Royal Caribbean Cruise Lines 2014 Annual Report Download - page 27

26 Royal Caribbean Cruises Ltd.
PART I
A foreign corporation will qualify for the benefits of
Section 883 if, in relevant part: (1) the foreign country
in which the foreign corporation is organized grants
an equivalent exemption to corporations organized in
the United States; and (2) the stock of the corporation
(or the direct or indirect corporate parent thereof)
is “primarily and regularly traded on an established
securities market” in the United States or another
qualifying country such as Norway. In the opinion of
our United States tax counsel, Drinker Biddle & Reath
LLP, based on the representations and assumptions
set forth in that opinion, we, Celebrity Cruises Inc.
and our ship-owning subsidiaries qualify for the bene-
fits of Section 883 because we and each of those
subsidiaries are incorporated in Liberia or Malta, which
are qualifying countries, and our common stock is
primarily and regularly traded on an established secu-
rities market in the United States or Norway (i.e., we
are a “publicly traded” corporation). If, in the future,
(1) Liberia or Malta no longer qualifies as an equivalent
exemption jurisdiction, and we do not reincorporate in
a jurisdiction that does qualify for the exemption, or
(2) we fail to qualify as a publicly traded corporation,
we and all of our ship-owning or operating subsidiaries
that rely on Section 883 for tax exemption on qualify-
ing income would be subject to United States federal
income tax on their United States source shipping
income and income from activities incidental thereto.
We believe that most of our income and the income
of our ship-owning subsidiaries is derived from or
incidental to the international operation of a ship or
ships and, therefore, is exempt from taxation under
Section 883. Additionally, income earned through a
partnership will qualify as income derived from or
incidental to the international operation of a ship
or ships to the same extent as the income would so
qualify if earned directly by the partners. Thus, we
believe that United States source income derived
from or incidental to the international operation of
a ship or ships earned by the United Kingdom ton-
nage tax company will qualify for exemption under
Section 883 to the same extent as if it were earned
directly by the owners of the United Kingdom ton-
nage tax company.
Regulations under Section 883 list activities that are
not considered by the Internal Revenue Service to
be incidental to the international operation of ships
including the sale of air and land transportation,
shore excursions and pre- and post-cruise tours.
Our income from these activities that is earned from
sources within the United States will be subject to
United States taxation.
Taxation in the Absence of an Exemption Under
Section 883
If we, the operator of our vessels, Celebrity Cruises
Inc., or our ship-owning subsidiaries were to fail to
meet the requirements of Section 883 of the Internal
Revenue Code, or if the provision was repealed, then,
as explained below, such companies would be subject
to United States income taxation on a portion of their
income derived from or incidental to the international
operation of our ships.
Because we and Celebrity Cruises Inc. conduct a trade
or business in the United States, we and Celebrity
Cruises Inc. would be taxable at regular corporate
rates on our separate company taxable income (i.e.,
without regard to the income of our ship-owning sub-
sidiaries) from United States sources. In addition, if
any of our earnings and profits effectively connected
with our United States trade or business were with-
drawn, or were deemed to have been withdrawn, from
our United States trade or business, those withdrawn
amounts would be subject to a “branch profits” tax at
the rate of 30%. We and Celebrity Cruises Inc. would
also be potentially subject to tax on portions of cer-
tain interest paid by us at rates of up to 30%.
If Section 883 were not available to our ship-owning
subsidiaries, each such subsidiary would be subject
to a special 4% tax on its United States source gross
transportation income, if any, each year because it
does not have a fixed place of business in the United
States and its income is derived from the leasing of
a ship.
Other United States Taxation
We and Celebrity Cruises Inc. earn United States
source income from activities not considered inci-
dental to international shipping. The tax on such
income is not material to our results of operation
for all years presented.
State Taxation
We, Celebrity Cruises Inc. and certain of our subsid-
iaries are subject to various United States state income
taxes which are generally imposed on each state’s
portion of the United States source income subject to
federal income taxes. Additionally, the state of Alaska
subjects an allocated portion of the total income of
companies doing business in Alaska and certain other
affiliated companies to Alaska corporate state income
taxes and also imposes a 33% tax on adjusted gross
income from onboard gambling activities conducted
in Alaska waters. This did not have a material impact
to our results of operations for all years presented.