The Irish tonnage tax regime for shipping operations was introduced in Ireland in 2003. Similar in operation to tonnage tax regimes in other countries, the Irish regime ensures that shipping businesses based in Ireland pay tax based on the tonnage of the fleet as opposed to tax on actual profit generated by the business.
Advantages of the Irish Tonnage Tax Regime
- Taxable profits can be determined upfront and, combined with the general Irish 12.5% corporate tax rate, results in a favourable end result;
- No vessel ownership requirement for ship management companies;
- No capital gains tax ("CGT") on the disposal of a ship;
- No requirements regarding where the ship is registered;
- No Irish flag requirements;
- No crew training requirements;
- No requirement to provide training berths;
- Up to 75% of the fleet's tonnage may be chartered in; and
- The company's tax position is clear and statute based, making it more attractive to prospective investors and potential business partners.
Additional Irish Tax Benefits
- Ireland has a large network of double tax treaties which may exempt the Irish company from foreign tax or the company will be credited for foreign tax paid against Irish tax;
- Irish withholding tax exemptions for overseas qualifying lenders on interest payments on loans to Irish tonnage tax companies; and
- Various exemptions on Irish dividend withholding tax on repatriation of profits to overseas shareholders.
Conditions for the Tonnage Tax Regime
For the regime to apply, the company must be a 'qualifying company' for the purposes of section 697A of the Irish tax code. A ' qualifying company' is a company which is within the charge to Irish corporation tax, carries on the business of operating qualifying ships and carries on the strategic and commercial management of those ships in Ireland.
A company will be regarded as operating ships if it owns, charters in or manages ships. A 'qualifying ship' for the purposes of the legislation means a self-propelled seagoing vessel of an adequate size to engage in reasonable commercial operations and complies with all the requirements for navigation at sea imposed by the competent authorities of any country or territory. It does not include a vessel of 'an excluded kind'. Some examples of excluded vessels include fishing and fish factory vessels, recreational vessels, oil tankers and dredgers.
Finally, the company must carry on the 'strategic and commercial management' of those ships in Ireland. The legislation does not define exactly what constitutes 'strategic and commercial management' of ships. However, the Irish Revenue Commissioners have provided some guidance in this regard. In their view, for a company to be considered to be carrying 'strategic and commercial management' it must demonstrate that all elements of management activity relating to the ships in question occur in Ireland.
In assessing whether strategic management is carried out in Ireland, the following items will be considered:
- Where the company is headquartered;
- Where senior managers are located;
- Where decisions of the board of directors are made;
- Where decisions on significant capital expenditure and disposals are made;
- Where the awarding of major contracts occur; and
- The extent to which foreign based personnel work under the direction of, and report to personnel based in Ireland.
In the case of determining whether commercial management is carried out in Ireland, the following items will be considered:
- Matters relating to route planning;
- The taking of bookings for passengers or cargo;
- The management of the bunkers;
- Personnel management;
- Technical management of ships; and
- The maintenance of support facilities such as training centres and terminals in Ireland.
A company can choose whether to stay in the normal corporation tax system or move their shipping activities into the tonnage tax regime. To enter into the tonnage tax regime, an election must be made by the company within 36 months beginning with the day on which the company first became a 'qualifying company'. It is important to note that all qualifying companies in a group must enter the scheme.
A valid election for tonnage tax takes effect from the beginning of the accounting period in which it is made and the company must stay in it for a minimum of 10 years. The commitment to stay in for 10 years can be renewed by election (called a "renewal election") at any time in which case the period of election is extended for a further period of 10 years from the date of the renewal election.
A company who makes an election has the same obligations in respect of corporation tax return deadlines and preliminary tax deadlines as any other Irish resident company.
To account for tonnage tax profits companies must complete a Form CT1 Supplement – Tonnage Tax Profits. This Return is part of the company's Corporation Tax return (Form CT1).
Relevant Shipping Income
The tonnage tax regime only applies to 'relevant shipping income' as defined in the legislation. Relevant shipping income includes income earned from, for example:
- Activities which are related to the actual operation of a qualifying ship, for example carriage of passengers at sea or carriage of cargo at sea;
- The provision of goods and services on board the qualifying ship such as the operation of bars and restaurants, shops etc., which are ancillary to the carriage of cargo and passengers and which are consumed on board the ship; and
- The provision of ship management services for qualifying ships.
Calculation of Tonnage Tax
A qualifying company will be subject to Irish tax at the 12.5% corporate tax rate on the profits calculated on the basis of a daily profit formula per ship. This profit figure per ship is then multiplied by the number of days the ship was operated by the company in the accounting period.
The amount of the profits per ship for an accounting period is aggregated to get the company's total tonnage tax profits for the accounting period. The corporation tax rate of 12.5% is then applied to this profit.
Once a company is established in the tonnage tax regime, there are no deductions allowed for capital allowances nor are balancing charges and capital gains allowed as part of the tonnage tax regime.
Lastly, a company cannot use losses forward from any period before entry into tonnage tax to reduce tonnage tax profits.
Alternative Tax Treatments
In certain cases, it can be beneficial for a shipping company or shipping related activities to be treated under a regime outside of tonnage tax, such as an Irish trading company regime, the Irish securitisation regime or as a regulated Irish fund. We can advise on this further depending on the facts of the case.
Ireland is a highly attractive country for locating international shipping operations. Ireland has a pro-business environment, is a long-standing member of the European Union and Eurozone, an English speaking country and the maritime industry has strong Government support.
Originally published by Maples Group, August 2020
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.