Shipping Company
Cyprus is the only EU state member that has an approved tax framework (Tonnage Tax basis) for purposes of merchant shipping. The Merchant shipping Act that was approved from the parliament and came into effect in January 2010 places Cyprus in a prominent position and offers many advantages towards the shipping companies that choose to operate in Cyprus.
- The ship owner companies and management companies are taxed according to the net tonnage of the ship and not on the basis of the local corporate tax (12.5%)
- The tax obligations of the company are controlled by the Department of merchant shipping and not the Tax registrar
- Ensures the total exemption of the profits from the corporate tax and the tax arising from the sharing of the profits (dividends)
- Allows the operation of a variety of activities to a company/group of companies, as well as the taxation of the shipping activities on the tonnage tax law and any further activities based on the corporate tax at 12.5%
- Provides the transparency of the registered corporations and vessels list
The Cyprus tax system is designed in accordance of the EU as well as the guidelines of OECD ensures safe tax practices are applied. Briefly the Cyprus tax system offers the following advantages to all kind of investors:
- Low corporate tax (12.5%), the lower rate in EU
- Exemptions on the dividends taxation (including criteria that can be easily met)
- Exemption of profits arising from permanent establishment based abroad
- Exemption of profits arising from the purchase/sale of shares, bonds, currency or any financial derivatives
- Exemption from withholding tax from the source when transferring profits in the form of dividends, interest and almost in every form of intellectual property
- Extensive double tax treaty agreement for the avoidance of double taxation between more than 80 countries worldwide.
- Total compliance with the EU directives
- Legislation governing the relationship between non-controlled foreign companies
- No low capitalization rules
- Neutral tax treatment in cases of rearrangements related to EU companies as well as from third countries
Cyprus plays a prominent role as an important maritime and management center and will continue to strengthen this position in the global economy by maintaining the maritime infrastructure, the favorable tax system, the competitive registration scheme and maintenance of the tonnage tax.
The tax incentives accompanied with the financial benefits provided, together with the excellent infrastructure, make Cyprus ideal choice for ship owners, charterers and managers.
Cyprus ship registry is one of the biggest in EU and the 10th bigger worldwide. In addition Cyprus is the third ship management center in EU. Cyprus joined the EU in 2004 with large fleet and well established shipping infrastructure and aims to continue to upgrade and improve the fleet.
The Cyprus ship registry is one of the two “open” registries within the European Union and is estimated that it holds the 15% of the total merchant fleet in the region.
The country has an established maritime infrastructure which includes the Naval Chamber of Commerce. It has also the Department of Merchant shipping which operates under the Transportations Ministry and provides high value services to the maritime industry.
A significant percentage of vessels in Cyprus registry today are managed by specialized management companies well known and established due to their expertise in the field.
The main force however behind the rapid expansion of the shipping industry in Cyprus for more than half a century is the tax law.
Cyprus offers complete tax exemption of all profits and dividends at all levels of distribution arising from qualifying shipping operations.
On 2010 the Cyprus Parliament enacted the long awaited new shipping legislation. The new Merchant Shipping Law, which applies from 1 January 2010, extended significantly the scope of the Tonnage Tax (TT) regime and enhanced the position of Cyprus as a maritime center.
The legislation, a major success for the Cyprus shipping industry, offers new opportunities:
- It introduced two new TT schemes applicable to ship owners of non-Cyprus flag vessels and charterers.
- It also extended the application of the TT regime (and exemption from profits tax) currently enjoyed by ship owners and ship managers.
The European Commission considered that the scheme is in line with the European Union’s Guidelines on state aid to maritime transport and authorized the scheme until 31 December 2019. It is aimed at supporting the shipping sector in Cyprus and other EU countries with a strong maritime sector, providing incentives for the employment of EU seamen and registration of vessels in the EU and enhancing the competitiveness of ship owners, charterers and ship managers operating in the EU.
Under this legislation, qualifying shipping activities are fully exempt from corporation tax.
Tonnage tax on the net tonnage of the vessels is imposed instead of corporation tax on the actual profits. Qualifying persons are also regulated completely by the Department of Merchant Shipping rather than the Tax Authorities.
