Tax Considerations of a Shipping Company

| 7 Sep 2012 | 0 Comments

Predictably, the unrelenting financial downturn has left its mark on almost all key industries across the globe – including the shipping industry. In response to the current shipping climate, shipping companies need to carefully consider where to operate in order to benefit from favorable tax and maritime regulations, and to maintain profit levels despite surrounding financial turmoil. This article aims to identify the main taxes that shipping companies should be aware of.

shipping taxCompanies operating within the shipping sector have become largely reliant on favorable tax regimes, tax incentives and preferential maritime regulations, and so it has become increasingly relevant for companies to be aware of applicable industry taxes. Below is a selection of the most common maritime taxes imposed on shipping companies across the globe.

Corporate Tax

Corporate tax, often referred to as company tax is a form of taxation applied on the profits derived from certain types of corporate entities.

Most jurisdictions offer a different tax rate for shipping companies. For example, in Cyprus, income arising from ship management activities is subject to a 4.25% tax rate. However, a company can elect to pay special tonnage tax if more beneficial.

To maintain a competitive business, it is important to minimize your shipping tax burden, and as such, shipping companies must look to the most tax friendly jurisdiction to operate from. It is also prudent to research jurisdictions that have multiple double tax agreements in place, as this will effectively prevent shipping business operations from being tax liable in more than one location.

Tonnage Tax

Tonnage TaxCountries with high corporate tax rates usually provide ‘tonnage tax regimes’. Tonnage tax, abbreviated to TT, is an alternative to corporate tax for shipping companies. Tonnage tax is not based on a shipping company’s profits or losses, instead, it is a set rate based on the tonnage of a ship, or fleet of ships.

The tonnage of a ship is the mass weight of the vessel. Once the tonnage has been identified, the applicable tax bracket will be imposed on an annual basis.

Tonnage tax often provides a more preferential tax treatment for shipping companies, thus where such schemes are implemented by flag states, shipping companies will usually elect to use them. Certain flag states stipulate that election to their tonnage tax system will be valid for a specified period; in the UK, tonnage tax is valid for a 10-year period, with the right to renew upon expiry. However, tonnage tax systems often require shipping companies to satisfy a number of conditions before tonnage tax can be applied.

Types of requirements that must be satisfied to qualify for tonnage tax:

  • The shipping company must operate ‘qualifying’ ships
  • The company must be managed in the same country where tonnage tax is sought
  • Ships owned by the company must meet specified tonnage masses
  • The shipping company must operate ships for the purpose of transporting passengers, cargo, towage or salvage activities

Usually, the following types of vessels will not qualify for tonnage tax systems:

  • Fishing vessels
  • Pleasure boats
  • River ferries
  • Oil field tankers

Why choose tonnage tax over corporate tax?

Typically, calculating shipping company tax under the respective flag’s tonnage tax regime results in a lower rate of tax payable when compared to the country’s corporate tax rate. It is therefore important to find out whether your selected flag state offers a TT system, as this form of tax incentive could significantly lower your tax bill.

Other benefits of tonnage tax systems include:

  • The level of tax payable is known to the shipping company, thus reducing the need for organizations to make provisions
  • Tax owed is usually minimal and applying for tonnage tax is optional
  • Shipping companies benefit from greater flexibility
  • Tonnage tax systems are easy to comprehend, which means shipping companies tax positions are more obvious and therefore more appealing to investors

It should be noted that net tonnage tax systems are not always more favorable than the standard shipping corporate tax rates. Although the tonnage tax may appear less than the corporate tax rate, it must be reiterated that tonnage tax is based on the mass tonnage of a company’s entire fleet; thus for large shipping companies, it may be prudent to remain with the standard corporate tax. Additionally, shipping companies can use ‘losses to offset profits’ within their business structure, however under a tonnage tax system, this may not be permitted.

Further to this, qualifying for a tonnage tax system can be very difficult. Many flag states request that certain criterion is met, including stringent training standards and other related regulatory conditions. It should also be noted that where certain conditions are not met, or where standards of a shipping company slip during the tonnage tax period fines can be levied.

Cyprus, a popular flag state for vessel registration, and home to the 3rd largest fleet in Europe and the 5th largest ship register in the world, enacted a new Tonnage Tax System (TTS) in March 2010 in a bid to heighten competition and attract new shipping investors. The new, more advantageous system applies to all maritime transport activities in international shipping, exempts eligible shipping companies from corporate tax, and enables them to pay a more favorable net tonnage tax instead. Ireland also enacted a more competitive tonnage tax (under the Finance Act 2002) to entice new shipping business, and deter companies moving to alternative flag states offering advantageous tonnage tax rates. Malta and the Cayman Islands also boast favorable tonnage tax systems.

Carbon Tax

Carbon taxDue to increasing environmental awareness and stricter government ecological regulations in countries across the globe, carbon tax schemes have become a topic of frequent discussion between various charities, maritime authorities and government bodies. At present, Australia has enacted the CMAS – Charities Maritime and Aviation Support Program, which is designed to provide carbon tax relief to ‘not for profit’ companies within the air and sea rescue sectors. Essentially, the implementation of this scheme will help to lower man made climate change by taxing the biggest carbon polluters.

This type of taxation will directly affect shipping companies, particularly large-scale cargo ships, as the level of carbon they emit is significant and the tax payable is calculated in relation to the amount of carbon the ship emits. The European Union also aims to incorporate maritime carbon taxes in the EU-ETS (EU Emission Trading System).

Christine Lagarde, Head of the International Monetary Fund, has mirrored Australia’s carbon tax development by calling on governments to begin taxing greenhouse gases.

Speaking on the matter, Ms Lagarde stated,

“Getting the prices right means using fiscal policy to make sure that the harm we do is reflected in the prices we pay.”

Although carbon schemes help to protect the environment, such schemes can also be costly to shipping companies, and so it is important to be aware of existing or potential carbon tax schemes being introduced.

Additional tax considerations for shipping companies

Through establishing a shipping company, and registering your fleet in a favorable offshore flag state, you can potentially benefit from the following tax advantages:

  • No stamp duty on ship mortgage deeds
  • VAT exemption
  • No income tax or tax on dividends when participating in a tonnage tax system
  • No estate duty
  • Tax incentives including seafarer income tax exemption status
  • No sales tax

Being aware of the range of taxes imposed on your shipping company is essential…

Depending on your flag state of choice and the type of shipping company you wish to establish, the taxes payable will vary from one location to another. It is therefore imperative that proper consideration is given to the applicable taxes in your chosen flag state to ensure your long-term business plans and potential for profits are realistic in light of current maritime tax laws and regulations.

VN:F [1.9.20_1166]
Rating: 5.0/10 (2 votes cast)
Tax Considerations of a Shipping Company, 5.0 out of 10 based on 2 ratings

Category: Corporate Taxation, Hottest Articles

Leave a Reply