Tonnage tax – maintenance of prescribed levels of Community-flagged vessels

he Merchant Shipping (Fees and Taxing Provisions) Law of 2010, usually referred to as the tonnage tax law, requires that, in order to qualify for Cyprus’s favourable tonnage tax scheme, Community-flagged ships (ships registered in and flying the flag of an EU or EEA member state) must account for at least the same percentage of the taxpayer’s fleet as they did when the taxpayer entered the tonnage tax scheme. This percentage is called the reference share.

The tonnage tax law requires the Department of Merchant Shipping to assess the Community-flagged share of each participant in the tonnage tax scheme at the end of third year after it entered. Any company or group of companies whose Community-flagged share at the time of assessment is below its reference share and is not greater than 60% may not introduce any additional non-Community ships into the tonnage tax system until it restores its Community-flagged share to at least the level of its reference share.

However, articles 15, 25 and 35 of the tonnage tax law provide an exception to the general rule, allowing owners, charterers or managers to introduce additional non-Community vessels if the aggregate share of Community-flagged ships in their particular sector has increased compared with the reference date. Taxpayers taking advantage of this provision are subject to a surcharge of 10 per cent on the total amount of tonnage tax payable for all the qualifying non­Community ships in the fleet.

The Department of Merchant Shipping has recently announced the arrangements for the review as at 31 December 2017, which will cover companies which entered the tonnage tax system between 2 January 2014 and 1 January 2015.

According to its calculations, the aggregate share of Community-flagged ships in the scheme has increased for charterers in comparison with 1 January 2015, but has fallen for owners and ship managers. This means that for the fiscal year 2017 the option of introducing additional non-Community vessels and paying the surcharge is available only to charterers. Owners of foreign ships and ship managers whose Community-flagged share at 31 December 2017 is less than 60% and is less than their reference share may not include additional non-Community ships in the tonnage tax scheme until they increase their Community-flagged share to at least their reference share. Any additional ships will be treated as non-qualifying ships, in respect of which the taxpayer will be liable to corporate income tax on their profits, and must maintain separate books, records and accounts as provided by article 44 of the tonnage tax law.