The analysis of Tonnage Tax System in Cyprus
The Tonnage Tax System covers any ship-owner of a qualifying vessel that conduct qualifying activities. This consists of the following:
- Cyprus Flag Vessels
- EU/EEA flag vessels that are owned by a Cyprus tax resident company and choose to be taxed under the Tonnage Tax regime (under conditions)
- Fleet of EU/EEA and non EU/EEA vessels that are owned by a Cyprus tax resident and choose to be taxed under the Tonnage Tax regime (under conditions)
- Owners of re-flagged ships
- Profits from the usage of a qualifying vessel
- Profits from the disposal of shares in a ship-owning company
- Profits from the disposal of the qualifying ship
- Dividends paid out of the above referred to profits at all distribution levels
- Interest income received on funds used as working capital, or on income from shipping operations
All vessels (Cyprus/ EU/ EEA/ Fleet) chartered in qualifying shipping activity (bareboat, demise time, voyage charter) can choose to follow the Tonage Tax regime, providing that the charterer is a legal person and Cyprus tax resident. Chosen regime has to be kept for a minimum of 10 years. If the Tonnage Tax System is not implemented, then profits are taxed at 12.5% under corporation tax. The following types of income is tax exempt for Ship Charterers:
- Profits from the use of a qualifying vessel
- Dividends paid out of the above profits at all distributions levels
- Interest income related to the working capital/qualifying activity as well as any interest on capital that was used for investments
A ship-manager is considered as a Cyprus tax resident legal person that offers technical/ crewing services on behalf of a qualifying vessel. The rates that are applied to ship managers are 25% of those that are applied for ship owners and charterers. If the Tonnage Tax is not chosen, then all profits are taxed under 12.5% corporation tax. There are several requirements that ship managers must met in order to have the opportunity to be taxed under Tonnage Tax System.
- The ship manager must have an independent office in Cyprus where works a ample amount of employees with the appropriate experience and expertise.
- Minimum 51% of total onshore staff must be EU/EEA citizens
- Minimum 2/3 of total tonnage under management must be ruled within the EU/EEA in any defined fiscal year
- Crew managers must adhere provisions of Maritime Labor Convention and Ship managers must be certified under the ISM code.
- International standards and EU Law requirements in terms of safety, security, working conditions, training etc. must all be strictly adhered by all ships and crew under management.
- Profits from technical/crew management
- Dividends paid out of the above referred to income, at all levels of distribution
- Interest income in relation to working capital/qualifying activity, as long as such income was used for business purposes. Interest income on capital that was used for investments is not included.
- Salary and other benefits received by the crew members, master and the officers of a qualifying Cyprus Flag vessel will not be taxed upon.
The tonnage tax can be reduced for Owners and Charterers of Cyprus and Community ships in the following cases: Laid-up ships If the ship is laid up for a period of more than 3 consecutive months the tonnage tax payable is reduced by 75 percent for the period during which the vessel is laid-up, provided that the Department of Merchant Shipping is duly notified not later than 3 months from the commencement of the lay-up period. Inoperative Ships If the ship is rendered inoperative for a period of at least 3 months due to her judicial arrest, or by act of piracy, or armed robbery, or by force majeure, then the tonnage tax payable is equal to 25% of the tonnage tax rates for the period during which the vessel is inoperative. Section 8 of the Merchant Shipping (Fees and Taxing Provisions) Laws, 1992-2007 provides for the reduction and refund of the tonnage tax in the cases listed below. Environmentally friendly ships Tonnage Tax Reductions are eligible of up to 30% for environmentally friendly ships (Cyprus Green Incentives Programme). Under the Law of 2020, a reduction of up to 30% of the tonnage tax is possible in the case of a Cyprus ship or EU/EEA ship using mechanisms for the environmental preservation of the marine environment and the reduction of the effects of climate change.