Cyprus is considered as the ultimate shipping hub due to its special geographical location, located between 3 continents and thereby providing vital shipping routes for Europe, Africa, the Arabian Peninsula and East Asia. With its continuously improving sound maritime infrastructure, attractive tax regime and annual tonnage tax rates, Cyprus plays a leading role in the shipping industry and is an attractive choice for many ship owners, charterers, and ship managers.
One of the main reasons of the growth of shipping sector in Cyprus is its tax legislation. In 2010, Cyprus introduced the EU approved Tonnage Tax System (TTS) under the Merchant Shipping (Fees and Taxing Provisions) Laws of 2010-2020 (Law 44(I)/2010 as amended by Law 39(I)/2020), (hereinafter referred to as the “Law”). The main benefit of the TTS is that the tax burden related to the vessel is known (depending on the tonnage of the vessels) and does not fluctuate with the levels of income or profit. The beneficiaries of the TTS are qualifying owners of Cyprus and foreign ships, charterers and ship managers who respectively own, charter or manage a qualifying ship engaged in a qualifying shipping activity, subject to certain conditions. This article will delve into the applicability of the TTS in Cyprus and the conditions imposed, to assist shipping companies with optimising their business operations and establishing headquarters in Cyprus.
What is a qualifying ship?
“Qualifying ship”: is any seagoing ship certificated under the applicable international or national rules and regulations registered in the ship register of any member of the International Labour Organisation (ILO) and International Maritime Organisation (IMO) which is recognised by the Republic of Cyprus.
Eligibility Requirements
The eligibility requirements for each beneficiary are as follows:
Shipowners
A shipowner who (a) owns a qualifying ship under the Cyprus or foreign flag (b) is a Cyprus tax resident and (c) carries out a qualifying shipping activity, will fall within the scope of the TTS (eligible for the TTS).
What is a qualifying shipping activity?
“Qualifying shipping activity”: is any commercial business or activity which constitutes maritime transport, or crew or technical management of qualifying ships.
It is worthwhile noting that owners of Cyprus ships are automatically subject to the TTS while owners of foreign or non-community ships have the option to elect to be taxed under the TTS, subject to the “Community-Flagged Share” requirement.
When shipowners opt to be taxed under the TTS, they must remain in the system for a period of 10 years. Early withdrawal can lead to penalties equal to the difference between the amount paid during the period under the TTS and the amount that would have been paid if they had been subject to corporation tax.
Maritime Trasport involves the carriage of goods and passengers by sea, outside the territorial waters of the Republic of Cyprus, between a Cyprus port and a foreign port or an offshore facility, or between foreign ports, or offshore facilities. It can also include ancillary activities, towage activities and laying provided certain conditions in regard to revenue and compliance (where applicable) are satisfied.
Bareboat chartering can also be considered maritime transport provided certain conditions are met.
Tax exemptions for ship owners under the TTS:
- Profits from the use of a qualifying ship in a qualifying shipping activity;
- Profits from the disposal of a qualifying ship and/or shares of a ship owning company
- Dividends paid out of the above profits at all levels of distribution
- Interest income related to the financing/maintenance/operation of a qualifying ship and the working capital, excluding interest on capital used for investments
In 2020, the Law has been amended with the purpose of providing an incentive to qualifying ship owners to decrease the environmental impact of their ships, whereby a decrease of up to 30% of the tonnage tax imposed can be accepted, where mechanisms for the environmental preservation of the marine environment and the reduction of the effects of climate change are employed.
Ship Charterers
Given the charterer is a Cyprus tax resident legal person, there is an option for all ships (Cyprus/EU/EEA fleet or non-community ships) chartered under bareboat, demise, time, voyage charter to be included in the TTS. If the option is not used, profits are taxable under 12.5% corporate tax. The fleet qualifying criteria are the same as for ship owners and so is the minimum 10-year duration.
