On the 29th of April 2010 the Cyprus Parliament enacted the new legislation which introduces a new shipping tax system in Cyprus which provides a wider applicability of the use of the tonnage tax option to a wider range of ship owners and managers.
The new law has a retroactive effect as from 1st of January 2010 and shall remain in force until the 31st of December 2019, unless extended by the European Council).
The new tax regime extends the provision of the already advantageous tax system to owners of foreign flag vessels and charterers, which previously was only applicable to owners of Cyprus flag vessels and ship managers. Further, the new regime generously provides additional tax benefits in relation to profits from the disposal of vessels, interest earned on funds and dividends paid directly or indirectly from shipping-related profits. The tonnage tax option is also now extended to crew management companies who otherwise would have been exposed to a 10% corporate tax.
The main provisions of the new tonnage tax regime are summarized below.
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 provisions of the Law are applicable to owners of ships registered under the Cypriot flag automatically. Other qualifying persons who may elect to taxed under the provisions of the tonnage tax regime (or alternatively will remain subject to corporation tax) include owners of ships registered under the flag of an EU or European Economic Area (“EEA”) member state who are resident for tax purposes in Cyprus, owners of a fleet of both EU/EEA and non EU/EEA ships which meet certain threshold criteria and ship managers providing technical and/or crewing services in respect of qualifying ships. Once a qualifying person makes an election for the tonnage tax regime, such person must remain under this regime for at least 10 years at the risk of suffering withdrawal penalties, calculated as the difference between the amount paid during the tonnage tax period and the amount that would have been payable had a corporation tax election been made in the same period.
*A “qualifying ship” is any seagoing vessel certified under applicable international regulations and registered in the ship register of any member of the International Maritime Organisation and/or the International Labour Organisation, recognized by Cyprus. Certain ships, such as fishing vessels and tug boats, are specifically excluded from the new regime.
**A “qualifying shipping activity” consists of any commercial activity which constitutes maritime transport, crew management and/or technical management. The term “maritime transport” includes the carriage of goods and passengers and certain ancillary services, such as dredging and cable laying, as well as accommodation and catering on board a qualifying ship.
The Law provides for a number of tax benefits the most important being that:
i. profits from the operation of a qualifying ship from a qualifying shipping activity are exempted from taxation;
ii. dividends paid directly or indirectly out of profits from a qualifying shipping activity are exempted from taxation;
iii. interest income resulting on working capital or from the financing, operation and maintenance of a ship (excluding interest on funds used for investment purposes) is exempted from taxation;
iv. profits made from the disposal of a ship or from the disposal of a share in a ship are exempted from taxation; and
v. profits from the disposal of shares in a ship-owing company are exempted from taxation.
The above is intended to provide a brief guide only. It is essential that appropriate professional advice is obtained.