Cyprus Tonnage Tax Scheme - Improving the competitiveness of Cyprus Ship-owners, Charterers and Ship Managers.
The Law effective as from 01.01.2010 has repealed and replaced the Merchant Shipping (Fees & Taxing Provisions) Law of 1992-2007 and the Merchant Shipping (Taxation of ship management services) Regulations of 2000. The Law is fully in line with the current Community Acquis.
The Income Tax Law was also amended by repealing current section 19, which allowed ship managers to be taxed for a specific fiscal year with corporate tax rate 4.25%.
The Special Contribution for the Defence Law has also been amended by repealing current section 3 (11) which exempted from this tax the dividends received from profits generated from ship owning (Cyprus flag ships) or ship management activities.
Beneficiaries for the Tonnage Tax Schemes may be:
- The owners of ships under the Cyprus flag.
- The owners of ships under any foreign flag who are tax residents of Cyprus.
- The charterers of ships under any flag who are tax residents of Cyprus.
- The Ship Managers providing crew or technical ship management services to ships under any flag who are tax residents of Cyprus.
Tax Resident of Cyprus means any individual who stays in Cyprus more than 183 days in a calendar year. A legal entity is considered to be a tax resident if the management and control of the entity is exercised in Cyprus.
The eligible beneficiaries must:
a) engage in a “qualifying shipping activity” which is defined as being any commercial business or activity which constitutes maritime transport, i.e. carriage of goods or passengers by sea outside the territorial sea of the Republic of Cyprus or in crew and/or the technical management of qualifying ships.
b) own or charter or manage a “qualifying ship”.
A “qualifying ship” is a seagoing vessel, certificated in accordance with the applicable international or national rules and regulations, registered in the ship register of any member of the International Maritime Organisation (IMO)/ International Labour Organisation (ILO) which is recognized by the Government of the Republic of Cyprus.
Imposition of Tonnage Tax and Exemption from Income Tax
As a general rule, owners, charterers or managers of qualifying ships engaged in a qualifying shipping activity are taxed under Income Tax in respect of the income generated by the operation of their ships in such an activity unless they opt in advance to participate in the tonnage tax system. The tonnage tax is charged, levied and collected by the Department of Merchant Shipping. The only exemption to this rule applies to owners of ships under Cyprus flag which are exempted from Income Tax and are automatically subjected by law to the annual tonnage tax system.
When an option is exercised by a qualifying owner, charterer or manager to participate in the tonnage tax system they must remain in the tonnage tax system for at least 10 years.
If at any time before the expiry of the 10 year period a beneficiary exits from the tonnage tax system, he will be liable to pay the difference between the tax due under the corporate tax system and that payable under the tonnage tax system for the whole period the beneficiary remained under the tonnage tax system. Such a requirement does not apply in case the ship is disposed of or lost. The Law has specific provisions regarding transactions not made at arm’s length, provision for separate accounting, fair share of expenditure, the “all or nothing option” and status changes in a tonnage tax company.
Other important tax exemptions
a) Dividend exemption; shareholders of eligible companies which are owners or charterers or managers and which have elected to participate in the tonnage tax system, are also exempted from Income Tax or any other tax or levy on any dividend paid from profits earned from a qualifying shipping activity.
b) Interest exemption - Eligible entities which are owners or charterers or managers which participate in the tonnage tax system, are also exempted from Income Tax or any other tax or levy on any interest earned on the working capital.
c) Profit from sale of qualifying ships exemption. Profit realized from qualifying owners, from the sale of any qualifying ship is exempted from Income Tax.
d) Salaries of seafarers of Cyprus ships exemption
There is a specific provision in the Law whereby no tax is charged, levied or collected upon the salary or other benefits derived from the employment of the master, the officers and the crew members of a Cyprus ship.
Of course many more provisions apply to the individual categories of ship owners, charterers and ship managers to which one can refer to if a specific client requirement is made.
Finally it should be mentioned that the tonnage tax scheme will be effective for a period of 10 years as from 01.01.2010 and will be re-notified to the European Commission before the end of this 10-year period. Therefore, the last date until which entry into tonnage tax may be granted shall be the 31.12.2019.