This section deals with shipping companies as a special type of local company enjoying total tax exemption.
Shipping companies are companies incorporated in the Republic of Cyprus which own ships registered under the Cyprus flag and which may or may not be fully owned by foreigners.
Today, the Cypriot merchant fleet ranks 5th on the list of leading maritime nations with over 2,600 vessels exceeding 26 million gt and is still expanding.
19.1 Legal Requirements
In terms of legislation enacted in 1963 and based on the British Merchant Shipping Act, registration under the Cyprus flag is freely open to foreigners as well as to local residents.
A ship can be registered under the Cyprus flag if more than 50% of the shares in the ship are owned :-
- by Cypriots; or
- by a Cyprus registered company irrespective of whether such company is totally owned by foreigners; or
- with the special permission of the Council of Ministers, by a foreign corporation in which Cypriots have a controlling interest.
Thus a shipping company, unlike all other international entities, can be owned by Cypriots alone, by foreigners alone or jointly by Cypriots and foreigners.
19.2 Provisional Registration
The Cyprus Merchant Shipping legislation allows for the provisional registration of a vessel and most owners usually opt to have their ship provisionally registered first. This will allow them time (up to nine months including a three month extension) to complete the administrative formalities for permanent registration.
Any ship may be provisionally registered under the Cyprus flag with the approval of the Minister of Communications and Works. Such registration may take place abroad in countries where Cyprus has an Embassy, High Commission, Consulate or Honorary Consul.
The procedure for provisional registration is fairly quick and can usually be completed within 7-10 days, provided that all the necessary documents, details and safety confirmation certificates are furnished within this time.
19.3 Permanent Registration
Permanent registration must take place within 6 months from the date of provisional registration. However, this period may be extended by an additional 3 months upon application. To effect permanent registration a ship must be properly surveyed in any part of the world by any one of the recognised classification societies.
19.4 Parallel Registration
The Merchant Shipping (Registration of Ships, Sales and Mortgages) Law provides for the registration for a fixed period of bareboat charterparties under the Cyprus flag while the vessel remains registered under its foreign registry but subject to parallel registration being permitted by the foreign country. During this period the vessel must carry the Cyprus flag to the exclusion of all others and will also be subject to the above-mentioned Cyprus Law and the regulations introduced in accordance with it.
By an amendment effected to the Merchant Shipping (Registration of Ships, Sales and Mortgages) Law in May 1987, the parallel registration of Cyprus vessels under bareboat charterparties in foreign registries is permitted, provided that this is allowed by the relevant foreign authorities.
The advantages of parallel registration are two-fold:-
19.4.1 the bareboat charterer has all the rights and liabilities of the owner, except that he may not sell or mortgage the vessel; and
19.4.2 the ship's owner has access to foreign financing while also enjoying the tax and other advantages of Cyprus.
19.5 Tax Advantages
Under Section 3 of the Merchant Shipping Law, a ship sailing under the Cyprus flag is entitled to complete tax exemption in respect of all profits, dividends, estate duty and capital gains tax arising from shipping activities.
19.5.1 No income tax is payable on the profits of a Cypriot shipping company operating in international waters.
19.5.2 No income tax is payable on dividends declared by a Cypriot shipping company.
19.5.3. No estate duty is payable on the inheritance of shares in such a company.
19.5.4 No capital gains or other tax is payable on the sale, ownership or transfer of any ship or shares in a shipping company.
19.5.5 No stamp duty is charged on ship mortgage deeds or other security documents.
19.5.6 Emoluments of seamen employed on board Cyprus ships are exempt from tax.
19.5.7 Emoluments of seamen employed by Cyprus international shipmanagement companies on board foreign flag ships managed by them are exempt from tax if paid through a bank operating in Cyprus, otherwise a tax of 10% of the Cyprus income tax rates for individuals is imposed. If such emoluments are paid in respect of services on board Cyprus flag ships they are totally exempt from taxation.
19.5.8 Dividends distributed to shareholders of international shipmanagement companies are not taxed at all.
Because of the tax incentives available to Cyprus shipping companies, there is no requirement for them to submit annual financial returns nor to furnish reports on income or accounts.
