Cyprus shipping and ship management
Introduction

For the Cyprus economy, the shipping industry pays a vital role and as such due care is taken by every government not only to protect but also to strengthen further through various tax incentives.

Cyprus can be utilized in 3 main ways by the international shipping community, by either establishing:

1. A Cyprus shipping company owning / bareboat chartering Cyprus flag ships and benefiting from a zero taxation regime and a low tonnage tax regime, or;

2. A ship management company offering full management services to ship owners worldwide including chartering, crewing, ship broking and similar activities and benefiting from an option to be taxed EITHER on a 4,25 % tax on their net earnings OR a tax rate equal to one quarter of the tonnage tax rates which the vessels under management would pay if they were under Cyprus flag, or;

3. A Cyprus international business company, generating profits from shipping activities of ships under non-Cyprus flag, taxed at 10 %.


The Cyprus Shipping Company

The company is registered as a private company with limited liability (limited by shares) under Cyprus Companies Law.
Tax and other benefits to Shipping Activities:

1. No income tax is payable on the profits derived from shipping activities by a Cyprus shipping company which owns or bareboat charters ships under the Cyprus flag.

2. A very competitive annual tonnage tax (Cyprus is considered to be among the most competitive shipping centers in the world in this respect). For the tonnage tax calculation please see Appendix I.

3. No capital gains tax is payable on the sale or transfer of a ship or shares in a shipping company.

4. No income tax is payable on the salaries of officers and crew of Cyprus ships which operate in international waters.

5. No stamp duty is payable on bills of sale and mortgages on ships and related documents.

 

Ship Management Companies

Ship management companies offer full management services to ship owners worldwide and are engaged in chartering, crewing, ship broking and similar activities.

Ship management companies are finding Cyprus increasingly attractive as a base for managing ships under various flags. In order to encourage the establishment of ship management companies and other shipping headquarters in Cyprus, the existing legislation grants such companies and their foreign employees various tax advantages and other incentives.

Ship Management Companies - Tax advantages
Law 73(I) of 1999 amending The Merchant Shipping (Fees and Taxing Provisions) Laws 1992-1999, introduced a new taxation regime of ship management services rendered by Cyprus ship management companies which applies both to international business companies and local companies. The main characteristics of this new regime are the following:

1. The new taxation regime covers three types of accepted ship management services, i.e. crewing, technical and commercial management of ships, rendered under a contract with the owner or bareboat charterer of a ship, by persons who have an office in Cyprus manned with sufficient personnel in number and qualifications.
2. Ship management companies are taxed in accordance with the provisions of the Merchant Shipping (Fees and Taxing provisions) Law, unless they select to be taxed for a specific tax year in accordance with the provisions of the Income Tax Law.

The interested persons may make the election with a written notice addressed to the Department of Merchant Shipping with a copy to the Commissioner of Income Tax (Department of Inland Revenue). For a specific fiscal year, the notice must be submitted at least 30 days prior to the 1st January of the relevant fiscal year, and will remain in force until withdrawal in the same way.

Cyprus ship management companies therefore have the option to choose one of the two tax regimes listed below under which their income will be taxed in any given fiscal year:

1. Either in accordance with the provisions of the Income Tax Law, any income arising from the provision of ship management services is subject to a special tax rate of 4,25%. Or
2. in accordance with the provisions of the Merchant Shipping (Fees and Taxing Provisions) Law, and for the period ending 31 December 2020, any income arising from the provision of the ship management services is subject to a tax rate equal to 25% of the tonnage tax rates of the vessels under management. For the calculation of the tonnage tax please refer to Appendix I. This tax is applicable to all vessels under management (i.e. Cyprus flag or foreign flag vessels) and is calculated based on the annual tonnage tax these vessels would have to pay if they were registered in the Cyprus Register of Ships.

This tax on ship management services is not applicable in the case of Cyprus ships which by virtue of section 8(3) (b) (i) of the Law, are entitled to a 30% reduction on the annual tonnage tax payable by their ship owners, provided that their technical and crewing management is entirely contracted to a Cyprus ship management company.
In accordance with the same legislation, no tax will be withheld from dividends distributed out of profits generated from ship management activities and no tax is imposed on the recipient shareholders in respect of these dividends.

For vessels other than passenger ships the tonnage tax is calculated as follows:


Tonnage tax

(BASIC CHARGE + GROSS TONNAGE INCREMENT) x AGE MULTIPLIER
The basic charge is €170 and the gross tonnage increment is calculated as follows:

Gross Tonnage Cyprus Cents *
For each unit up to 1.600 45
For each additional unit between 1.601-10.000 27
For each additional unit between 10.001-50.000 10
For each additional unit over 50.000 7

The age multiplier is shown below:
Age ** Ship Rate Multiplier
Up to 10 years 0,75
11-20 years 1,00
Over 20 years 1,30
** This is calculated by taking the year in which the keel was laid and then deducting it from the year of assessment of the tonnage tax.

For passenger ships the tonnage tax payable is double that payable for other vessels.


For Passenger Ships

Section 8 of the Merchant Shipping (Fees and Taxing Provisions) Laws, 1992-2003 provides for the reduction and refund of the tonnage tax in the cases listed below.


