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: 
  1. Cyprus Flag Vessels 
  2. 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) 
  3. 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) 
  4. Owners of re-flagged ships 
Owners of Cyprus flag vessels are automatically taxed under Tonnage Tax System and do not have the option to be taxed under Corporation tax. Nevertheless, Cyprus tax resident ship owners of non-Cyprus flag vessels can select to be taxed under Tonnage Tax System regime following certain criteria.  For the ship-owner who choose to adhere the Tonnage Tax regime, it is mandatory to be a Cyprus tax resident and this option must be kept for a minimum of 10 years.  According to Tonnage Tax regime, the qualifying ship owners are exempt from Income tax on the below: 
  • 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. 
  1. The ship manager must have an independent office in Cyprus where works a ample amount of employees with the appropriate experience and expertise. 
  2. Minimum 51% of total onshore staff must be EU/EEA citizens 
  3. Minimum 2/3 of total tonnage under management must be ruled within the EU/EEA in any defined fiscal year 
  4. Crew managers must adhere provisions of Maritime Labor Convention and Ship managers must be certified under the ISM code. 
  5. 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. 
In case the Tonnage Tax regime is chosen, so it must have a minimum of 10 years duration.  Tax exemptions for ship managers include: 
  • 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. 
Tax exemption for crew: 
  • Salary and other benefits received by the crew members, master and the officers of a qualifying Cyprus Flag vessel will not be taxed upon. 
All qualifying ships that included in a group must adhere Tonnage Tax System together. 
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.

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