The entry of a charterer into the TTS is only eligible when at the opting time, the aggregate net tonnage of the chartered-in vessels and included in the TTS does not exceed 75% of the aggregate net tonnage of all chartered-in vessels or operated by the qualifying charterer and included in the TTS.
Following the entry into the system, the net tonnage chartered-in percentage by the charterer can be increased from the maximum amount of 75%, provided that this does not exceed 90% for more than 3 consecutive tax periods. To be eligible for this extension in the net tonnage chartered-in, each ship must be registered in an EU Member State and its crew/technical manager is carried out from the territory of an EU Member State.
Where the above threshold is exceeded, ships representing the excess tonnage will not be included under the TTS and income will be taxed according to the corporate tax rate.
When the percentage of net tonnage chartered-in is 100% (no vessels owned or bareboat chartered) the charterer is deemed to be a non-qualifying charterer and will be taxed according to the provisions of the applicable Income Tax Laws.
Tax exemptions for Ship Charterers:
- Profits from use of a qualifying ship in a qualifying shipping activity;
- Dividends paid out of such profits at all levels of distribution;
- Interest income related to the working capital or for the payment of expenses arising from the charter, excluding interest on capital used for investments.
The income tax exemption of qualifying charterers is granted if at least 25% of the net tonnage of vessels subject to tonnage tax are owned or are bareboat chartered. There is a possibility of percentage’s reduction but not for more than 3 consecutive years.
Ship Managers
A qualifying ship manager is a Cyprus tax resident legal person providing crew and/or technical ship management services to qualifying vessels (Cyprus/EU/EEA/ non-community)
Crew management services include:
- Selecting and engaging the ship’s crew including payroll arrangements and insurance for the crew.
- Ensuring that the applicable laws in respect of manning levels, rank, qualifications and certification of the crew and the employment regulations including crew’s tax discipline and other requirements are satisfied.
- Ensuring that all members of the crew have passed a medical examination certifying that they are fit and are in possession of valid medical certificates.
- Arranging for transportation of the crew.
- Training of the crew and supervising their efficiency.
- Other relevant functions usually performed by ship managers under the BIMCO standard ship management agreement.
Technical management services include:
- Providing competent personnel to supervise the maintenance and general efficiency of the ship.
- Arranging and supervising of dry dockings, repairs, alterations and the up keeping of the ship to the standards required by the Law of the flag and/or the places the ship trades and/or the requirements and recommendations of its classification society.
- Arranging the supply of necessary stores, spares and lubricating oil.
- Other relevant functions performed by ship managers under the BIMCO standard ship management agreement.
Commercial management does not fall under qualifying activities for the purposes of the TTS and is taxable under the corporate tax rate of 12.5%.
Commercial management services include:
- Providing chartering services in accordance with the instructions of the owner, including seeking and negotiating the employment of the ship and the conclusion of charter parties or other contracts relating to the employment of the ship
- The payment to owners of all hire and freight revenues and any other moneys, to which the owners are entitled and arise out of the employment of the ship
- Providing voyage estimates, accounts, the calculation of hire, freights and demurrage, and/ or dispatch moneys due from or due to the charterers of the ship
- Other relevant functions performed by ship managers under the BIMCO standard ship management agreement
The fleet qualifying criteria is the same as the ship owners / charterers and so is the minimum 10-year duration.
However, ship managers have two additional requirements under the TTS.
The 2/3 rule
Ship managers can only benefit from the TTS when at least 2/3 of the total ships under management of the ship manager in a given fiscal year are managed from the territory of any EU Member State.
Fully-fledged office
To qualify under the TTS ship managers must maintain an office in Cyprus with an adequate number of and sufficiently qualified personnel. At least 51% of the persons employed must be citizens of the EU. Ship managers managing up to 10 ships must employ at least 5 persons including one qualified marine engineer and/or one skilled crew manager, depending on whether technical and/or crew management services are provided. Where more than 10 ships are managed at least 10 persons must be employed, including two qualified marine engineers and/or one or two skilled crew managers (depending on whether technical and/or crew management services are provided)
Tax exemptions for Ship Managers:
- Profits from technical and/or crew management services to any qualifying ship
- Dividends paid out of the above profits at all levels of distribution
- Interest income related to the working capital or the payment of expenses related to the management of ships, interest on capital used for investments.
