1120-F Schedule S Instructions for Form 1120-F Schedule S

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Instructions for Schedule S
(Form 1120-F)

Department of the Treasury
Internal Revenue Service

(Rev. December 2022)

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

DRAFT AS OF
December 22, 2022
Section references are to the Internal Revenue
Code unless otherwise noted.

Future Developments

For the latest information about
developments related to Schedule S
(Form 1120-F) and its instructions, such
as legislation enacted after they were
published, go to IRS.gov/Form1120F.

General Instructions

Purpose of Schedule

Schedule S (Form 1120-F) is used by
foreign corporations to claim an exclusion
from gross 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.
Dec 10, 2022

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 below in the instructions for
Parts II, III, and IV. See also Regulations
section 1.883-1(c)(3)(ii).
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,
• 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.

Cat. No. 51665B

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
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.

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).

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 above under
Regularly traded if the stock is regularly
quoted by dealers making a market in the
stock.

DRAFT AS OF
December 22, 2022
Specific Instructions
Part I—Qualified Foreign
Corporation
Line 1a. Enter the name of the qualified
foreign country (defined earlier) 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 on line 1a. For a
non-inclusive list of countries that grant
equivalent exemptions, see Rev. Rul.
2008-17, 2008-12 I.R.B. 626, available at
IRS.gov/irb/2008-12_IRB#RR-2008–17,
as modified by Announcement 2008-57,
2008-26 I.R.B. 1192, available at
IRS.gov/irb/2008-26_IRB#Ann-2008-57.
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 2a. Enter the gross income the
foreign corporation derived from the
carriage of passengers and cargo.
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

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 below under Regularly
traded (that is, the more than 50%
requirement), 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 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
-2-

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.

Closely-held classes of stock. 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 below) own, in the
aggregate, 50% or more of the vote and
value of the outstanding shares of the
class of stock. If one or more 5%
shareholders own, in the aggregate, 50%
or more of the vote and value of the
outstanding shares of the class of stock,
such shares held by the 5% shareholders
will constitute a closely-held block of
stock.

Note. If the general rule described in the
previous paragraph for closely-held
classes of stock 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 to the general rule for
closely-held classes of stock. 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 below in Part IV),
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

Instructions for Schedule S (Form 1120-F) (Rev. 12-2022)

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, 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).

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
statement that uses the same format as
lines 10a and 10b.

outstanding stock, including the value of
any bearer shares.
Line 11b. Enter the percentage of the
value of the outstanding shares of the
CFC that are bearer shares maintained in
a dematerialized or immobilized
book-entry system. In determining the
percentage to enter on line 11b, the
numerator is the total value of bearer
shares owned within the meaning of
section 958(a) or Regulations section
1.883-3(b)(4) by the qualified U.S.
persons and maintained in a
dematerialized or immobilized book-entry
system. The denominator is the total value
of all the CFC's outstanding stock,
including the value of any bearer shares.

DRAFT AS OF
December 22, 2022

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
earlier. The description must include:
• An indication as to whether the class of
stock was issued in registered or bearer
form and 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 that 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, earlier, for
instructions for completing this line 9.
Line 10. If the answer to line 9 is “Yes”
with respect to one or more classes of the
corporation's stock, the foreign
corporation must complete lines 10a and

Line 10b(ii). Enter the applicable
two-letter codes from the list of country
codes at IRS.gov/countrycodes.

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 the substantiation and reporting
requirements of Regulations sections
1.883-3(c) and (d).

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 11a. 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 11a, 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 (unless such shares are
maintained in a dematerialized or
immobilized book-entry system). The
denominator is the total value of the CFC's

Instructions for Schedule S (Form 1120-F) (Rev. 12-2022)

-3-

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
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 sections 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 (for example, 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
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, the shareholder may own its
interest in the foreign corporation through
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 IRS.gov/countrycodes.

DRAFT AS OF
December 22, 2022

-4-

Line 16c. Enter the percentage of the
value of the outstanding shares that is
owned, or treated as owned, by applying
the attribution rules of Regulations section
1.884-4(c) by the qualified shareholders
as bearer shares maintained in a
dematerialized or immobilized book-entry
system. In determining the percentage to
enter on line 16c, the numerator is the total
value of bearer shares owned by the
qualified shareholders and maintained in a
dematerialized or immobilized book-entry
system. The denominator is the total value
of all outstanding shares of the
corporation, including the value of any
bearer shares.

Instructions for Schedule S (Form 1120-F) (Rev. 12-2022)