The Cyprus Tonnage Tax System – a useful tool for ship owners, managers and charterers
With the emergence of Cyprus as a leading maritime centre encompassing the full range of shipping related activities coupled with its attractive tax regime, we would like to remind clients of the benefits and importance of the Tonnage Tax System (the “TTS”) which was approved by the European Commission transposed into national legislation by the Merchant Shipping (Fees and Taxing Provisions) Law of 2010 (the “Law 44(I)/2010”).
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, charter or manage and in doing so, enjoy exemptions from income tax and dividends as further set out below.
The applicant in order to apply for the TTS must be a “qualified person” and carry out “qualifying activities” in relation to “qualified ships” in order to be able to qualify for the TTS.
1. Qualifying persons:
Tax-residents ship managers providing crewing services;
Ship managers are required to maintain a functioning office in Cyprus staffed by a sufficient number of appropriately qualified personnel;
At least 51% of onshore personnel must be citizens of the European Economic Area (EEA); and
at least two-thirds of the total tonnage under management must be managed within the EEA.
a. Owners of Foreign Ships
is a tax resident of the Republic of Cyprus
has opted to be taxed under the TTS and
owns a qualifying ship, which is engaged in a qualifying shipping activity
complies with the “Community-Flagged Share” Requirement
charterer who charters ships under bareboat, demise, time or voyage charter
is a tax resident of the Republic of Cyprus;
has opted to be taxed under the TTS;
charters a qualifying ship, which is engaged in a qualifying shipping activity;
Minimal Share of the Fleet in Ownership;
Percentage of Chartered-in ships;
Complies with the “Community-flagged share” requirement.
c. Ship managers
The ship manager is a legal entity tax resident in Cyprus;
Must provide qualifying services, i.e. crewing and/or technical ship management to qualifying ship(s) of any flag;
Must maintain a fully-fledged office in Cyprus;
Must employ 5 persons including one skilled crew manager (at least 51% of its employees must be EU/EEA citizens);
Complies with the “2/3 Rule”, i.e. the requirement for the economic link of managed ships with the Community. Noting that the net tonnage of the qualifying ships providing crewing services must be managed from the territory of any EU Member State;
Complies with the “Community-flagged share” requirement;
Has opted to be taxed under the TTS.
2. Qualified ships:
Please note that the qualified ships must be part of the International Maritime Organisation and/or International Labour Organisation in order to qualify for the TTS.
3. Qualifying shipping activity
Any commercial activity that constitutes maritime transport or ship management (crew management and/or technical management).
4. Tax Exemptions – TTS
Exemption from Income Tax on the income of a qualifying ship manager, derived from the rendering of crew services to any qualified ships;
No tax is charged, levied or collected upon the salary or other benefits from the employment of the master, the officers and other crew members of a qualifying Cyprus ship, engaged in a qualifying shipping activity;
Upon the dividends paid to the shareholders or the members of a qualifying ship manager, out of the profits made from the rending of crew ship services to any qualifying ship;
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 an entity that is the owner of a qualifying ship.
How MPC can help
Assistance with the formation of a corporate structure in order to take advantage of the TTS;
Advice on how you can be qualified under the TTS and enjoy the tax benefits of TTS;
Liaise with the Shipping Deputy Ministry and tax authorities in order to ensure smooth operation of the structure.