The Merchant Shipping (Fees and Taxing Provisions) has been amended by law 73(1)/99, which provides that a Cypriot-registered shipmanagement company is entitled every year to choose to be taxed either in accordance with the provisions of the prevailing income tax laws (currently at the rate of 4.25%) or at rates equal to 25% of the applicable rates for calculating the tonnage tax of vessels under management which are registered outside Cyprus. This option may be exercised by a written notice to the Department of Merchant Shipping at least 30 days before the start of the year for which the tax payer wishes to exercise the option.
The shipmanagement company will be able to calculate its tax liability in advance and can opt for the method which will result in the lower amount of tax.
19.6 Vessel Registration and Age Limit
At present, vessels of any type and tonnage not exceeding seventeen years of age may be registered in the Register of Cyprus Ships. Vessels of over seventeen years and up to twenty years of age may be registered provided that:-
19.6.1 the vessel undergoes a special inspection; or
19.6.2 the vessel is managed from Cyprus.
A vessel of any type and tonnage over twenty years and up to twenty-three years of age may be registered provided that:-
19.6.3 the beneficial owner of the vessel has at least two other vessels registered under the Cyprus flag, each having a gross tonnage of over 1000 tons, with a good safety record, and whose average age, including the vessel to be registered, does not exceed seventeen years, or its beneficial owner is a Cypriot who, if he resides abroad, fully manages his vessel;
19.6.4 the vessel undergoes a special inspection, or
19.6.5 the vessel is managed from Cyprus.
A vessel of any type and tonnage over twenty-three years of age may be registered provided that:-
19.6.6 it is owned by Cypriots permanently residing in Cyprus or by a Cypriot company. If the owner is a Cypriot company, at least 51% of the shares must be owned by Cypriots permanently residing in Cyprus and at least 51% of its directors, who must participate substantially in the management and control of the activities of the company, must be Cypriots permanently residing in Cyprus;
19.6.7 the vessel undergoes a special inspection;
19.6.8 the vessel is managed from Cyprus.
From 1st January 2000 a new policy for the registration of ships under the Cyprus flag will be introduced, placing a new ceiling on the age of ships which may be registered and lowering, from 17 to 15 years, the age at which an entry inspection is required.
19.7 Shipping Companies' Headquarters
The Republic of Cyprus has enacted legislation to encourage shipping companies to establish their headquarters in Cyprus.
The primary aim of this legislation is to provide benefits for foreign employees of shipping and other companies. Foreigners employed by such international shipping companies and who derive their income from activities outside Cyprus are taxed at one tenth of the normal Cyprus tax rates or are totally exempt from tax if they receive their emoluments in Cyprus.
Foreign employees of such international companies working inside Cyprus are, subject to half the normal Cyprus tax rates and enjoy certain duty free concessions and other advantages.
International shipping companies and their foreign employees may maintain accounts in foreign currencies and they may remit their income abroad at any time they wish, after payment of taxes. By using this procedure, foreign employees may avoid payment of higher taxes in their own countries.
19.8 Future Plans
In recent years, Cyprus has made considerable progress in achieving growth in its merchant fleet and establishing itself as an even bigger maritime centre. Now the government, in a conscious effort to upgrade the image of its flag, has decided to allocate its resources to safety measures, prevention of pollution and adequate manning standards. It has ratified the latest international conventions on safety, training and certification of seafarers and prevention of pollution and has strengthened its merchant shipping department. All these measures, together with a long maritime history and tradition and the presence on the island of an active shipping community, have meant that Cyprus has developed as a high quality open register and as a suitable location for ship management operations.
The purpose of this publication is to assist clients and associates in clarifying and appreciating the range of opportunities which are available in or through Cyprus. Although every effort has been made to provide the reader with a clear and comprehensive picture of the island's beneficial regime, it should be appreciated that is not possible to cover all aspects comprehensively in a publication of this size.
Individuals or companies who are seriously considering using Cyprus for any of their international business activities are advised to obtain expert professional advice before taking positive action.