HMRC internal manual

International Manual

INTM153090 - Description of double taxation agreements: Shipping/air transport

The general principle in most of the UK’s agreements is that the profits from the operation of ships or aircraft in international traffic are taxable only in the country of residence of the operator of the ships or aircraft. Some agreements, however, give the sole taxing rights to the country in which the place of effective management of the enterprise is situated.

It is only the profits from international traffic which are normally covered by the agreements. Thus if a non-resident or an enterprise of a foreign country operates ships which are engaged both in international voyages but also in voyages between United Kingdom ports, the profits of the latter activities can be taxed in the United Kingdom if the enterprise has a permanent establishment here.

Auxiliary activities of the operator of ships or aircraft, for example the transportation of goods by road between a depot and a port or airport, may be regarded as within the provisions of this Article.

Guidance concerning the types of income from ancillary activities which may be within or outside the Article may be found in the OECD Model Commentary. In particular, interest earned from temporary lodgement of current working capital may be treated as profits from international traffic, for example interest earned on overnight deposits of trading income. Interest from fixed term deposits for example for 30 to 60 days is not considered as profits from international traffic and should be considered either under the business profits Article or the interest Article depending upon whether or not it is effectively connected with a permanent establishment. Any cases of doubt or difficulty may be referred to Business, Assets & International, Tax Treaty Team.

Where an enterprise participates in a shipping pool, the profits attributable to the enterprise are only taxable in the country in which the effective management of the enterprise is carried on or its country of residence as the case may be (see first sub-paragraph above).

If an enterprise operating ships or aircraft in international traffic leases containers which are used in inland transport, the income derived from such leasing may be within the provisions of the Article if it is incidental to the enterprise’s main shipping or air transport operations.

Ship chartering is mainly of three kinds.

a) Time charter 

The ship owner provides the ship and the master and crew to the charterer for a specified period to carry the charterer’s goods. The profits from such chartering are regarded as within this Article.

b) Voyage charter 

This is similar to a time charter except it is a contract to take specified goods on specified voyages. The profits from this activity are also within the Article.

c) Bareboat charter 

The shipowner charters the ship without master or crew. The ship owner’s profits from such a charter would be within the business profits Article or in the royalties Article in those agreements where leasing of equipment is included in the definition of royalties, unless, as in the case of newer agreements, the shipping and air transport Article specifically includes incidental profits from bareboat chartering.