fund
as defined in Regulations section
1.883-4(b)(5) and that is organized in a
qualified foreign country.
(E) An individual beneficiary of a
pension fund (as defined in
Regulations section 1.883-4(b)(5)(iv))
that is administered in or by a qualified

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foreign country, who is treated as a
resident under Regulations section
1.883-4(d)(3)(iii) of a qualified foreign
country, or
(F) A shareholder of a foreign
corporation that is an airline covered
by a bilateral Air Services Agreement
in force between the United States and
the qualified foreign country in which
the airline is organized, provided the
United States has not waived the
ownership requirement in the Air

Services Agreement, or that the
ownership requirement has not
otherwise been made ineffective.
2. Does not own its interest in the
foreign corporation through bearer
shares, either directly or by applying the
attribution rules of Regulations section
1.883-4(c). However, for tax years
beginning on or after September 17,
2010, the shareholder may own its
interest in the foreign corporation through

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bearer shares if such shares are
maintained in a dematerialized or
immobilized book-entry system.
3. Provides to the foreign corporation
the documentation required in
Regulations section 1.883-4(d).
Line 16b. Enter the applicable
two-letter codes from the list of country
codes at http://www.irs.gov/efile/article/
0,,id=175595,00.html.