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The New Cyprus Tonnage Tax Scheme

26 Jul 2010

With the introduction of the Cyprus Tonnage Tax Scheme ship owning and ship management companies can now consider Cyprus for international shipping. Cyprus is ranked among the top ten most competitive shipping centres worldwide in terms of cost. Its strategic geographical position and infrastructure are also what attracts ship owners to this part of the world. The maritime industry is among the largest industries in the EU with Cyprus the third biggest 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 to comply with the EU's guidelines on State aid to maritime transports. Taxand Cyprus discusses their new tonnage tax scheme and benefits to ship owning and ship management companies.

The new tax regime, as pre-approved by the Cypriot Council of Ministers, obtained the green light by the European Commission on 24 March 2010. The draft bill was then 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 in 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, ship owners, ship charterers and 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.

Ship owners, ship charterers and ship managers must fulfil a number of requirements in order to qualify under the new regime. Different conditions apply according to the categories, having as a basic and common requirement that the ships and the activities undertaken must also qualify under the new regime.

In line with the above, qualifying ships are the seagoing vessels, certified under the applicable international or national rules and regulations; registered in the ship register of any state, being a member of the International Maritime Organisation and the International Labour Organisation, which is recognised by Cyprus. ?on-qualifying vessels are also listed under the Law.

Qualifying shipping activities include any commercial business or activity which constitutes maritime transport, crew management or technical management of qualifying vessels. 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.

Taxand's Take

This revised legislation obtained prior approval from the European Commission for a 10 year period, on the grounds of state aid to the shipping industry and complying with EU regulations. This approval is considered 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, non-designated vessels and / or shipping activities are subject to tax under the ordinary corporate income tax rate of 10%.

In addition to the new Cyprus tonnage tax scheme, the shipping industry can also benefit from 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 businesses and easy accessibility.

Developments in merchant shipping are expected to increase Cyprus's shipping industry activities as well as the number of ships and shipping companies registered in Cyprus. Ship owning and ship management companies should keep abreast of these developments to maximise on international shipping activities.

Your Taxand contacts for further queries are:
Sophie Stylianou

Orestis Livadas

Taxand Finland, in the January issue of Taxand's Take, announced their government were also proposing amendments to the Finnish tonnage tax regime with the aim of promoting their international competitiveness - Read the full article to understand the impact on ship owners here

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