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EU approval of Cypriot scheme for international maritime transport



Introduction

The Parliament approved on 29 April 2010 the Merchant Shipping (Fees & Taxing provisions) Law which introduces a new tonnage tax system in Cyprus, applicable retroactively as from 1 January 2010.

The new regime has previously received EU approval on 24 March 2010. The Commission based its decision on the importance of the shipping industry on the economy of Cyprus. It has particularly noted that the Cypriot shipping industry is one of the largest in the EU and the 10th largest worldwide Moreover Cyprus is the biggest third party ship management centre in the EU.

The tonnage tax regime will be available for companies engaged in international maritime transport and liable to Corporation Tax in Cyprus. This measure allows companies to opt for a tax calculated on the net tonnage of the fleet that they operate instead of being taxed on the actual profits of their maritime transport activities.

The Commission authorized this new regime until 31 December 2019.

A large number of new shipping companies both within and outside of the European Union are expected to seek to benefit from this new very competitive taxation system by establishing and operating shipping offices in Cyprus.

Details

Income on which it applies

The new regime extends the favourable benefits applicable to owners of Cyprus flag vessels and ship managers to owners of foreign flag vessels and charterers. It also extends the tax benefits that previously only covered profits from the exploitation of vessels in shipping operations to cover:

  • profits on the disposal of vessels;
  • interest earned on funds used other than for investment purposes; and
  • dividends paid directly or indirectly from shipping-related profits.

Beneficiaries

The underlying principle is that the tonnage tax system is available to any owner, charterer or ship manager who owns, charters or manages a qualifying ship in a qualifying shipping activity.

The tonnage tax is calculated on the net tonnage of the ship according to a broad range of bands and rates prescribed in the legislation. The rates applicable to ship managers are 25% of those applied for ship owners and charterers.

Qualifying ship

A qualifying ship is any seagoing vessel certified under applicable international or national rules and regulations and registered in the ship register of any member of the International Maritime Organisation and/or the International Labour Organisation that is recognized by Cyprus.

The regime specifically excludes certain types of ships, such as fishing vessels, ships used primarily for sports or recreation, river ferries, non-self propelled floating cranes and tug boats, etc.

Qualifying shipping activity

Any commercial activity that constitutes maritime transport, crew management and/or technical management is considered a qualifying activity.

The definition of maritime transport includes the traditional carriage of goods and passengers, as well as ancillary services such as all hotel, catering, entertainment and retailing activities on board a vessel, the loading and unloading of cargo, the operation of ticketing facilities and passenger terminals, tonnage and dredging, cable laying, etc.

Ship owners

Ship owners of Cyprus flag ships automatically fall within the scope of the tonnage tax system. Ship owners of EU flag ships and/or third country flag ships may elect to be taxed under the tonnage system.

Ship owners of third country flag ships must comply with certain requirements to qualify for an election to be taxed under the new regime. These include the requirement that a part of their fleet be comprised of EU flag ships, which part must not be reduced in the 3-year period following the election and that the commercial and strategic management of the fleet be carried out from the EU.

Any ship owner electing the tonnage tax system must remain in the system for 10 years. Early withdrawal will result in penalties, calculated as the difference between the amount paid during the period the ship owner was under the tonnage tax system and the amount that would have paid had it been subject to Corporation Tax in the same period. In addition, the ship owner will lose the right to elect for tonnage taxation until expiration of the 10-year period from the date of the first election.

The tonnage tax system covers:

  • profits from shipping operations;
  • dividends paid directly or indirectly out of such profits;
  • profits on the disposal of the ship; and
  • interest earned on funds used as working capital, or for the financing, operation and/or maintenance of the ship.

Charterers

Any charterer who charters a ship under bareboat, demise, time or voyage charter is eligible for the tonnage tax system provided the tonnage of the ships under time and/or voyage charters do not exceed 75% of the total tonnage of ships chartered and owned for more than 3 consecutive years. This eligibility percentage increases to 90% if the ships chartered are EU ships or their crew and technical management are carried out from the EU. The charterers of third country flag ships must comply with the additional requirements that apply for third country flag ship owners.

An eligible charterer may elect to be taxed under the tonnage tax system, but once the election is made, it must remain in the system for 10 years. Early withdrawal will result in the penalties outlined above for ship owners.

The tonnage tax system covers:

  • profits from shipping operations;
  • dividends paid directly or indirectly out of such profits; and
  • interest earned on funds used as working capital, or for the payment of expenses arising out of the charter agreement.

Ship managers

A ship manager who provides crew and/or technical ship management services is eligible for the tonnage tax system provided it satisfies certain criteria. These include the maintenance of a fully fledged office, the employment of a sufficient number of qualified personnel (51% of whom should be EU citizens), and at least two thirds of the management is carried out from within the EU. Further, at least 60% of the fleet under management should be carrying an EU flag, while all ships and crew under management must comply with international standards and EU law requirements relating to maritime security, safety, training and certification of seafarers, the environment, on-board working conditions, and so on.

Other specific criteria must be complied with, depending on the ship management service provided (i.e. full implementation of the Maritime Labour Convention for crew managers, the ISM Code certification for technical managers, etc.).

The 10-year election rule also applies to eligible ship managers and the same penalties apply for early withdrawal.

The tonnage tax system covers:

  • profits from the provision of crew/or technical ship management services;
  • dividends paid directly or indirectly out of such profits; and
  • interest earned on funds used as working capital, or for the payment of expenses relating to the management of the ships.

Cyprus Industry Insight

Seven methods of ensuring a smooth running of a Cyprus company
by Contributed by Fiducenter (Cyprus) Ltd

Cyprus commercial companies and the need for ‘substance’
by Fiducenter

Why Cyprus?
by Anthony Ashiotis & Co

Trusts
by Fiducenter

The New Cyprus Tonnage Tax System
by Andreas Chrysostomou, Head of Maritime Policy and Standards Division, Department of Merchant Shipping

Cyprus: An International Maritime Centre
by Department of Merchant Shipping Cyprus

New Developments in Russia Regarding Cyprus Structures
by Savva & Associates

EU approval of Cypriot scheme for international maritime transport
by Fiducenter

Private Investments Funds (ICIS) in Cyprus: the new trend
by Michalis Kyriakides and Olga Shelyagova

Shipping in Cyprus
by Aspen Trust Group


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