2016 Annual Report for Norwegian Cruiseline Holdings - 16

We believe and have taken the position that substantially all of NCLH's income, including the income of its ship-owning subsidiaries, is properly
categorized as shipping income, and that we do not have a material amount of non-qualifying income. It is possible, however, that the IRS interpretation
of shipping income could differ from ours and that a much larger percentage of our income does not qualify (or will not qualify) as shipping income.
Moreover, the exemption for shipping income is only available for years in which we will satisfy complex tests under Section 883. There are factual
circumstances beyond our control, including changes in the direct and indirect owners of NCLH's ordinary shares, which could cause NCLH or its
subsidiaries to lose the benefit of the exemption under Section 883. Further, any changes in our operations could significantly increase our exposure to
taxation on shipping income, and we can give no assurances on this matter.
Under certain circumstances, changes in the identity, residence or holdings of NCLH's direct or indirect shareholders could cause NCLH's ordinary
shares not to be regularly traded on an established securities market within the meaning of the regulations under Section 883. Therefore, as a
precautionary matter, NCLH has provided protections in its bye-laws to reduce the risk of such changes impacting our ability to meet the publicly traded
test by prohibiting any person, other than the Sponsors, from owning, directly, indirectly or constructively, more than 4.9% of NCLH's ordinary shares
unless such ownership is approved by NCLH's Board of Directors (the "4.9% limit"). Any outstanding shares held in excess of the 4.9% limit will be
transferred to and held in a trust.
For U.S. federal income tax purposes, Regent and its non-U.S. subsidiaries are disregarded as entities separate from their immediate foreign parent
(PCH) and Oceania Cruises is treated as a corporation. For 2015 and 2016, both Regent and Oceania Cruises relied on NCLH's ability to meet the
requirements necessary to qualify for the benefits of Section 883 as discussed above. For 2014, both Regent and Oceania Cruises relied on PCH's ability
to meet the requirements necessary to qualify for the benefits of Section 883. PCH is organized as a company in Panama, which grants an equivalent tax
exemption to U.S. corporations, and is thus classified as a qualified foreign country for purposes of Section 883. PCH was classified as a CFC for the
taxable year ended December 31, 2014, and we believe PCH met the ownership and substantiation requirements of the CFC test under the regulations
for that year.
Taxation of International Shipping Income Where Section 883 of the Code is Inapplicable
Unless exempt from U.S. federal income taxation, a foreign corporation is subject to U.S. federal income tax in respect of its "shipping income" that is
derived from sources within the U.S. If we fail to qualify for the exemption under Section 883 in respect of our U.S. sourced shipping income, or if the
provision was repealed, then we will be subject to taxation in the U.S. on such income.
Generally, "shipping income" is any income that is derived from the use of vessels, from the hiring or leasing of vessels for use on a time, voyage or
Bareboat Charter basis or from the performance of services directly related to those uses. For these purposes, shipping income attributable to
transportation that begins or ends, but that does not both begin and end, in the U.S., which we refer to as "U.S.- source shipping income," will be
considered to be 50% derived from sources within the U.S.
If we do not qualify for exemption under Section 883, or if the provision was repealed, then any U.S.-sourced shipping income or any other income that
is considered to be effectively connected income would be subject to federal corporate income taxation on a net basis (generally at a 35% rate) and state
and local taxes, and our effectively connected earnings and profits may also be subject to an additional branch profits tax of 30%, unless a lower treaty
rate applies (the "Net Tax Regime"). Our U.S. source shipping income is considered effectively connected income if we have, or are considered to have,
a fixed place of business in the U.S. involved in the earning of U.S. source shipping income, and substantially all of our U.S. source shipping income is
attributable to regularly scheduled transportation, such as the operation of a vessel that follows a published schedule with repeated sailings at regular
intervals between the same points for voyages that begin or end in the U.S.
If we do not have a fixed place of business in the U.S. or substantially all of our income is not derived from regularly scheduled transportation, the
income will generally not be considered to be effectively connected income. In that case, we would be subject to a special 4% tax on our U.S. source
shipping income (the "4% Tax Regime").
Other United States Taxation
U.S. Treasury Regulations list several items of income which are not considered to be incidental to the international operation of ships and, to the extent
derived from U.S. sources, are subject to U.S. federal income taxes under the Net Tax Regime discussed above. Income items considered non-incidental
to the international operation of ships include income from the sale of single-day cruises, shore excursions, air and other transportation, and pre- and
post-cruise land packages. We believe that substantially all of our income currently derived from the international operation of ships is shipping income.
Income from U.S.-flagged Operation under the NCL America
Income derived from our U.S.-flagged operation generally will be subject to U.S. corporate income taxes both at the federal and state levels. We expect
that such income will not be subject to U.S. branch profits tax nor a U.S. dividend withholding tax under the U.S.-U.K. Income Tax Treaty.
U.K. Income Taxation
As a result of a restructuring, NCLH and NCLC became tax residents of the U.K. and are subject to normal U.K. corporation tax.
U.S. Taxation of Gain on Sale of Vessels
Gains from the sale of vessels should generally also be exempt from tax under Section 883 provided NCLH qualifies for exemption from tax under
Section 883 in respect of our shipping income. If, however, our gain does not qualify for exemption under Section 883, or if the provision was repealed,
then such gain could be subject to either the Net Tax Regime or the 4% Tax Regime.
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Table of Contents for the Digital Edition of 2016 Annual Report for Norwegian Cruiseline Holdings