Today, as a member of the European Union, Cyprus remains an optimal business base. It is one of the most attractive locations for foreign investments worldwide. Foreign companies have been given the opportunity to invest and establish business in Cyprus on equal terms with local investors as no distinction is made between foreign and Cypriot companies.
Despite its small geographical size Cyprus has developed into a major ship management centre attracting foreign ship owners and ship management companies through the highly favourable tax provisions available to them on the island as well as many other non fiscal advantages offered to this sector. These shipping entrepreneurs have helped develop the island into a fully-fledged shipping centre combining both a sovereign flag and a resident shipping industry which is renowned for its high quality services and standards of safety.
Cyprus has an open registry allowing non Cypriot citizens to
register ships under the Cyprus flag.
The recent agreement reached between the Eurogroup and the Cypriot authorities on the key elements for a future macroeconomic adjustment programme and in relation to the commercial banks in Cyprus, have not affected the Shipping sector. The Department and the Registrar of Cyprus ships have been and will continue to operate as usual according to the Ministry of Communications and Works announcement of the 27th of March 2013.
As the announcement explains, the reason for this is that the Cyprus tonnage tax system is 'locked' for ten years. Unlike the other tonnage tax schemes, the Cyprus scheme is one of the schemes for which the European Commission has determined that it complies with the European Union State Aid Policy. The situation which has emerged has no direct or indirect effect on the Cyprus tonnage tax scheme. The main reason for this is that although the Cyprus flag fleet ranks amongst the 10 largest in the world, the banks in Cyprus, historically, have not been active in ship financing. Thus the recent developments are not affecting and have had no impact on the financing of Cyprus ships.
Advantages of Registering a Cypriot Shipping Company:
- An advanced maritime infrastructure with two deep sea multipurpose ports in Limassol and Larnaca;
- Sound International Relations;
- The Harmonisation with The EU acquis expedited the modernisation of the Cyprus maritime legislation in the fields of maritime safety and security;
- Cyprus is fully harmonised with all international instruments currently in force as well as with the regulations and directives of the EU and as a result the Cyprus flag has turned into a flag of quality which has attracted high quality tonnage;
- Recognition of Competence certificates from many countries.
The Cyprus ship registry which ranks 10th amongst international fleets is continuously upgrading its services in order to offer a high standard of support to international shipping and a reputation of a flag of progress:
- Easy deletion from the Cyprus Ship Register;
- Low Ship Registration Fees;
- Low set up and operating costs of companies;
- Anonymity of beneficial owners through nominee or trustee shareholder;
- Low Corporate tax rate at 12,5%;
- Efficient and modern legal accounting and banking services with highly educated, qualified and multilingual personnel;
- Availability of competent multilingual local employees;
- Low operation and construction costs;
- Cyprus is signatory to numerous international maritime conventions with over 40 double taxation treaties in effect and more under negotiation;
- There is a liberal foreign direct Investment Regime allowing up to 100% foreign participation in most sectors of the economy;
- Bilateral Agreements of cooperation in Merchant shipping with 23 countries including major labour supplying countries;
- Advanced telecommunications network and easy access by air and sea;
- No exchange control and freedom of movement of foreign currency;
- VAT exemption for international transport services when the effective use and enforcement of the services takes place outside the EU.
All the above have prompted the establishment by many European entrepreneurs of local companies with fully fledged offices on the Island.
There is an extremely favourable taxation regime and fiscal benefits available for ship-owners, crew members and ship management companies:
- No Estate duty on inheritance of shares in a ship owning company;
- No income tax on the emoluments of officers and crew on board of a Cyprus Ship;
- No stamp duty on ship mortgage deeds or other security documents;
- No Capital gains tax for Cyprus registered ships on the sale of a Cypriot vessel or transfer of shares in a Cypriot ship owning Company;
- No tax on profit from the operation or management of a vessel registered under the Cyprus flag or shares in a ship owning company.
