Cyprus: Cyprus’s Shipping Tax Regime

Last Updated: 18 November 2014
Article by Philippos Aristotelous and Stavros Supashis
Most Read Contributor in Cyprus, April 2019

Cyprus is among the world's top shipping centres, with a government policy which actively attracts investment to the island. This article looks at the features and exemptions which make it so attractive to shipping businesses.

I. Background

Since it became independent in 1960 Cyprus has recognised the importance and potential of shipping, and government policy has succeeded in attracting shipping entrepreneurs and developing the island into a major international shipping centre combining both a sovereign flag and a resident shipping industry. The Cyprus registry currently ranks tenth among international fleets, with 1,857 ocean going vessels with an aggregate gross tonnage of more than 21 million tonnes, and Cyprus is among the world's top five ship management centres, accounting for approximately one-fifth of the global third-party ship management market.

II. Introduction

Cyprus's attractiveness as a shipping centre is based on operational and financial benefits, not least of which is an extremely attractive tax regime for qualifying international shipping activities. Since Cyprus joined the EU in 2004, Cyprus resident shipping and ship management companies had enjoyed the most benevolent shipping taxation regime in Europe, with significant exemptions and the option for ship management companies to elect between a reduced corporate income tax rate of 4.25 percent or a tonnage tax regime under section 19 of the Income Tax Law of 2002 (Law 118(I) of 2002) as amended (ITL).

The Merchant Shipping (Fees and Taxing Provisions) Law of 2010 (Tonnage Tax Law), which took effect from January 1, 2010, introduced a tonnage tax regime complying with EU state aid and other taxation norms and offering an even lower tax burden. Following enactment of the Tonnage Tax Law, section 19 of the ITL was repealed by the Income Tax (Amendment) Law of 2010 (Law 41 (I) of 2010).

The Tonnage Tax Law extended the benefits of the tonnage tax regime and exemptions from income tax that were previously restricted to owners, operators and managers of Cyprus-flag ships to Cyprus-resident owners and charterers of non-Cyprus flag vessels, and widened the scope of tax exemptions to include profits on the disposal of vessels, interest earned on funds and dividends paid directly or indirectly from shipping-related profits, in addition to profits from shipping operations.

III. Qualifying persons, activities and vessels

In order to be eligible for the tonnage tax regime, a ''qualifying person'' must be carrying out ''qualifying activities'' in relation to ''qualifying vessels''. Qualifying persons are tax-resident owners or charterers (bareboat, demise, time and voyage) of:

  • Cyprus ships;
  • EU ships or fleets of ships comprising EU and non-EU ships; and
  • ship managers providing technical or crewing services or both.

Ship managers are required to maintain a functioning office in Cyprus staffed by a sufficient number of appropriately qualified personnel. At least 51 percent of onshore personnel must be citizens of the European Economic Area (EEA) (comprising the EU together with Iceland, Liechtenstein and Norway) and at least two-thirds of the total tonnage under management must be managed within the EEA.

For owners of Cyprus ships the tonnage tax scheme is mandatory. Other owners or charterers and ship managers may opt for taxation based on profits under the ITL or tonnage tax, but, having opted for the tonnage tax scheme, they must remain within it for 10 years unless the vessel is sold, or a charter or management agreement is terminated. For a fleet to qualify for the scheme, at least 60 percent of its tonnage should comprise EU ships. If this requirement is not met, the non-EU vessels may still qualify if certain criteria are met, but surcharges may be payable. For owners and charterers, qualifying activities are:

  • maritime transport of goods or people between Cyprus ports and foreign ports: or
  • offshore installations; or
  • between foreign ports or offshore installations, including towage, dredging and cable laying.

For ship managers, qualifying activities are the provision of services under a written agreement to a ship owner or bareboat charterer in relation to crew management, technical management or both. A qualifying vessel is a sea-going vessel that has been certified in accordance with international principles and legislation of the flag country and is registered in the register of a member country of the International Maritime Organisation and International Labour Organisation. Vessels which transport humanitarian aid are included in the definition, but the following vessels are excluded:

  • fishing and fish factory vessels;
  • vessels used primarily for sport or recreation;
  • vessels constructed exclusively for inland waterway navigation;
  • harbour, estuary and river ferries and tug boats;
  • fixed offshore installations which are not used for maritime transport;
  • non self-propelled floating cranes;
  • non-ocean going tug boats;
  • stationary vessels employed for hotel and/or catering operations (floating hotels or restaurants); and
  • vessels employed mainly as casinos or gambling facilities.

IV. Tax exemption

The Tonnage Tax Law replaces taxes based on profits with a tax calculated on the net tonnage of the vessels concerned.

For owners and charterers the tax exemption covers profits from the use of a qualifying vessel, dividends paid out of those profits at all levels of distribution and interest income relating to the financing, maintenance or use of a qualifying vessel and the related working capital, excluding interest on capital used for investments. Profits from the disposal of a qualifying vessel or any share or interest in it and profits from the disposal of shares in a qualifying ship-owning company are also exempt from tax. In order to qualify for the exemption at least 25 percent of the net tonnage of vessels subject to tonnage tax must be owned or bareboat chartered. The percentage can be reduced but not for more than 3 consecutive years. The qualifying percentage is reduced to 10 percent if all the vessels of the charterer are registered or managed in the EEA.