It is quite common, for ship owners, charterers and ship managers to invest surplus funds and have non shipping income. Such income, that is not subject to TT, is subject to corporation tax at the normal rate of 12,5%, the lowest corporation tax rate in the EU.
The tax legislation provides for several exemptions that may reduce the effective tax rate on non-shipping income to well below 12,5%. If mixed income is earned (TT and corporation tax), separate books must be kept. Also transactions with related parties who are not in the TT system should be made at arms’ length.
The law provides full exemption to ship owners, charterers and ship managers from all profit taxes and imposes tonnage tax on the net tonnage of the vessels.
A qualified vessel is a sea-going vessel that:
- has been certified in line with international principles and legislation of the flag country, and
- is registered in the register of a member country of the International Maritime Organization (IMO) and International Labor Organization (ILO).
The definition includes vessels that transport humanitarian aid but excludes the following vessels:
- fishing boats
- Boats that are primarily used for the athletic and entertaining purposes boats that have been constructed exclusively for domestic navigation
- Ferry and trailer boats that are used in ports, mount of rivers and / or rivers
- fixed offshore constructions that are not used for maritime transport
- Non self-propelled floating cranes
- Floating hotels and restaurants
- Floating or movable casinos
Other provisions
- Eligible individuals that use the Tonnage tax system are handed from the Department of Merchant Shipping an annual certification, copy of which is sent to the Tax Commissioner
- A list is held (from the Department of Merchant Shipping) with all the vessels under Cyprus registry and owners are not considered to do any qualified activities
- A similar list is held from the from the Department of Merchant shipping for all the ship owners/ charterers and ship managers of fleet under Cyprus flag either they perform qualify activities or have decided not to use the Tonnage Tax System
- The salary of Cyprus registered boat’s crew is exempted from income tax
Ship owners
The Tonnage Tax regime applies to any owner of qualifying vessels that carry out a qualifying activity:
- Cyprus flag vessels
- EU/European Economic Area (EEA) flag vessels that exercised the option to be taxed under the Tonnage Tax regime
- Fleet of EU/EEA and non EU/EEA vessels that exercised the option to be taxed under the Tonnage Tax regime
The new legislation introduces the definition of a fleet. A fleet consists of two or more vessels that belong directly or indirectly to the same person(s) or companies of the same group. A group is defined as at least two companies that are directly or indirectly in a parent/subsidiary relationship or that are directly or indirectly subsidiaries of the same parent company.
The legislation allows non EU/EEA vessels to enter the TT regime provided the fleet is composed by at least 60% EU/EEA vessels. If this requirement is not met, the non EU/EEA vessels may still qualify if certain criteria are met.
The tax exemption covers:
- Profits from the use of a qualifying vessel
- Profits from the disposal of a qualifying vessel and/or share and/or interest in it
- Profits from the disposal of shares in a ship owning company
- Dividends paid out of the above profits at all levels of distribution
- Interest income relating to the financing/maintenance/use of a qualifying vessel and the working capital, excluding interest on capital used for investments
Where an option is exercised to enter the Tonnage Tax system, the ship owner must be a Cyprus tax resident and the option must remain in force for at least 10 years.
The charterers
As with ship owners, the TT regime applies to qualifying vessels that carry out a qualifying activity. An option exists for all vessels (Cyprus/EU/EEA/fleet) chartered under bareboat, demise, time, voyage charter, provided the charterer is a legal person tax resident in Cyprus. If the choice is not made, profits are taxable under 12,5% corporation tax.
The fleet qualifying criteria are the same as for ship owners and so is the minimum 10 year duration.
The tax exemption covers:
- Profits from the use of a qualifying vessel
- Dividends paid out of such profits at all levels of distribution
- Interest income relating to the working capital / qualifying activity provided such interest is used to pay expenses arising from the charter, excluding interest on capital used for investments.
The law grants the exemption provided a composition requirement is met. That is, at least 25% of the net tonnage of vessels subject to tonnage tax are owned or are bareboat chartered. The percentage can be reduced but not for more than three consecutive years.