The greatest advantage of Cyprus is considered to be the special taxation regime for shipping companies: Ship-owners, charters and ship managers participating in the Cyprus tonnage tax system are exempted from income tax and any other tax or levy on dividends paid to shareholders on interest earned on working capital and on any profit made from the sale of a qualifying ship.
The new Cyprus tonnage system for Cyprus Merchant Shipping was approved by the European Commission in March 2010 as complying with the requirements of the EU acquis in accordance with the relevant guidelines on State Aid to Maritime Transport. It has many benefits for ship-owners, charterers and ship managers.
It is a very significant development for the shipping industry because firstly it simplified the tonnage tax system which was approved by the European Commission and secondly Cyprus is the only EU member state with an open registry which has received the approval of such a tonnage tax system. Under this new Tonnage Tax System qualifying owners of Cyprus and foreign ships, charterers and ship managers who opted and are accepted to be taxed under the TTS are subject to an annual tax referred to as tonnage tax which is calculated on the basis of the net tonnage of the qualifying ships they own or charter.
The New Tonnage Tax System provides favourable tax provisions for:
- Owners of Cyprus flag vessels;
- Owners of foreign flag vessels;
- Charterers from any jurisdiction;
- Ship managers that provide crew and or technical ship management services.
Provided that they own, charter or manage a qualifying ship in a
qualifying ship activity (defined as any commercial business
activity which constitutes maritime transport or crew or technical
management of a qualifying ship) and are tax residents in
Whoever chooses to enter the Tonnage Tax System is not obliged to pay income tax and they have to pay tonnage tax.
Ship-owners of Cyprus flagged vessels are admitted to the Tonnage Tax System automatically as it is obligatory. Whereas the ship-owners of foreign flagged vessels the charterers and the ship managers have an option either to be admitted to the tonnage tax system or to be taxed on corporate tax currently at 12,5%. If admitted to the Tonnage Tax system they shall have to remain in it for a period of 10 years from the date of admission.
Tonnage tax is calculated on the net tonnage of the vessel according to a broad range of bands and rates that are prescribed in the legislation. The rates applicable to ship managers are 25% of those applicable to ship-owners and charterers.
When the new Tonnage Tax System is chosen the following income tax exceptions apply that provide that notwithstanding the provisions of the Income tax laws or any other Law in force in the Republic no tax shall be charged, levied or collected upon the following:
- Income of a qualifying owner/charterer derived from the operation of a qualifying ship in a qualifying shipping activity;
- Income of a qualifying ship manager from the rendering of crew and /or technical management services (ship management) to a qualifying ship;
- Profit dividends paid to shareholders directly or indirectly.
- From the operation/ship management of a qualifying ship or from the sale of a qualifying ship (only the owners).
Bank Interest earned on working capital or shipping revenue provided that the said working capital or shipping revenue is used by a qualifying:
- Owner to pay expenses for the financing and/or operation and/or maintenance of ship;
- Charterer to pay expenses arising out of the charter party;
- Ship manager to pay expenses relevant to the management of qualifying ships.
Income or profit made by a qualifying owner from the sale of a qualifying ship or from the sale of any shares in a qualifying owner entity that is the owner of a qualifying ship.
Given the considerable advantages offered to the Cypriot ship - owners and ship management companies it is not difficult to realise why a small island like Cyprus has grown to be one of the largest third party ship management centres in the world.
With at least 60 ship management companies operating in its territory Cyprus represents a large percentage of the world's ship management market and several of the largest management companies in the world operate out of this small island. In fact Cyprus appears to be amongst the top five countries and territories in the world with the largest number of third party ship management companies in its territory.
It can be concluded from the above that despite the recent challenges facing our small Island the Cyprus shipping industry has a huge potential for greater growth and expansion during the years to come, under the new image of a quality orientated and competitive shipping centre. Despite the limited number of cases where shipping companies have been affected by the banking system "the overall shipping operational and taxation infrastructure in Cyprus remains intact."
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.