The Cyprus Department of Merchant Shipping (DMS) has recently issued the following circulars to owners, managers and representatives of ships under the Cyprus flag and to owners, masters and representatives of foreign ships calling at ports in Cyprus.
"Ring fencing" provisions of the Tonnage Tax Law
Circular 21/2011 draws attention to the "ring fencing" provisions of the Merchant Shipping (Fees and Taxing Provisions) Law of 2010 (Law 44(I)/2010) ("the Tonnage Tax Law").
These provisions forbid the transfer of income or expenses between affiliated persons engaged in activities subject to tonnage tax and income tax, 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.
To this end, 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. Similarly, under section 42 of the Tonnage Tax Law qualifying shipping activities of a person subject to tonnage tax must 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 of 2002.
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. Failure to comply with this obligation may give rise to criminal liability under section 136 of the Cyprus Criminal Code. According to section 43, notification must take place within 90 days of entry into the tonnage tax scheme, but the retrospective application of the scheme makes this timescale impossible and so the following arrangements apply instead.
For qualifying owners of Cyprus ships, notification must take place no later than 1 September 2011 in respect of ships which are currently registered in the Register of Cyprus Ships and no later than 90 days from the date of registration of each additional vessel. For other persons or companies subject to tonnage tax (owners or charterers of foreign ships or ship managers) the period of 90 days will run from 15 July 2011, the cut-off date for the Department of Merchant Shipping to decide on eligibility for the tonnage tax scheme. Accordingly, notification must take place by 15 October 2011.
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 has undertaken to provide details regarding implementation of the arm's length principles and the sanctions for non-compliance and we will cover these in a future edition.
Digital publications aboard Cyprus flag ships
Circular 17/2011 notified interested parties of the Department of Merchant Shipping's decision to authorise the use of nautical publications (such as sailing directions, lists of lights, notices to mariners, tide tables and other publications necessary for their intended voyage) in digital format aboard Cyprus flag ships and to accept such publications as meeting the requirements specified in SOLAS Regulation V/27.
A number of conditions must be observed if digital publications are used. In particular there must be an adequate stand-by system in case of failure or unavailability of the primary system.
In the event that the changeover to digital publications takes place other than during an annual or renewal survey related to the ship's safety certificate, the master change took place and the implementation should be verified during the first annual or renewal survey thereafter.
Following the installation and commissioning of the digital system, any nautical publications which are in a printed form should be stored so as to avoid being easily accessible and should be clearly marked as being "out of use".
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.