Cyprus: Shipping In The European Era

Cyprus is a well established shipping centre in a strategic geographical location at the crossroads of prosperous financial regions of three continents and next to the Suez Canal. The independence of Cyprus in 1960 heralded a new era of prosperity which saw an upsurge in the island’s economy and the modernization of its infrastructure.

The role of the island as an international business, financial and shipping centre has evolved considerably, stimulated by increased trade, a growth in offshore activities and the aggressive expansion of the Cypriot economy.

Cyprus is nowadays considered as one of the most favourable jurisdictions in the European Union and the whole world in which to do business.

The island is a low tax jurisdiction, not a tax haven, and its fiscal and regulatory regimes as well as its legislation are now aligned with the EU’s acquis communautaire. Cyprus is a signatory to a large number of international conventions and treaties, including an extensive network of tax treaties.

The legal system is based on the English common law system, and the adoption of modern shipping legislation, closely modelled on its English counterpart, has paved the way for the Cypriot flag to become the well respected flag that it is today, flown by vessels from almost every nation. The Constitution of Cyprus, as well as the EC Treaty, safeguard the rule of law, political stability, human rights and the ability to challenge the legality of administrative decisions.

The framework of the policy and conduct of government ministries, departments and organizations such as the Department of Merchant Shipping maintains the respectable and responsible reputation of the Republic of Cyprus whilst at the same time allowing activities to be conducted in a environment as free from onerous and bureaucratic delays and restrictions as possible.

The accession of Cyprus to the European Union on 1 May 2004 and the harmonization of the island’s legislation with the EU’s acquis communautaire only add to and reinforce the quality of the Cypriot registered fleet. This is evidenced by the withdrawal of the Cypriot flag from the recently published black list of the Paris Memorandum of Understanding on Port State Control Organization. At the same time, Cypriot registered vessels enjoy the benefits of flying the flag of an EU member state which remains highly competitive.

The extension and diversification of shipping activity is to a large extent attributable to the island's excellent infrastructure. Operating in Cyprus are all the businesses and services, public and private, which ship owners, banks, investors and individuals require and all are provided at the highest international standards.

The ship management companies feature prominently in Cyprus, along with companies engaged in chartering, crewing, ship broking, surveying, insurance and salvage. Membership of numerous international organizations enables the island to influence at the highest level decisions relating to shipping matters and furthermore helps Cyprus to maintain strong and friendly links with almost all foreign powers. As a result, vessels flying the Cypriot flag receive a warm welcome in ports of call the world over.

Cyprus offers nondiscriminatory and favourable tax treatment of shipping activities which may constitute a major factor in successful tax planning, particularly through the use of the extensive network of tax treaties. Virtually all such treaties provide, directly or indirectly, that shipping profits are taxable only in the place of residence or effective management, irrespective of whether or not a permanent establishment exists in the other treaty country (with the exception of Denmark and France).

The tax environment provides that:

• Ship management companies are exempt from income tax and enjoy a different and more favourable tax regime altogether;
• No tax is payable either on profits from the operation of Cypriot-registered vessels, or on dividends received from a ship owning company;
• No capital gains tax is payable on the sale or transfer of a Cypriot-registered vessel or the shares of a ship owning company;
• No stamp duty is payable on ship mortgage deeds or other security documents;
• Emoluments of seamen employed on board Cypriot-registered vessels are exempt from tax;
• No estate duty or inheritance tax is levied following the death of a shareholder.

The Merchant Shipping (Fees & Taxation Provisions) Laws 1992-2004 contain special provisions for the taxation of ship management companies with a qualified and sufficiently staffed office in Cyprus.

The Republic of Cyprus is a member of numerous international associations, including the United Nations, the Council of Europe, the British Commonwealth and the Group of Non-Aligned Countries and it acceded to the European Union on 1 May 2004.

Furthermore, Cyprus is an active member of the International Maritime Organization, the International Labour Organisation, the International Telecommunication Union and the United Nations Conference on Trade and Development. Its membership of the European Union implies the active participation of the island in the newly established European Maritime Safety Agency as well in the shaping of the EU’s transport policy in general.

It is expected that the signing of the EU Customs Union Protocol between Cyprus as a new EU entrant and Turkey as an applicant country will remove all current obstacles faced by Cypriot registered ships to trading in Turkish ports. The European Commission Ship Owners’ Association fully supports such development.

Cyprus has also ratified many international conventions, thereby achieving further enhancement of the island's high standing in the shipping community.

Although every effort is made by the Cypriot government to ensure that strong bonds of cooperation and friendship are maintained and encouraged with all international organizations and among all of their respective members, at the same time it safeguards the interests of its shipping industry.

In Cyprus, the commercial infrastructure is so advanced that all the professional services required for successful shipping operations are present and offer high standards of service. There are numerous highly skilled and educated accountants and lawyers, with extensive experience in the shipping arena yet the fees for the provision of such services are usually low in comparison with other western jurisdictions. These professionals may also act as directors, trustees or secretaries of shipping companies.

