Jones Act Waiver Voyages Are Not Eligible for Section 883
On August 11, 2026, President Trump extended and narrowed the existing waiver of the Jones Act (the “Waiver”), which permits foreign-flagged vessels to transport certain cargos between U.S. points. The original waiver was set to expire in mid-August; the President’s action extended the waiver for another 90 days until mid-November.
At the same time, the Internal Revenue Service (the “IRS”) posted on its website that income from vessels operated pursuant to the Waiver would not be exempt from U.S. federal income tax under Section 883 of the Internal Revenue Code or the international shipping article of a U.S. tax treaty.
While Section 883 and U.S. tax treaties only provide an exemption for income derived from the international operation of ships and certain incidental income derived therefrom, the IRS pronouncement was surprising in that it was inconsistent with the broader U.S. federal government policy of increasing shipping capacity along domestic shipping routes. The pronouncement is also inconsistent with IRS guidance provided during the Jones Act’s previous waiver in the wake of Hurricane Katrina.
In light of the IRS release, a foreign corporation that operates a vessel between U.S. ports pursuant to the Waiver could be (i) subject to U.S. federal corporate income tax on a net basis at a rate of 21% plus a 30% branch profits tax on its net income (charter hire less allocable expenses, including allowable vessel depreciation deductions) from the voyage if the foreign corporation is engaged in a U.S. trade or business or (ii) subject to U.S. federal income tax at a rate of 30% on its gross income from the voyage if the foreign corporation is not engaged in a U.S. trade or business.
However, a foreign corporation which qualifies for the benefits of a U.S. tax treaty may be able to claim exemption under the Business Profits article if it does not have a “permanent establishment” in the United States.
Foreign flag shipowners should be aware of the U.S. federal income tax implications of engaging in a voyage between U.S. ports under the Waiver and carefully consider the after-tax returns on any such voyage.
If you have any questions about the U.S. federal income tax implications of the Waiver, please contact Jim Cofer or Brett Cotler.
