The U.S. Internal Revenue Service has clarified that foreign shipping companies using the temporary Jones Act waiver to move cargo between U.S. ports cannot claim a tax exemption normally available to international shipping operators.

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The decision could increase the cost of domestic U.S. voyages for foreign-flagged vessels taking advantage of the waiver.

Under the new IRS guidance, income earned by a foreign corporation from transporting cargo between U.S. ports does not qualify as income from the “international operation of ships.” That means operators cannot use the Section 883 gross-income exclusion or related shipping provisions in U.S. tax treaties.

Instead, foreign companies earning income from these domestic voyages must report it on Form 1120-F, the U.S. Income Tax Return of a Foreign Corporation.

Waiver Creates New Tax Questions

The IRS clarification addresses a tax issue that emerged after the Trump administration temporarily allowed foreign-flagged vessels to participate in U.S. domestic shipping.

The Jones Act generally requires vessels transporting merchandise between U.S. points to be U.S.-built, U.S.-owned and eligible for coastwise trade.

The administration introduced a 60-day waiver in March amid disruptions in global energy markets and later extended the measure. A second 90-day extension is scheduled to begin August 17.

While qualifying foreign shipping companies can generally benefit from U.S. tax exemptions on certain international shipping income, the IRS has drawn a clear distinction for waiver voyages because they operate entirely between U.S. locations.

Foreign Shipowners Could Face Higher Costs

The tax ruling could alter the financial calculations for foreign operators and charterers considering domestic U.S. routes.

Maritime tax lawyers had previously warned that the Jones Act waiver created unusual tax issues for foreign shipowners.

Seward & Kissel outlined several potential tax treatments, including corporate and branch-level taxes as well as taxes calculated on gross voyage income, depending on the circumstances.

Hughes Hubbard & Reed also warned that income from U.S.-to-U.S. voyages could generally face a 30% gross-basis withholding tax unless an applicable exception exists.

Some charter agreements may further shift the financial impact. Charterers can be required to compensate vessel owners for certain withholding taxes, potentially increasing the cost of hiring foreign ships.

Tax Issue Reaches Congress

The question had already attracted attention from lawmakers.

During a June 4 Senate Finance Committee hearing with Treasury Secretary Scott Bessent, Sen. Maria Cantwell raised the issue of “Jones Act waiver tax parity” and called on Treasury to address the treatment of foreign operators.

The IRS guidance now provides greater certainty for companies using the waiver.

Impact on U.S. Domestic Shipping

For foreign shipping companies, the ruling means that access to the Jones Act waiver does not automatically extend to the tax treatment associated with international shipping operations.

Operators planning U.S.-to-U.S. voyages will therefore need to account for potential U.S. tax liabilities when evaluating charter agreements and voyage economics.

The clarification could make some waiver voyages more expensive at a time when foreign-flagged vessels are being brought into U.S. domestic trades to help address market and energy supply pressures.