The low costs found throughout all sectors of the economy in Cyprus include the costs of incorporating shipping companies, as well as the levies payable by shipping companies for the registration and retention of vessels under the Cypriot flag and which cover an initial registration fee and an annual tonnage tax thereafter that are both reasonable and, more importantly, are considerably lower than those of other comparable jurisdictions.

Cyprus has adopted a tonnage tax system which is very favorable to ship owners. Under it the relevant calculation formula takes into consideration the age and tonnage of the vessel. The tonnage tax is reduced or a refund may be made in the following instances:

• Where the vessel is laid up for 3 consecutive months, the tonnage tax for that period is reduced by 75%;
• Where technical and crew management is undertaken by a Cypriot or an EU ship management company operating in Cyprus, the tonnage tax is reduced by 30%.

Within the Department of Merchant Shipping there is a Cyprus Ship Registry, whereby all kinds of registrations, whether provisional, permanent or parallel, as well as all mortgages, transfers and deletions regarding Cypriot vessels, are approved and recorded.

Certain conditions exist as to the registrations of ships under the Cypriot flag which primarily depend upon the age of the vessel.

There are numerous advantages to Cypriot mortgages and international banking institutions are usually willing to grant loans on the strength of such mortgages.

Ships flying the Cypriot flag have every opportunity to employ foreign crew. The requirement to employ a minimum Cypriot crew content was abolished on 1 May 2004.

The composition and quality of the crew must nevertheless be of such a standard as to secure the safe manning of the vessel. The Cypriot authorities require that all crew members possess a valid certificate of competency appropriate to their rank or position issued by the Cypriot authorities or one of the several countries whose certificates are recognized.

The EC Treaty provisions on the protection of competition are directly applicable in Cyprus. In addition, Cyprus enacted in 1989 the Protection of Competition Law which forbids in a fashion similar to the EC Treaty, any agreement having as its object or effect the elimination, restriction or distortion of competition or the abuse of a dominant position.

For the shipping industry, two block exemptions have been adopted: one concerning liner conferences (PI 210/97) and the other in relation to liner consortia (PI 211/96 as amended). These may be used as guidelines so that agreements are compatible with the law. The main difference between these two exemptions is that the former allows carriers to fix prices, while the latter does not. Both exemptions are contained in regulations based on EU Regulation 4056/1986 on Liner Conferences and Regulation 823/2000 as amended on Liner Consortia. The application of these block exemptions is limited to international scheduled cargo services and, while the two Cypriot enacted block exemptions only concern such operations out of Cypriot ports, the European block exemptions are applicable where there is an effect on EU trade. Tramp and passenger operations are excluded while a separate Regulation has been adopted by the European Union in connection with cabotage services.

The block exemption for liner conferences provides that members of liner conferences engaged in the fixing of rates and conditions of carriage, subject to certain conditions and obligations, will not breach the 1989 law. However, this block exemption is currently under review by the European Commission.

The block exemption for liner consortia exempts the following agreements between shipping companies from the 1989 law:

• Joint operation of liner shipping transport services, including the fixing of timetables, pooling of vessels and the exchange of space on board;
• Temporary capacity adjustments;
• Joint operation of port terminals;
• Participation in tonnage and/or revenue/net revenue pools;
• Joint exercise of consortium voting rights held in a conference, as long as it concerns the consortium;
• Joint marketing structures, joint operations offices, issue of joint bills of lading and use of computerized data exchange systems;
• Other arrangements ancillary to the above, which are necessary for their implementation.

Exemptions are granted subject to certain conditions and obligations.

The freedom to provide maritime transport services within the territory of another member state (cabotage services) is granted by EC Regulation 3577/1992 to ship owners operating ships registered and flying the flag of Cyprus, subject to certain conditions.

The incorporation of the International Safety Management (ISM) Code on the Safe Operation of Ships and for Pollution Prevention and the International Ship and Port Security (ISPS) Code in the International Convention on the Safety of Life at Sea (SOLAS) makes the two codes enforceable via port state control and compliance is mandatory for ships flying the Cypriot flag or entering the Cypriot jurisdiction.

The object of the ISM Code is to ensure safety at sea, the prevention of human injury and loss of life, and avoidance of damage to the environment and property. Under the ISM Code, the company that undertakes the operation of the ship must develop and maintain a Safety Management System and, among other things, issue detailed manuals that cover a wide variety of matters. The ship must have on board a Document of Compliance and a Safety Management Certificate.

The purpose of the ISPS Code is to enhance the maritime security of ships and port facilities. It is therefore necessary for Cypriot ships to have approved security plans and to abide by them. Upon compliance of a ship with the ISPS Code, the relevant International Ship Security Certificates are issued.

Cyprus is rightfully considered as one of the leading international maritime centres worldwide as it is the third largest ship management centre in the world and currently ranks sixth on the list of leading maritime nations with a merchant fleet exceeding 26 million gross tonnes.

The long-standing policy of the Cypriot Government has been the continuous improvement of the already high quality infrastructure and the incentives available to both residents and non-residents alike.

In addition, the current regime guarantees the prosperity and growth of the Cypriot shipping industry.