The Internal Revenue Service (IRS) has released new guidelines stating that foreign shipping companies using the Jones Act waiver for trips between U.S. ports cannot take advantage of a tax exemption typically available for international shipping income. This could significantly increase costs for these voyages.
According to the IRS, the income generated by foreign companies transporting goods within U.S. ports under the Jones Act waiver is not considered income from the “international operation of ships.” As a result, they are not eligible for the gross income exclusion outlined in Section 883 of the Internal Revenue Code or related benefits in U.S. tax treaties.
Foreign companies earning income from these routes must report it using Form 1120-F, which is the U.S. Income Tax Return for Foreign Corporations.
This ruling addresses concerns raised by maritime tax attorneys since the Trump administration allowed foreign-flagged vessels to operate in domestic U.S. trade earlier this year.
Normally, the Jones Act limits the transport of goods between U.S. locations to vessels that are built in the U.S., owned by U.S. citizens, and qualified for coastwise trade. In March, the administration provided a 60-day waiver in response to disruptions in global energy markets and has since extended this exemption. A second extension for 90 days is set to start on August 17.
Foreign shipping companies typically avoid U.S. federal income tax on qualifying international shipping income under Section 883 if they meet certain requirements. However, voyages covered by the Jones Act waiver are different since both start and end points are in the U.S.
The law firm Seward & Kissel warned in April that the waiver introduces “new U.S. tax considerations” for foreign shipowners, highlighting various potential tax scenarios. These range from a 21% corporate income tax and a 30% branch profits tax on net income to a 30% tax on gross voyage income, depending on specific conditions. The firm also mentioned that some operators may try to categorize these voyages as incidental to their international shipping to claim the Section 883 exemption.
Similarly, Hughes Hubbard & Reed pointed out that income from U.S.-to-U.S. voyages is usually subject to a 30% gross-basis withholding tax unless an exception applies.
This issue has also gained attention in Congress. During a Senate Finance Committee hearing on June 4, Treasury Secretary Scott Bessent was confronted by Senator Maria Cantwell from Washington regarding the need for “Jones Act waiver tax parity.”
The IRS has now clearly stated that Section 883 and shipping-related treaty benefits do not apply to income earned under the Jones Act waiver.
This clarification could significantly affect the financial calculations for foreign shipowners and charterers utilizing the waiver. Hughes Hubbard noted that some charter agreements may require charterers to cover the owners’ withholding taxes, which could shift additional costs to the companies renting the vessels.
For foreign operators considering domestic U.S. voyages under the waiver, the IRS has clarified that the typical tax exemptions for international shipping do not apply when engaging in domestic trade.