The “Community-Flagged Share” requirement
All beneficiaries of the TTS with a mixed fleet (fleets of ships comprising of EU and non-EU ships) are subject to the “Community share requirement” to remain in the system, whereby at least 60% of the fleet in terms of tonnage should be Community ships. The legislation therefore allows the entry of non-EU/EEA vessels into the tonnage tax regime provided the fleet is composed of at least 60% EU/EEA vessels. If, in terms of tonnage, the rate is less than 60%, then a share of the fleet should comprise of Community ships and this EU/EAA flagged share must not be reduced in the 3-year period, following the exercise of the option. Where there is a decrease in the community share, the Tonnage tax for all non-community ships will be subject to an increase by 10%. The commercial and strategic management of the fleet must be carried out from the EU/EEA.
“Qualifying community ship”: is deemed to be qualified when it is registered for and flies an EU/EEA flag.
“Qualifying non- community ship”: is only eligible for the TTS if:
- It is classed by a classification society recognised by the EU
- It is duly certificated as appropriate according to the International Conventions regulating to maritime safety, security and protection of the environment (the flag should be recognised by the ILO and IMO)
- Is manned by seafarers who are duly certificated according to the Standards of Training, Certification and Watchkeeping for Seafarers (STCW) Convention (the flag should be recognised by both the ILO and IMO).
In accordance with the First and Second Schedule of the Law, the applicable tonnage tax rates are as follows:
| Units of Net Tonnage | Ship-owners & Charterers €TT per 100 units | Ship-managers €TT per 400 Units |
| 0-1,000 | 36.50 | 36.50 |
| 1,001 – 10,000 | 31.03 | 31.03 |
| 10,001 – 25,000 | 20.08 | 20.08 |
| 25,001 – 40,000 | 12.78 | 12.78 |
| > 40,001 | 7.30 | 7.30 |
Ring-fencing provisions
The TTS contains certain ring-fencing provisions preventing eligible beneficiaries from obtaining a tax exemption in respect of non-qualifying activities. As such, it is noteworthy to mention that separate accounts must be maintained in respect of qualifying and non-qualifying activities. Similarly, transactions with related parties not part of the TTS must be made at arm’s length.
How can we assist?
For clients operating in the shipping industry, our dedicated team of professionals can assist by:
- Carrying out a review of the structure of operations of the client to determine eligibility under the TTS;
- Communications with the Department of Merchant shipping as regards to eligibility, registration, and administrative procedures etc.;
- Registration of shipping companies and vessels and their further administration;
- Drafting of all documentation for the proper operation and set up of the business;
- Contractual and shipping matters in relation to the operations of the client in the shipping industry;
- Preparation of accounts, reporting and compliance procedures.
Evidently, Cyprus is a continuously growing shipping centre with a vast network of professionals that can provide to the everyday needs of shipping companies. Being an EU flag, Cyprus is White-listed on the Paris and Tokyo MOU and is a signatory to all international maritime conventions on safety and pollution prevention, ensuring the sustainability of the shipping sector for the next decade. All these factors, together with Cyprus having an extensive double taxation treaty network with over 60 countries, a TT regime that confers a total exemption from income tax for qualifying activities without preventing companies with certain non-qualifying activities to enter the TTS, contribute to a regime that is effective, simplified and transparent, offering valuable benefits to all its beneficiaries and enhancing the competitive edge of Cyprus shipping industry.
Disclaimer
The information provided above by C. Pilyugin & Co LLC is intended for general information purposes only and should not be construed as professional or legal advice in any sense. It is advised that readers should refrain from acting only on the basis of the above information without first obtaining legal or professional advice on the subject.
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