Cyprus today is considered as an ideal centre for the establishment of ship owning and ship management companies. Mainly due to its strategic geographical position and good infrastructure, Cyprus is favoured for international shipping. Currently, Cyprus is ranked among the top ten most competitive shipping centres worldwide in terms of cost. The maritime industry is among the largest of the European Union while Cyprus is the biggest third party ship management centre in the EU. Despite the need to preserve the favourable merchant shipping regime under Cypriot legislation, the need for the revision of the Cypriot legislation arose as to comply with the European Union's guidelines on State aid to maritime transports.
Accordingly, the new tax regime, as pre-approved by the Cypriot Council of Ministers, obtained the green light by the European Commission on March 24. Respectively, the draft bill was unanimously approved by the Plenary Session of the Cypriot House of Representatives on 29 April 2010. The Cypriot Tonnage Tax Scheme aims to contribute towards the enhancement of the competitiveness of the Cypriot Merchant Shipping industry, by the adoption and implementation of motives for a wide range of shipping activities, while preserving compliance with the European acquis communautaire.
The new tax regime deviates from the Cypriot Income Tax Legislation by the introduction of a more competitive tonnage tax scheme. Accordingly, qualifying ship owners, qualifying ship charterers and qualifying ship managers are subject to tonnage tax, which is calculated based on the net tonnage of the vessels that they possess, charter or manage respectively.
In line with the above, qualifying ship owners are the owner of a Cyprus registered vessel, conditional upon the fact that such vessel qualifies as a qualifying ship and is engaged in qualifying shipping activities; the owner of a community vessel who has opted to be subject to tonnage tax, conditional upon the fact that such ship owner is a tax resident of Cyprus and the vessel is engaged in qualifying shipping activities; and the owner of a fleet of EU and non-EU registered vessels who has opted to be subject to tonnage tax, conditional upon the fact that such ship owner is a tax resident of Cyprus and the vessel is engaged in qualifying shipping activities.
Notwithstanding the above, a ship charterer is any legal person engaged in the chartering of vessels belonging to third parties in order to perform maritime transfers, who, among others, charters vessels by way of a bareboat, demise, time charter and so on. Cyprus tax residency and chartering of qualifying vessels engaged in qualifying shipping activities are among the preconditions for a ship charterer to qualify under the tonnage tax regime irrespective of whether such charterer charters Cyprus or EU registered vessels or a fleet of EU and non-EU registered vessels. Moreover, eligibility for the application of the tonnage tax system is also conditional upon complying with the fact that the tonnage of the ships chartered out may not exceed 75% of the total net tonnage of all ships chartered for more than three consecutive tax years. A 90% requirement is imposed where the ships chartered are EU registered and their ship management is exercised from the EU. It should be noted that charterers opting to be taxed under the tonnage tax system, must remain in the system for a period of at least 10 years.
A ship manager is any legal person rendering ship management services, whereby such services include crew management and/or technical management services. Respectively, such ship managers may qualify for the tonnage tax system if a number of preconditions are established, some of which are identified hereunder. Accordingly, the ship manager must be a Cyprus Tax resident rendering its services to qualifying vessels of any flag. Notwithstanding the above, the ship manager must maintain a fully fledged office in the Republic and employ qualified personnel (51% of which must be EU residents). Equally, the application of the tonnage tax regime is dependent upon the fact that at least 2/3 of the total tonnage of the qualifying vessels under management must be exercised from the territory of a Member State, irrespective of whether such ship management is exercised in the form of in-house management or is assigned to other ship management companies. Furthermore, from a tonnage perspective, at least 60% of the vessels under management must be, among others, EU registered and flagged. A qualified ship manager will be liable to 25% of the rate imposed to ship owners and ship charterers.
Furthermore, qualifying ships are the seagoing vessels, which have been certified under the applicable international or national rules and regulations and are registered in the ship register of any state, being a member of the International Maritime Organisation and the International Labour Organisation, which is recognized by Cyprus. A list of non-qualifying vessels is also provided for under the Law.
Qualifying shipping activities include any commercial business or activity which constitutes maritime transport, crew management or technical management of qualifying vessels. In line with the above, maritime transport, by definition, is limited to the carriage of goods and passengers, and includes ancillary services, including but not limited to hotel and catering services, entertainment activities, on board retail activities exercised on a qualifying vessel, and so forth. Activities such as towage, dredging and underwater wiring are also included.
Further to the above, all qualifying parties under the Cypriot Tonnage Tax Scheme, may also enjoy an income tax exemption on dividend income and interest income deriving from qualifying shipping activities, as well as for gains deriving from the alienation of ships.
This revised legislation obtained the prior approval of the European Commission for a 10 year period, on the grounds of state aid to the shipping industry and it complies with the EU regulations. This approval is considered as the most important accomplishment in the shipping area since the establishment of Cyprus. Despite the fact that the revised legislation provides for a more competitive tonnage tax regime, it expressly limits its scope of application to qualifying vessels and activities. Accordingly, nondesignated vessels and/or shipping activities are subject to tax under the ordinary corporate income tax rate of 10%.
In addition to the modernised tax scheme, it is worth mentioning that Cyprus offers a lot of advantages to the shipping industry such as a full exemption from exchange control restrictions for non residents, no taxes on the crew salaries, no stamp duties on mortgage documents, strategic geographic location which makes it easier to contact business, easy accessibility, non discriminating legal system and others.
Such beneficial developments in the area of merchant shipping are expected to increase Cyprus's shipping industry activities as well as the number of ships and shipping companies registered in Cyprus.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
