Instructions for Schedule S

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

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.

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

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).

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

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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.

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).

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

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.

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)

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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.

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

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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.

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)