The Merchant Shipping (Fees and Taxing Provisions) Law has recently been amended with a view to incorporate new taxing provisions in respect of shipmanagement companies incorporated and based in Cyprus.

Law 73 (I)/99 provides that a Cypriot registered shipmanagement company is entitled every year to opt to be taxed either in accordance with the provisions of the prevailing Income Tax Laws or at rates equal to 25% of the applicable rates for calculating tonnage tax of vessels under management which are registered outside Cyprus. Of course, management of Cypriot registered vessels is not covered by the provisions of this Law. The abovementioned option may be exercised by a written notice to the Department of Merchant Shipping with a copy to the Inland Revenue, at least 30 days before the commencement of the year for which the tax payer wishes to exercise his option.

The Merchant Shipping (Fees and Taxing Provisions) Law has been further amended by Law 63(I)/1999. Cypriot registered vessels or Cypriot vessels registered parallel out in a foreign registry which are managed by a Cypriot shipmanagement company are allowed 30% reduction on the annual tonnage tax payable. In effect the tonnage tax is paid in full and the shipowner or the bareboat charterer can have the 30% reduction refunded to him upon applying to the Department of Merchant Shipping. The abovementioned application is submitted together with a declaration made by the shipmanagement company that the shipmanagement agreement was valid and in force for the full period of time that the reduction is claimed for.

Law 63(I)/1999 provides in addition that the management of a vessel by a Cypriot registered shipmanagement company can be proved by the shipmanagement agreement entered into between the shipmanagement company and the owner of a Cypriot vessel, or the bareboat charterer of a Cypriot vessel registered parallel out in a foreign registry.

Other amendments to the merchant shipping legislation enacted by the abovementioned two Laws include the definition of a foreign ship, the change in the definition of a speed-boat as well as changes in various ship duties.

In light of the above amendments the following conclusions could be drawn:

a) With regard to Law 73(I)/99 the Cypriot shipmanagement company will be in a position to know in advance its tax burden to be calculated in accordance with the tonnage tax method of calculation and can thus opt to be taxed in accordance with the taxation method that will result in the lowest tax liability.

b) Cyprus present role as an international and regional shipmanagement centre is further established. The abovementioned amendments enhance even further the favourable tax treatment of the existing Cyprus registered shipmanagemnt companies and provide a very attractive incentive for the expansion of this field of shipping activities in Cyprus.

c) It remains to be seen whether the new amendments will have any effect on Cypriot shipmanagers based outside Cyprus (mostly in Greece), who in principle are also the owners of the vessels under their management. It could be argued that the Cypriot shipmanagers could now avoid the unattractive 25% income tax payable on their yearly profits which would apply in the event that they relocated their operations in Cyprus by opting for the fixed percentage on tonnage tax applicable. However, this could only happen in the event that the Cypriot managers decided to register their vessels outside Cyprus.

Although the effects of these new amendments are yet to be tested, it appears that they will greatly and permanently contribute to the permanent establishment of Cyprus’ leading shipmanagement role both regionally as well as internationally. However, one might argue that there can also be some negative effects resulting therefrom, since it would now be more beneficial for Cypriot shipmanagement companies to have the vessels under their management registered outside Cyprus in order to fall within the ambit of Law 73(I)/99. Could this contribute to the reduction in size of the Cypriot merchant fleet?

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