Ship managers may elect to pay tonnage tax at one-quarter of the rates applicable to owners and charterers, in which case profits earned from the provision of technical and crewing services are exempt from tax in respect of qualifying vessels, together with dividends paid out of those profits at all levels of distribution.

Profits from commercial management are not covered by the tonnage tax scheme and remain taxable under corporation tax.

Section 46 of the Tonnage Tax Law contains an ''all or nothing'' provision. Qualifying owners, charterers and ship managers opting to enter the tonnage tax system must include all qualifying ships. If a company which is part of a Cyprus tax resident group of companies enters the tonnage tax scheme, then all other qualifying members of the group must simultaneously enter the scheme.

As noted above, entry into the tonnage tax system is for a minimum period of 10 years. Early withdrawal other than as a result of the disposal or termination of the charter of the vessels concerned, results in tax liabilities being recalculated based on the provisions of the ITL as if the taxpayer had never entered the scheme.

V. Tonnage tax rates

Tonnage tax is charged on a sliding scale on net tonnage. The initial rates charged to owners and charterers are as follows:

Tonnage Rate per tonne
First 1,000 tonnes
Next 9,000 tonnes
Next 15,000 tonnes
Next 15,000 tonnes
Each tonne above 40,000
EUR0.3650
EUR0.3103
EUR0.2008
EUR0.1278
EUR0.0730

By way of example, the annual tonnage tax on a ship of 50,000 tonnes would be EUR8,816.70.

Cyprus-flag ships are also subject to an annual registry maintenance fee of EUR300.

For shipmanagers the rates are one-quarter of those set out in the table above.

VI. ''Ring fencing'' provisions

The Tonnage Tax Law contains ring-fencing provisions, so as to ensure that only profits from qualifying activities are subject to tonnage tax and that profits from other activities are not sheltered within tonnage tax. Separate accounts must be maintained in respect of qualifying and non-qualifying activities, and transactions with related parties that are outside the tonnage tax system must be made at arm's length.

Section 41 of the Tonnage Tax Law requires transactions between two parts of the same corporate structure (whether in Cyprus or abroad) to take place on arm's length terms and prices, as if the two parties involved were independent from each other and not part of the same corporate group. Section 42 requires qualifying shipping activities of a person subject to tonnage tax to be segregated from non-qualifying activities carried out by the same person and accounted for on an arm's length basis. Where transactions subject to section 41 or 42 have taken place other than on arm's length terms the tax authorities may make an appropriate adjustment to the taxable profits under section 33(1)(b) of the Income Tax Law.

Section 43 of the Tonnage Tax Law requires taxpayers to whom the provisions of section 41 apply to notify any potentially affected person of the possible application of the provisions of section 33 of the Income Tax Law in relation to transactions between them within 90 days of entry into the tonnage tax scheme. Failure to comply with this obligation may give rise to criminal liability under section 136 of the Criminal Code.

Taxpayers are required to maintain adequate records to demonstrate that transactions have taken place on an arm's length basis and to produce them to the authorities on request. If the terms differ from normal market terms, adequate reasoning must also be given.

The Department of Merchant Shipping (DMS), which administers the tonnage tax system, maintains records of all vessels within the scheme, as well as of Cyprus flag vessels and their owners which are not deemed to carry out a qualifying activity, and of all managers, owners or charterers of foreign flag vessels who do not carry out a qualifying activity or have not opted for the tonnage tax system. It issues an annual certificate to participants in the scheme, a copy of which is sent to the income tax authorities, to confirm their exemption from corporate income tax.

VI. Reduction of tonnage tax

If a ship is laid up or rendered inoperative for at least three months as a result of judicial arrest, act of piracy, armed robbery or force majeure the tonnage tax payable is reduced by 75 percent for the period of inactivity provided that the DMS is duly notified not later than 3 months from the commencement of the period of inactivity.

VII. Surcharge on non-EU ships listed by the Paris MOU on Port State Control

Qualifying non-EU ships flying a flag of a registry that appears in the Grey List or the Black List of the Paris MOU are subject to a surcharge of 30 percent or 60 percent respectively.

VIII. Other tax benefits

There are several other benefits available to Cyprus-resident shipping businesses. The wages of officers and crew are exempt from income tax, there is no capital gains tax on the sale or transfer of a Cyprus-registered vessel or the shares of a vessel owning company, and no stamp duty on ship mortgage deeds or other security documents.

IX. Conclusion

Cyprus enjoys the unique advantage of being the only country with an EU-approved tonnage tax regime for shipping activities which confers total exemption from income tax and tax on distributions at all levels and allows for both qualifying and non-qualifying activities.

Originally published by Bloomberg BNA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Philippos Aristotelous
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions