Foreign Vessels Lose Tax Exemption Under Jones Act Waiver, IRS Clarifies

The Internal Revenue Service has issued new guidance clarifying that foreign shipping companies operating between U.S. ports under the Jones Act waiver cannot claim a longstanding tax exemption normally available to international shipping income, potentially adding a significant cost to waiver voyages.

The IRS said income earned by foreign corporations transporting cargo between U.S. ports under the waiver does not qualify as income from the "international operation of ships" and therefore is not eligible for the gross income exclusion under Section 883 of the Internal Revenue Code or related shipping provisions in U.S. tax treaties.

Foreign corporations earning income from those voyages must instead report it on Form 1120-F, the U.S. Income Tax Return of a Foreign Corporation, according to the IRS.

The guidance resolves an issue maritime tax attorneys have flagged since the Trump administration began allowing foreign-flagged vessels to participate in domestic U.S. trades earlier this year.

Under normal circumstances, the Jones Act restricts the transportation of merchandise between U.S. points to vessels that are U.S.-built, U.S.-owned and coastwise qualified. The administration issued an initial 60-day waiver in March amid disruptions to global energy markets and has since extended the exemption. A second 90-day extension is scheduled to take effect August 17.

Foreign shipping companies engaged in international voyages can typically avoid U.S. federal income tax on qualifying shipping income under Section 883 if they meet certain requirements. But Jones Act waiver voyages are different because both ends of the voyage are within the United States.

Law firm Seward & Kissel warned in April that the waiver raised "novel U.S. tax considerations" for foreign shipowners and outlined several possible treatments, ranging from a 21% corporate income tax plus a 30% branch profits tax on net income to a 30% tax on gross voyage income, depending on the circumstances. The firm also raised the possibility that some operators could attempt to treat the voyages as incidental to their international shipping activities and claim the Section 883 exemption.

Hughes Hubbard & Reed similarly warned that income from U.S.-to-U.S. voyages is generally subject to a 30% gross-basis withholding tax unless an exception applies.

The issue has also drawn attention on Capitol Hill. During a June 4 Senate Finance Committee hearing with Treasury Secretary Scott Bessent, Sen. Maria Cantwell of Washington specifically raised "Jones Act waiver tax parity" as an issue she wanted Treasury to address.

The IRS has now explicitly ruled out Section 883 and shipping-related treaty benefits for Jones Act waiver income.

The clarification could materially change the economics for foreign shipowners and charterers using the waiver. Hughes Hubbard noted that some charter agreements require charterers to compensate owners for withholding taxes, potentially shifting the additional cost to companies hiring the vessels.

For foreign operators considering domestic U.S. voyages under the waiver, the IRS has now made it point clear that the tax exemptions normally available to international shipping do not follow the vessel into domestic trade.