Cyprus: Notifications Under The Tonnage Tax Law

The Department of Merchant Shipping ("DMS") has issued a number of Notifications giving guidance on its interpretation of certain aspects of the Merchant Shipping (Fees and Taxing Provisions) Law of 2010 ("the Tonnage Tax Law").

Deadline for applications to be included in the tonnage tax scheme for 2011

Qualifying Cyprus tax-resident owners of foreign ships, charterers and ship managers may opt to be taxed under the tonnage tax scheme in respect of any particular fiscal year under the provisions of section 7, section 19 and section 29 respectively of the Tonnage Tax Law.

In order to do so they must submit a completed Application for Approval of the Option to be taxed under the Cyprus Tonnage Tax System on form MS TT 1 to the Director of the Department of Merchant Shipping, with a copy to the Commissioner of Income Tax, no later than thirty days before the beginning of the relevant year.

The Department of Merchant Shipping will review the application and its supporting documentation and will notify the applicant and the Commissioner of Income Tax within thirty days whether the applicant qualifies or not. If the application is approved, the option will be effective as from the date of receipt of the application and will remain in force until it expires, or is subsequently withdrawn by the owner, charterer or ship manager, as the case may be. A notice of withdrawal given during the course of any year will take effect from the last day of the year. If early withdrawal takes place otherwise than as a result of the disposal of the ships, termination of the charters or cessation of all ship management activities, the tax liability will be recalculated as if the option to be included in the tonnage tax scheme had never been exercised, and the taxpayer will be required to pay any shortfall.

Taxpayers wishing to be included in the scheme for 2011 were unable to do so within the time allowed by the Tonnage Tax Law since the necessary subsidiary legislation for implementation of the Law was not in place at the time. Accordingly, the Department of Merchant Shipping has set a deadline of 31 May 2011 for receipt of applications from owners of foreign ships, charterers and ship managers wishing to be taxed under the tonnage tax system for the fiscal year 2011. If the application is approved, the option will be effective from 1 January 2011.

Definition of "Community ship"

The definition of the term "Community ship" is contained in section 2 of the Tonnage Tax Law, and is further explained in the Tonnage Tax (Definition of Community Ships) Notification of 2010, issued by the DMS in July 2010 ("the July Notification").

According to section 2 of the Tonnage Tax Law, a Community ship is a ship registered in a Member State which flies the flag of a Member State in accordance with its legislation, and is determined by Notification, in compliance with the applicable guidelines on State aid to maritime transport adopted from time to time by the European Commission.

In the light of this, the DMS considers that there are two concurrent prerequisites for a ship to qualify as a Community ship, namely; it must be registered in a Member State; and it must fly the flag of a Member State in accordance with its legislation.

The July Notification contains a list of qualifying Registers. It does not include the Registers of overseas territories of Member States such as the Dutch Antilles Register and the Cayman Islands Register.

However, "Community ship" must be interpreted to include the term "Cyprus ship" which, according to section 2 of the Tonnage Tax Law, includes foreign registered ships registered in the Special Book of Parallel Registration, under the provisions of Part VA of the Tonnage Tax Law. Accordingly, a ship registered paralle-lin under the Merchant Shipping (Registration of Ships, Sales and Mortgages) Laws of 1963 to 2005 (Law 45 of 1963 as amended), is considered by the DMS to be registered in Cyprus and flying the Cyprus flag, and so constitutes a Cyprus ship and a Community ship.

Furthermore, the DMS regards a ship registered parallel-out under Law 45 of 1963 as amended as a Cyprus ship (and by analogy a Community ship), even though it may temporarily be flying a foreign flag. However, a ship which has no registry connection with Cyprus (either as underlying register or as flag register) is deemed by the DMS not to be a Cyprus ship or a Community ship because its bareboat charter registration is not effected according to Cyprus law.

In order to avoid any eventual discrimination as a result of the specific treatment of the status of Cyprus ships DMS may also interpret the term "Community ship" to include cases where the underlying register is a Community ship Register other than the Cyprus Register and the vessel is temporarily flying a non-Community flag, if it is evidenced that for tax purposes and for the whole duration of the bareboat charter the ship is considered by the legislation of the relevant Member State (the underlying registry) to be a ship of the Member State concerned.

Calculation of Community-flagged share percentage

Section 15 of the Tonnage Tax Law allows owners of mixed fleets, comprising Community-flagged ships and non-Community-flagged ships to benefit from inclusion in the tonnage tax scheme provided that:

  • at least 60% of the fleet in terms of tonnage comprises Community ships; or
  • part of the fleet comprises Community ships; and
    • the percentage share of the fleet in tonnage terms represented by Community-flagged ships is not reduced for three years from the date of entering the tonnage tax scheme; and
    • the commercial and strategic management of the fleet is carried out from the territory of the EEA.

Sections 25 and 35 of the Tonnage Tax Law include similar provisions for charterers and managers respectively of mixed fleets, apart from the requirement for the ships to be managed from the EEA.

Failure to maintain the percentage share of the fleet represented by Community-flagged ships results in the imposition of surcharges and disqualifications.

In December 2010 the DMS issued the Tonnage Tax (Special Provisions for the Calculation of the Community Flagged Share) Notification of 2010 which sets out the detailed method for calculation of the relevant percentages and includes illustrative calculations.

Reference date for calculation of the Community-flagged share

For the purposes of calculating the Community-flagged share for a given fiscal year only the net tonnage of the ships owned, chartered or managed as at 31 December of that year will be taken into account.

The Department of Merchant Shipping will carry out a calculation of the Community-flagged share at the end of the third year (on 31 December) after entry into the tonnage tax system and every three years from that date for as long as the tonnage tax scheme is in place. A company which opted to enter the tonnage tax system on 1 January 2011 will be assessed on 31 December 2013 and every three years thereafter. A newly established company which opted to enter the tonnage tax system on 13 May 2011 (upon establishment) will be assessed for the first time on 31 December 2014 and every three years thereafter.

31 December is also the reference date for calculating the minimum percentage set out in section 33 of the Tonnage Tax Law regarding the economic link between the managed ships and the Community.

Minimum share of the fleet in ownership

Section 47 of the Tonnage Tax Law allows charterers to enter the tonnage tax scheme only if the total net tonnage of ships chartered-in and included in the tonnage tax scheme is no more than 75% of the total net tonnage of all ships chartered-in or operated by the charterer and included in the tonnage tax system. The limit is increased to 90% provided that every chartered-in ship flies an EEA flag or is entirely managed from within the EEA. Temporary increases in the chartered-in percentage after entry are permitted but if the percentage of net tonnage chartered-in reaches 100% (i.e. no vessels are owned or bareboat chartered) the charterer will be ineligible for tonnage tax and will be taxed under the Income Tax Laws.

The share of the fleet in ownership in a given fiscal year is calculated on the basis of the net tonnage of each ship chartered-in or operated as at 31 December which is included in the tonnage tax system, on a pro rata basis according to the number of days chartered-in or operated.

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.

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