Reduction of Tonnage Tax
Technical Management And Crewing By Cypriot Companies

If the vessel's technical management and crewing is carried out by Cypriot ship management companies operating in Cyprus, a 30 percent reduction of the tonnagetax is allowed provided that the relevant documentary evidence is submitted to the Department of Merchant Shipping in advance of the period for which the reduction is claimed.

If members of the crew of the vessel are Cypriot citizens, a percentage of the tonnage tax paid by that vessel may be refunded for each month they are employed on board the vessel, as follows:

• For vessels other than passenger ships - officers and cadet officers: 2,5 percent for each month of actual employment on board, ratings: 1,5 percent for each month of actual employment on board.
• In the case of passenger ships the above rates are reduced by 50 percent.

The Cypriot seafarers employed must be duly qualified for the post they hold on board.
The tonnage tax may be refunded on the application of the owner of the vessel who should submit relevant documentary evidence attesting the employment of Cypriot citizens on board his vessel.
If the ship is laid up for a period of more than 3 consecutive months the tonnage tax payable is reduced by 75 percent for the period during which the vessel is laid-up.
The maximum reduction or refund of tonnage tax described above cannot exceed 50 percent of the tonnage tax due.


The use of Cyprus in international tax structuring for the shipping industry

Issues to Consider on set up:

1. Legal form Vs "branch"
2. No thin capitalization rules that regulate inter-company loans when used as a method of financing
3. Transfer Pricing: Cyprus has a general provision which states that transactions should be carried out at "arms length basis [there is much debate in what constitutes an arm's length]

Taxation right on profit from the operation of ships: Risks

Article 8 OECD Model Tax Convention:

"Profits from the operation of ships or aircraft in international traffic shall be taxable only in the Contracting State in which the effective place of management of the enterprise is situated".

"If the place of management of a shipping enterprise is aboard a ship or boat then it shall be deemed to be situated in the contracting state in which the home harbour of the ship or boat is situated, or, if there is no such home harbour, in the contracting state of which the operator of the ship or boat is a resident"

(One should be careful to investigate if specific DTT grants exclude taxation rights)

Result: if no exclusive taxation rights for the contracting state in which the effective place of management of a shipping enterprise is situated, then full foreign tax on shipping profits.


Applicability Tonnage tax regime: Risks

No tax shall be charged in Cyprus on any income derived by the owner of a Cyprus ship from the operation of such ship in any shipping enterprise between Cyprus and Ports abroad or between ports abroad (with the exemption of any enterprise using Cyprus as their base).

Lessor of Cyprus ship in financial lease arrangement not considered to be the owner of the ship for the purpose of applying tax exemption.

Sale of a Cyprus ship by shipowner: not income from operating the ship (not subject to CIT, only in case gain of a capital nature)

Result: profit subject to CIT at a rate of 10%


Income generated by ship owner not closely connected to income from operating the ship:

• interest income
• other services

Income from Cyprus ships in the oil and gas exploration industry not considered to qualify as income from the operation of any shipping enterprise between ports abroad:

• applicable to Drilling Rigs (e.g. MODUs and FFPs)
• not applicable to certain support vessels (?!)


Result: profit subject to CIT at a rate of 10%.


EU State Aid for Maritime Transport: Risks

Article 87 EC Treaty: State aid exists where a tax measure:

1. grants an advantage to the taxpayer
2. which is granted by a Member State or through State resources
3. which distorts competition and trade between Member States, and
4. which favours certain undertakings or the production of certain goods

Repayment obligation: in case a shipping tax measure within the meaning of Article 87 EC Treaty is considered as (illegal) state aid by the European Commission after investigation, the Commission may require that the tax benefits realized (including interest) be recovered from the taxpayer.

Existing state aid is not illegal state aid if:

1. aid measures put into effect before 10 December 1994, or
2. aid measures specifically listed (i.e. approved state aid)

Justification Ground: Guidelines on Sate Aid to maritime transport in 2004. Is Cyprus tonnage tax system approved state?

Result: In case state is constituted benefit (tax saving) is to be paid back.

 

2009 Developments

New EU Rules on State Aid to Ship Management Companies are expected and will affect the industry in Cyprus

In June 2009 the European Commission provided new and detailed guidance on state aid granted to ship management companies, complementing the 2004 guidelines on state aid to maritime transport.

The new guidance confirms that tonnage tax may be applied to all ship managers, as long as they contribute to the development of the European maritime cluster and that they make a commitment to implement the Maritime Labour Convention 2006 ahead of its entry into force.

The 2004 guidelines restricted tonnage tax schemes to ship managers providing a complete package of technical and crew management for the same ship, with a commitment to re-examine the issue after three years. The Commission accordingly reassessed the matter and concluded that there was no justification for penalising partial outsourcing as compared with full outsourcing. Accordingly, crew management and technical management of ships will now also be eligible when they are supplied separately, subject to the ships managed being fully compliant with international safety rules, and subject to crew managers applying the main provisions of the 2006 Maritime Labour Convention, ahead of its entry into force.

The Cyprus government has announced that it now intends to publish a new draft law on shipping taxation which will further improve Cyprus's attractiveness as a shipping centre, with the aim of it being in force in 2010.

 

The above is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Libor Ltd will be glad to assist you in this respect. Please contact us for appropriate professional advice.

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