The percentage is reduced to 10% if all the vessels of the charterer:
- carry EU/EEA flags or
- are managed (crewing and technical) in the EU/EEA.
Ship managers
A qualifying ship manager is a legal person tax resident in Cyprus providing technical and/or crewing services in respect of qualifying vessels (Cyprus/EU/EEA/fleet). Commercial management is taxable under corporation tax.
An option exists to pay TT at 25% of the rates applicable to ship owners and charterers, for all vessels under management. If the choice is not made, profits are taxable under 12,5% corporation tax.
The fleet qualifying criteria are the same as the ship owners / charterers and so is the minimum 10 year duration.
Ship managers have to meet some additional requirements, namely:
- The ship manager is obliged to maintain a fully-fledged office in Cyprus with personnel sufficient in number and qualification
- At least 51% of all onshore personnel must be EU/EEA citizens
- At least 2/3 of the total tonnage under management must be managed within the EU/EEA (any excess of 1/3 taxed under 12,5% corporation tax).
The tax exemption covers:
- Profits from technical and/or crew management
- Dividends paid out of the above profits at all levels of distribution
- Interest income relating to the working capital / qualifying activity provided such interest is used to pay expenses relating to ship management, excluding interest on capital used for investments.
Permanent & provisional ship registration
Cyprus merchant shipping legislation allows for the provisional registration of a vessel (in case the vessel concerned was not previously a Cyprus ship) and most owners usually opt to have their ship provisionally registered first. The provisional registration is deemed to be a full registration for a period of up to six months and it can be extended further for three months with an application prior to the expiration of the six-month period. This will allow the owners time (up to nine months, including the three month extension) during which they will be able to complete the administrative formalities for permanent registration.
The permanent registration of a vessel registered provisionally under the Cyprus flag must be completed within nine months, including the three-month extension period, which is the maximum provisional registration period. It is not necessary for the ship to be present in a Cyprus port.
Once the necessary documents are submitted and formalities completed the Registrar of Cyprus Ships will issue the “Certificate of Cyprus Registry” and the vessel will be permanently registered under the Cyprus flag.
Parallel registration
Under Cyprus legislation the possibility of parallel (bareboat) registration of vessels exists. The legislation provides for the two forms of internationally accepted bareboat registration: “parallelin” registration and “parallel-out” registration. These two options offer some very interesting opportunities for leaseback, hire purchase and finance arrangements.
The administrative practice of the Department of Merchant Shipping has confirmed that the parallel (bareboat) registration of vessels under the Cyprus regime may be affected with more than 20 states whose legislation is compatible with Cyprus legislation. “Parallel-in” registration offers the possibility to a foreign flag vessel on bareboat charter to a Cyprus shipping company to be registered in “parallel” under the Cyprus flag for a period, usually two years, which is renewable.
Cyprus ships may be bareboat chartered to a foreign person or company and registered “parallel” in a foreign register for the duration of the charter party. This so-called “parallel-out” registration allows the financing of a ship and her mortgaging under the Cyprus flag and then her registration in a foreign registry through a bareboat charter arrangement.
Ship owners
Most of the Cyprus registered ships are owned by Cypriot companies with a wide range of foreign interests. Due to the fact that every limited liability company is a separate legal entity, it is very common to incorporate a ship owning company for every ship to be registered.
Bareboat chartering
As already mentioned it is possible to have parallel registration of the vessel under the Cyprus flag by bareboat chartering a vessel to a company formed in Cyprus and for a vessel registered under the Cyprus flag to be bareboat chartered-out to a foreign corporation for parallel registration under a foreign flag, provided the law of the other country recognizes the concept of bareboat charter registration.
Ship management headquarters
Ship management companies find Cyprus increasingly attractive as a base for managing ships under various flags. These companies offer full management services to ship owners worldwide and are engaged in chartering, crewing, ship-broking and similar activities. In order to encourage the establishment of ship management companies and other shipping headquarters in Cyprus, the existing legislation grants such companies and their foreign employees various tax advantages and other incentives.
