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The European Union (“EU”) approved the Cyprus tonnage tax system in 2010 and it has since provided a simplified taxation regime under The Merchant Shipping (Fees and Taxing Provisions) Law of 2010 (“the Law”) for qualifying persons, as defined below, offering a range of benefits and advantages that have significantly contributed to the continued growth of the Cyprus registry.
What is tonnage tax
Tonnage tax is a competitive taxation regime whereby ship owners,ship charterers and ship managers are subject to tonnage tax, calculated based on the net tonnage of a ship according to broad bands prescribed in the Law. The rates applicable to ship managers are 25% of those applied to ship owners and charterers. For example, a vessel of 1000 Net Tonnage (NT) will incur an annual tonnage tax rate of €365 whereas the annual tax rate for a qualifying ship manager of a vessel with the same NT will be approximately €91. Therefore, qualifying persons performing qualifying shipping activities in relation to qualifying ships are subject to the tonnage tax rates instead of the currently applicable rate of Corporations Tax at 12.5%.
The regime is regulated by the Department of Merchant Shipping rather than the tax authorities and taxpayers under the system receive an annual certificate, a copy of which is sent annually to the tax authorities.
Qualifying for the tonnage tax system
Qualifying persons are Cyprus tax resident owners, charterers or ship managers who own, charter or manage qualifying ship/s in a qualifying shipping activity.
Qualifying shipping activity is any commercial activity that falls within the scope of maritime transport, crew management, and technical management. Maritime transport, by definition, is limited to the carriage of goods and passengers, and includes ancillary services, such as hotel and catering services, entertainment activities, and on board retail activities exercised on a qualifying vessel. Activities such as towage, dredging and underwater wiring are also included.
“Non-qualifying activities” for example activities that are not any of the abovementioned or crew management, technical management are subject to standard corporate tax of 12.5%. Separate accounts must be maintained in relation to ‘qualifying’ and ‘non-qualifying’ activities.
Qualifying ship is any seagoing vessel certified under applicable international or national rules and regulations and registered in the register of any member of the International Maritime Organisation and the International Labour Organisation. However, the following are specifically excluded:
(a) fishing and fish factory vessels;
(b) vessels used primarily for sport or recreation;
(c) vessels constructed exclusively for inland waterway navigation;
(d) harbour, estuary and river ferries and tug boats;
(e) fixed offshore installations which are not used for maritime transport;
(f) non-self-propelled floating cranes;
(g) non-ocean-going tug boats;
(h) stationary vessels employed for hotel and/or catering operations (floating hotels or restaurants); and
(i) vessels employed mainly as casinos or gambling facilities.
Ship owners of Cyprus flagged vessels automatically fall under the tonnage tax system. Ship owners of community flag ships and foreign flags on the other hand may opt to be taxed under the tonnage tax system. In order to be eligible ship owners of foreign flag vessels must comply with certain requirements, including that a share of their fleet be comprised of EU flag ships (60%), which share must not be reduced for a three (3) year period, and that the commercial and strategic management of the fleet be carried out from the EU/European Economic Area (“EEA”).
Ship managers must also maintain working offices in Cyprus with 51% of onshore personnel being citizens of the EEA and at least two-thirds of the total tonnage under management being managed within the EEA.
Key benefits of the tonnage tax system
The benefits of the tonnage tax system include tax exemptions for the following:
(a) dividends paid directly or indirectly out of profits from a qualifying shipping activity;
(b) interest income resulting from working capital or from the financing, operation and maintenance of a ship (excluding interest on funds used for investment purposes);
(c) profits made from the disposal of a ship or from the disposal of a share in a ship; and
(d) profits from the disposal of shares in a ship-owing company.
Ship owners, charterers and ship managers are also exempted from income tax.
How tonnage tax is calculated
Tonnage tax is calculated as follows:
(a) From zero to 1.000 units of net tonnage, for every 100 units of net tonnage = tonnage tax of €36,50
(b) For every additional 100 units of net tonnage from 1.001 to 10.000 = tonnage tax of €31,03
(c) For every additional 100 units of net tonnage from 10.001 to 25.000 units = tonnage tax of €20,08
(d) For every additional 100 units of net tonnage from 25.001 to 40.000 units = tonnage tax of €12,78
(e) For every additional 100 units of net tonnage in excess of 40.000 units = tonnage tax of €7,30.
Further to the above, all qualifying parties under the Cypriot tonnage tax scheme also benefit from income tax exemptions on dividend income and interest income deriving from qualifying shipping activities, as well as for any gains from the sale of vessels.
Our team of specialist lawyers can assist you with all aspects of registering a ship under the Cyprus flag, transferring a ship’s flag from any other jurisdiction, acting as authorised representative and seeing to the efficient and timely completion of all administrative and/or otherwise requirements for the registration and maintenance of a ship under the Cyprus flag.
This publication has been written in general terms and should be seen as broad guidance only. This information should not be relied upon as a substitute for professional advice. For more information please contact us at email@example.com; +357 25 823 593