The new Regime of the prolonged Cyprus Tonnage Tax and Seafarer scheme
Following the formal assessment of the Cyprus Tonnage Tax and Seafarer scheme, the European Commission has concluded, on 16th December 2019, that the assessed scheme of Cyprus is compatible with the internal market and in line with the EU Guidelines on State aid to maritime transport, prolonging the Cyprus Tonnage Tax and Seafarer scheme for the next 10 years (by 31 December 2029).
The aforesaid prolonged scheme provides competitive advantages, including amongst others, wider list of eligible vessels and ancillary activities, discount rates for environmentally-friendly vessels and more importantly the companies operating under current Tonnage Tax System (‘TTS’) can continue to do so with no major changes.
It is worth underlying that Cyprus was the first ever open registry within the EU having a comprehensive, transparent and approved TTS by the EU, which has now been prolonged for the next ten years, following extensive negotiation and discussion between the Shipping Deputy Ministry of Cyprus and the European Commission.
The Cyprus’ TTS applies to ship ownership, ship management and ship chartering activities. It is a tax system whereby beneficiary companies can choose to be taxed on the basis of their net tonnage (tonnage tax) rather than on their actual profits from maritime transport activities. The tonnage tax is considered as one of the key assets of the Cypriot shipping industry in efforts to attract more ships and companies to the Cyprus maritime cluster.
The Cyprus scheme has been found that it contributes to the global competitiveness of the EU maritime sector without unduly distorting competition and encourages ship registration in Europe while at the same time preserving Europe’s high social, environmental and safety standards and ensuring a level playing field.
Moreover, the Commission found that it complies with the rules limiting tonnage taxation to eligible activities and vessels. Furthermore, as regards taxation of dividends of shareholders, the Commission found that the Cypriot tonnage tax scheme ensures that shareholders in shipping companies are treated in the same way as shareholders in any other sector. As regards the seafarer scheme the Commission found that Cyprus has agreed to apply the benefits of its respective scheme to all vessels flying the flag of any EU or EEA Member State.
The attractive and transparent Cyprus TTS, among other things, provides exemptions to beneficiaries (owners of Cyprus ships, owners of foreign ships, charterers and ship managers) from income tax. The tonnage tax for companies owning foreign vessels is payable by 28 February of each calendar year, while the tonnage tax for Cypriot vessels is payable by 31 March of each calendar year.
It is worth mentioning that before the establishment of the Shipping Deputy Ministry to the President of Cyprus in March 2018, 168 shipping related companies were registered under the Cyprus TTS, while currently 239 companies are registered under it, with approximately 4,500 employees. 87% of the companies are controlled by EU interests.
It is of great importance to mention that, as at October 2020, there are more than 1,115 Cypriot qualifying vessels, registered under the Tonnage Tax System.
New Cyprus Tonnage Tax Legislation
The aforementioned scheme was unanimously approved, on 15th April 2020, by the plenary of the House of Representatives of the Republic of Cyprus, securing the viability of the Cyprus Registry and the Cyprus Shipping Industry, maintaining at the same time its prominent position in the global shipping arena.
More precisely, the Merchant Shipping (Fees and Taxing Provisions) (Amendment) Law of 2020 (Law 39(I)/2020) which was published in the Official Gazette of the Republic of Cyprus No 4753, Supplement I(I), dated 16/4/2020) (hereinafter “the Law of 2020”), entered into force on 16th April 2020.
By virtue of the Law of 2020, the validity period of the Merchant Shipping (Fees and Taxing Provisions) Law of 2010 (Law 44(I)/2010) (hereinafter the “the basic Law”), has been prolonged until 31st December 2029, giving effect to the Decision of the European Commission dated 16th December 2019 (hereinafter “the EU Decision”) to prolong the Cyprus tonnage tax system and to approve it as being in line with the relevant EU policy and Community Guidelines on State aid to maritime transport.
The basic Law together with the amendments introduced by the Law of 2020 are hereinafter together referred to as “the new Law”.
In addition to the prolongation of the validity period, the Law of 2020 has introduced several amendments to the basic Law, in order for Cyprus to conform with the European Commission’s decisional practice and in particular the EU Decision.
The amendments are the following:
- “Maritime transport”
The definition of maritime transport in section 2 of the basic Law has been amended so as to now include “ancillary activities to maritime transport, provided that the revenues from such activities shall not exceed fifty per cent (50%) of the total gross revenues from the operation of each qualifying ship under tonnage tax by a qualifying owner or qualifying charterer.”
- “Ancillary activities”
In order to give effect to the new definition of “maritime transport”, a new definition “ancillary activities to maritime transport” has also been introduced by the Law of 2020.
By virtue of this amendment, ancillary activities are defined as:
- ‘’the activities related to a qualifying ship under tonnage tax, which have a substantial connection with the core maritime transport activities of a qualifying owner or a qualifying charterer but which exclude commercial activities that form part of an operation of a port carried on for profit; or
- (ii) where the qualifying owner or the qualifying charterer of a qualifying ship under tonnage tax is a member of a group of companies, the activities related to such qualifying ship’s core maritime transport activities provided by another member of that group which is a tax resident of the Republic.’’
