1. 1 US TAXATION OF INTERNATIONAL SHIPPING 2nd Annual Marine Money London Ship Finance Forum Thursday, 20 January 2011, The Dorchester, Park Lane F LOTT & C O. PC ATTORNEYS

2. 2 ©2011 - #2 F LOTT & C O. PC - A TTORNEYS US TAXATION OF INTERNATIONAL SHIPPING Overview  US Taxation of Shipping Company Income  Compliance Challenges  Taxation of US Investors in Shipping  Opportunities for Deferral  Cautions

3. 3 ©2011 - #3 F LOTT & C O. PC - A TTORNEYS US TAXATION OF INTERNATIONAL SHIPPING “Look Through Rule”  Ignores all intervening corporations or other entities between vessel owning corporation and ultimate beneficial owners More than 50% of the shares (by value) of the vessel corporation must be owned by persons who reside in “good” countries

4. 4 ©2011 - #4 F LOTT & C O. PC - A TTORNEYS US TAXATION OF INTERNATIONAL SHIPPING Investors X Shipping Inc. Z Shipping Inc. Partnerships Look Through Rule Y Shipping Inc.

5. 5 ©2011 - #5 F LOTT & C O. PC - A TTORNEYS US TAXATION OF INTERNATIONAL SHIPPING Stock Ownership Tests  Publicly-traded test of §1.883-2(a)  CFC (controlled foreign corporation) test of §1.883-3(a) Companies owned/controlled by US citizens  Qualified shareholder test of §1.883-4(a)

6. 6 ©2011 - #6 F LOTT & C O. PC - A TTORNEYS US TAXATION OF INTERNATIONAL SHIPPING Stock Ownership Tests  Publicly-traded test of §1.883-2(a) More than 50% of the stock of the corporation must be controlled by shareholders none of whom owns 5% or more of the shares If shareholders holding 5% of more of the shares control 50% or more of the shares, the public corporation is treated as a private company for purposes of exemption

7. 7 ©2011 - #7 F LOTT & C O. PC - A TTORNEYS US TAXATION OF INTERNATIONAL SHIPPING Qualified Shareholder  Constructive ownership Stock owned by or for a corporation, partnership, trust, estate, or similar entity shall be treated as owned proportionately by its shareholders, partners, beneficiaries, grantors or other interest holders as provided in §1.883-4(c)(2)-(7) No attribution will apply to an interest held directly or indirectly through bearer shares

8. 8 ©2011 - #8 F LOTT & C O. PC - A TTORNEYS US TAXATION OF INTERNATIONAL SHIPPING Investors X Shipping Inc. Y Shipping Inc. Z Shipping Inc. Partnerships Statement must describe chain of ownership from individual to shipowning company Ownership Statement

9. 9 ©2011 - #9 F LOTT & C O. PC - A TTORNEYS US TAXATION OF INTERNATIONAL SHIPPING Opportunities for Deferral  The JOBS Act (2003) removed shipping income from Subpart F  Prior to the JOBS Act, the US taxed Income from Foreign Shipping Investments on a current basis  The IRS treats time charter income as active income; bareboat income is considered passive income

10. 10 ©2011 - #10 F LOTT & C O. PC - A TTORNEYS US TAXATION OF INTERNATIONAL SHIPPING Controlled Foreign Corporation  A CFC is a foreign corporation in which a US person owns (or is deemed to own) more than 50% of the shares or US persons, each of whom owns (or is deemed to own) at least 10% of the shares, collectively own more than 50% of the shares of the corporation

11. 11 ©2011 - #11 F LOTT & C O. PC - A TTORNEYS US TAXATION OF INTERNATIONAL SHIPPING  Prior to the JOBS Act, US persons who wished to invest in shipping would try to avoid being part of a CFC to avoid the Subpart F tax regime  Post JOBS Act, US persons can use CFC’s to enjoy deferral of shipping income indefinitely until it is repatriated to the United States  CFC’s also enjoy exemption from the 4% tax under Section 887

12. 12 ©2011 - #12 F LOTT & C O. PC - A TTORNEYS US TAXATION OF INTERNATIONAL SHIPPING US Investors Foreign Shipping Co. Inc. Ship Holding Inc. CFC Non-US Investors CFC Deferral Structure Shipowning company elects deregarded status in US; income flows through to CFC’s

13. 13 ©2011 - #13 F LOTT & C O. PC - A TTORNEYS US TAXATION OF INTERNATIONAL SHIPPING Beware of the PFIC Rules  Passive Foreign Investment Company rules apply when at least 75% of a company’s income is passive income or at least 50% of its assets produce passive income  IRS treats bareboat hire as passive income; timecharter hire is treated as services income

14. 14 ©2011 - #14 F LOTT & C O. PC - A TTORNEYS US TAXATION OF INTERNATIONAL SHIPPING You may contact us as follows: Stephen Flott F LOTT & C O. PC 2009 N. 14 th Street, Suite 600 Arlington, VA 22201-2514 [PO Box 17655, Arlington, VA 22216-7655] Tel: +1-703-525-5110 Fax: +1-703-525-5122 Email: sflott@flottco.com Web: www.flottco.com