- Cyprus Tonnage Tax Scheme
- June 26, 2014 | Authors: Anastasios A. Antoniou; Aquilina Demetriadi
- Law Firm: Anastasios Antoniou LLC - Limassol Office
- Featuring one of the largest ship registries worldwide, Cyprus also boasts an EU-approved tonnage tax system. The European Commission approved the Cypriot tonnage tax scheme as compatible with the requirements of the EU guidelines on State Aid to Maritime Transport, the first time an EU Member State with an open registry receives such approval. The tonnage tax system confers tax exemptions in favour of the payment only of tonnage tax, which is calculated on the basis of the net tonnage of the ships owned, chartered or managed. Managers pay a rate which is 25% of the rate applicable to owners and charterers.
Ship owners falling under the scheme enjoy a total exemption from tax on any profits from the sale of a qualifying ship, income derived from the operation of a qualifying ship engaged in a qualifying shipping activity and dividends paid directly or indirectly out of shipping related profits. Also exempted is interest earned on working capital, and/or revenue earned by a qualifying owner from a qualifying shipping activity on bank accounts, if such working capital or revenue is used to pay expenses for the financing, operation and/or maintenance of a ship.
Charterers also benefit from similar tax exemptions in relation to profits from qualifying shipping operations, dividends paid out of such profits, as well as interest earned on working capital / revenue earned from a qualifying shipping activity on bank accounts where this is used to pay expenses arising out of a charter party. Managers’ income will be exempted from tax where it is derived from the provision of crew and/or technical ship management services to a qualifying ship. Also exempted will be managers’ dividends paid out of such profits, and interest on working capital/revenue which is earned from the provision of management services and used for the payment of expenses relevant to the management of such ship. Furthermore, no tax will be charged on the salary and other benefits which arise from the employment of the master, officers and other crew members of a qualifying Cyprus ship engaged in a qualifying shipping activity.
Any owner, charterer or manager opting for the tonnage tax scheme must remain in it for 10 years and early withdrawal will result in penalties. However, there are provisions which permit vessels to be sold and leave the Scheme, or charter or management agreements to come to an end, without necessarily incurring penalties.
Owners of Cyprus ships fall within the scope of the tonnage tax scheme by default, as well as tax resident owners of ships registered in an EU Member State (“EU Ships”) who have opted into the scheme. A company is considered a tax resident in Cyprus if it is managed and controlled in Cyprus. Also qualifying are the tax resident owners of any fleet comprising both EU and non-EU Ships which have opted into the scheme, provided certain conditions are met.
A ship qualifying for the Cyrus tonnage tax scheme is any seagoing vessel certified under applicable international or national rules and regulations and registered in the ship registry of any recognised member of the IMO and/or the International Labour Organization. Vessels used primarily for sports or recreation, non-self propelled floating cranes, non-ocean going tug boats, and floating hotels, restaurants and casinos are excluded. Activity qualifying for the scheme is any commercial activity that constitutes maritime transport, or crewing and/or technical management, where maritime transport means the traditional carriage of goods and passengers between ports and/or offshore facilities, ancillary activities, such as hotel, catering, entertainment and retailing activities on board a ship and towing, dredging and cable-laying activities.
Charterers (bareboat, demise, time or voyage charterers) also qualify for Cyprus’ tonnage tax scheme, provided it is tax resident in Cyprus and it charters (i) a Cyprus ship, or (ii) an EU Ship, or (iii) a fleet of both non-EU and EU Ships. For all charterers, the total net tonnage of ships under time or voyage charter must not exceed, for more than 3 consecutive tax years, a certain percentage of the total net tonnage of all ships owned or operated.
A ship management company which provides crewing and/or technical ship management services can also qualify for inclusion in the tonnage tax scheme of Cyprus, subject to conditions which include, without limitation, a requirement that the manager is tax resident in Cyprus, maintains a properly-staffed office in Cyprus and employs a sufficient number of qualified personnel, with 51% of the total staff it employs ashore being citizens of an EU Member State. Furthermore, at least 60% (in terms of tonnage) of the qualifying ships must be EU Ships.