In accordance with the recent Commission decision practice with respect to this matter and as provided in the EU Decision, core maritime activities comprise notably transport of goods and passengers by sea, crew and technical management of eligible vessels, towage and dredging activity (provided at least 50% of annual operations constitute maritime transport) and by analogy cable laying activities.
The implementing Notification P.I. 182/2020 which determines such ancillary activities has been issued and published in the Official Gazette on 28th April 2020.
- “Qualifying ship”
The definition of ‘’qualifying ship’’ in section 2 of the basic Law, has been amended and now includes both a list of eligible vessels as well as a list of the vessels which are excluded from this definition.
The vessel types which are included in the definition of “qualifying ship” in line with the Maritime Guidelines and Commission’s case practice in this respect, include the following vessels:
- vessels operating maritime transport activities, such as cargo and passenger ships;
- cable-laying ships, pipe-laying ships;
- ocean-going dredgers, ocean-going tug boats;
- crane vessels, self-propelled barges;
- research vessels;
- mobile offshore drilling units (MODUS);
- off-shore support/servicing vessels engaged in petroleum and gas activities;
- multi-purpose break-bulk and other types of support/ servicing vessels;
- cruise ships; commercial yachts;
- rescue and marine assistance vessels;
- guard vessels for maritime security and environmental clean-up purposes;
- vessels for raising, repairing and dismantling windmills;
- ice management vessels;
- accommodation vessels for housing offshore workers at sea; and
- any vessel engaged in the transportation of any UN/EU humanitarian aid or is involved in any UN or EU humanitarian relief operations.
According to the new Law, the above-mentioned list of eligible vessels may be extended following the prior notification approval by the European Commission.
Conversely, the definition of “qualifying ship” expressly excludes the following vessels:
- fishing and fish factory vessels;
- private yachts;
- vessels constructed and used exclusively for inland waterway navigation;
- fixed off-shore installations and floating storage units which are not used for maritime transport;
- non-ocean going tug boats and non-ocean going dredgers;
- floating hotels or restaurants;
- floating or cruising casinos; and
- non-propelled barges and any other vessels which may be determined as non-qualifying ships, following the prior notification approval by the European Commission.
- Bareboat Charter
In order to give effect to the recent decision practice of the European Commission, section 6 of the basic Law has been amended so that an owner of a ship which is bareboat chartered out shall be deemed to be a qualifying owner, if the ship is bareboat chartered to a charterer forming part of the same group as the owner (intra-group transaction). In other words, with the introduction of this amendment, intra-group transactions are eligible for tonnage tax without restrictions.
As of 1st January 2020, non-intra group bareboat charter agreements will be eligible for tonnage tax provided that they meet the following conditions included in section 6 of the new Law:
(1) the owner demonstrates that the ship was bareboat chartered out due to short-term over-capacity and the term of the charter does not exceed three years;
(2) the temporary excess capacity must be related to the beneficiary’s own shipping services, i.e. excess capacity specifically acquired (bought or chartered) for chartering-out purposes is ineligible for tonnage taxation; and
(3) at least 50% of the tonnage tax fleet must still be operated by the tonnage tax beneficiary.
The above conditions will not apply to existing bareboat charter agreements until their date of expiration or until 31 December 2022, whichever takes place earlier.
- Reduction of Tonnage Tax
Under the Law of 2020, a reduction of up to 30% of the tonnage tax is possible in the case of a Cyprus ship (section 9 of the new Law) or EU/EEA ship (section 13 of the new Law) using mechanisms for the environmental preservation of the marine environment and the reduction of the effects of climate change.
The eligibility criteria for such reduction as well as the level of reduction may be set by a relevant Order of the Council of Ministers published in the Official Gazette of the Republic.
- Tax Exemptions for Seafarers
In accordance with the EU decision, the tax benefits existing for seafarers have been extended to seafarers of Community ships.
More specifically, under section 55 of the new Law the tax exemptions apply to seafarers who are liable to income tax in Cyprus and are employed on board a Community ship which is a qualifying ship engaged in a qualifying shipping activity.
Where the vessels provide scheduled passenger services between ports of the Community, only seafarers who are citizens of the EU/EEA are eligible to benefit from the scheme. In all other cases, the exemptions apply to all seafarers (citizens of a Member State or a non-Member State).
- Introduction of terms “Shipping Deputy Minister”, “Shipping Deputy Ministry” and “Permanent Secretary”
Following the set-up of the Shipping Deputy Ministry on 1st March 2018, in addition to the above mentioned amendments, certain other minor amendments were deemed necessary to the basic Law in order for the new Law to be in line with the Establishment of a Shipping Deputy Ministry and Appointment of a Shipping Deputy Minister to the President and for Matters Connected Therewith Law of 2017 (Law 123(I)/2017).
More specifically there have been introduced the following new terms and their definitions:
- “Shipping Deputy Minister”;
- “Shipping Deputy Ministry”;
- “Permanent Secretary” and other necessary minor amendments throughout the text of the new Law.
Zacharias Kapsis is a shipping lawyer at A.Karitzis&Associates L.L.C in Limassol. He specialises in maritime law, he is a member of the Larnaca Bar Association and member the Navigation Committee of the Cyprus Bar Association. Zacharias obtained his bachelor’s degree in law from the National and Kapodistrian University of Athens in Greece and pursued his master’s degree in maritime law at the University of Southampton in the United Kingdom. firstname.lastname@example.org.