Article as appeared in The Euromoney Corporate Tax Handbook 2008
Advancing globalisation, more flexible tax regimes and an increasingly mobile workforce are creating opportunities and challenges for the shipping industry. New corporate strategies and processes are required to deal with an industry which is being reshaped through market consolidation and shifts in the balance of world trade. Sustained profitability in many sectors, increasingly international operations and ever more sophisticated tax authorities are leading shipping companies to look at effective ways to align their corporate, operational and tax structures.
The wide range of taxes falling on shipping business can be a major burden. Industry volatility and complex rules can make it difficult to manage the group’s taxation. A flexible and efficient structure, as well as clear procedures are essential.
The shipping business is capital intensive: technical and environmental developments trigger an ongoing need for investment. Tax optimised financing models help lower the cost of capital investment.
Since 1963, Cyprus has created a well established shipping industry with well founded infrastructure and services able to successfully meet the growing demands of today’s globalised shipping business. The Cyprus tax legislation has been the main force behind the rapid expansion of the shipping industry in the past half a century.
Development of the Cyprus shipping industry
The Republic of Cyprus was established in 1960 and the law dealing with the registration of ships, sales and mortgages was introduced in 1963. During the early years the number of ships registered in the Cyprus Shipping Registry was very small as it took some time for the shipping community to realise the opportunities offered by this legislation.
The double tax treaties signed and the numerous bilateral agreements in conjunction with the tax benefits introduced for both foreign and local shipowners, triggered the tremendous expansion of the Cyprus Shipping Registry, both in terms of number of vessels registered as well as gross tonnage. Today, Cyprus ranks among the top ten countries with one of the largest shipping fleets in the world, with ships representing a gross tonnage of 22 million. The Cyprus Merchant fleet represents approximately 6% of the merchant fleets under EU flags being the 3rd largest fleet in the EU.
Good international relations have played an important role in the development of the island as a shipping centre. Other than its good reputation as an international financial centre, Cyprus has the unique advantage of being a member of the United Nations, Council of Europe, Commonwealth, the Conference for Security and Co-operation in Europe and the Group of Non Aligned Countries. The accession of Cyprus in the EU has boosted further the registration of vessels in The Cyprus Registry as Cyprus is probably the only “Open Registry” in the EU.
The island has its own well-established maritime infrastructure comprising the admiralty courts, unions and Classification Society. It also has a specialised department, The Department of Merchant Shipping, which is operating under the Ministry of Communications and Works and offers a dedicated service to the shipping industry.
A substantial percentage of the vessels in the Cyprus registry is currently managed from specialised ship management companies, which operate from fully manned offices in Cyprus. This promotes the proximity and close relationship between the Cyprus Government and the shipping community.
Government policy on shipping is constantly upgraded to improve the safety standards and living and employment conditions of seamen on board Cyprus ships, and thus enhance the reputation of Cyprus as a maritime nation and a shipping power with high quality standards.
Cyprus shipping and the European Union
Cyprus accession in the European Union (EU) has created new prospects for further development in shipping. Cyprus has joined the EU with a strong fleet and a well founded and efficient maritime infrastructure and aims to continue the qualitative improvement of its fleet. The Cyprus Flag is probably the only “Open Registry” within EU and is estimated to constitute 25% of the whole EU “fleet”.
The sector of commercial shipping is in the foreground of the interest of the EU, which is particularly sensitive about the level of safety of ships. The Government of Cyprus has prepared a relevant plan of action and adopts new policies for the qualitative upgrading of the fleet and more generally for the enhancement of the Cyprus flag. The relevant plan of action, beyond the legislative work involved, entails the enhancement of the Department of Merchant Shipping with new posts in the fields of inspection of ships, the control of the Register, nautical education and the issuance of certificates, as well as labour relations in shipping, the protection of the marine environment, the investigation of accidents, the registering of ships and the legal department.
Registration of ships
Permanent & provisional 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 9 months, including the 3 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: "Parallel-in" 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 effected 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 2 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.
Types of shipping activities
Shipowning
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 shipowning 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 recognises the concept of bareboat charter registration.
Shipmanagement headquarters
Ship management companies are finding Cyprus increasingly attractive as a base for managing ships under various flags. These companies offer full management services to shipowners worldwide and are engaged in chartering, crewing, ship-broking and similar activities. In order to encourage the establishment of shipmanagement companies and other shipping headquarters in Cyprus, the existing legislation grants such companies and their foreign employees various tax advantages and other incentives.
Service companies and facilities
Today, Cyprus can claim numerous shipping agencies, classification societies, marine surveyors, average adjusters, marine insurance and P & I brokers, ship-brokers, bunkering facilities, a small ship-repair facility and the possibility of a larger one in the future, as well as an underwater survey service.
In addition, a growing number of international banking units are willing to offer their services for ship financing while there is a considerable number of UK trained lawyers and accountants specialising in shipping. The influx of service companies underlines the faith in the continued growth of Cyprus as a shipping centre.
The continuous improvement of services offered has led among others to the upgrading of the Cyprus flag to white lists of many countries.
Tax and other incentives
Favourable tax and other incentives have played an important role in the development of Cyprus as an international business, shipping and shipmanagement centre.
Shipping activities – Cyprus flag
Cyprus offers complete tax exemption on all profits and dividends arising from shipping operations. This tax relief was introduced in 1963 for 10 years and has been extended a number of times. The current expiry date is 31 December 2020. Essentially the relief provides that:
- no income tax is payable on the profits derived from any shipping activity by a Cyprus shipping company which owns or charters ships under the Cyprus flag or on dividends paid out of such profits at all levels of distribution
- The exemption extends to the bareboat charterer of a foreign flag ship under parallel registration in Cyprus
- no capital gains tax is payable on the sale or transfer of a ship or shares in a shipping company
- no income tax is payable on the salaries of officers and crew of Cyprus ships which operate in international waters
- no stamp duty is payable on bills of sale and mortgages on ships and related documents
Shipping activities – Foreign flag
Cyprus company profits generated from the operation of foreign flag ships are subject to corporation tax at 10%. Dividends distributed from such profits:
- have no WHT if paid to non Cyprus residents
- are fully exempt from tax in the hands of a Cyprus holding company
Capital gains from the disposal of ships or shares in shipping companies are exempt from tax.
Shipmanagement activities
Cyprus shipmanagement companies that manage Cyprus flag vessels pay no tax, whereas the shipmanagement of foreign flag vessels is subject to tonnage tax at 25% of the tonnage tax rates payable by the shipowner or subject to 4,25% tax on the profits.
In particular, the main characteristics of the shipmanagement tax regime are the following:
- The taxation regime covers the three types of internationally accepted shipmanagement services, i.e. crewing, technical and commercial management of ships, rendered under a contract with the owner or bareboat charterer of a ship, by persons that have an office in Cyprus manned with sufficient personnel in number and qualifications (at lease 5 employees for managing up to 10 vessels).
- Shipmanagement companies are taxed in accordance with the provisions of the Merchant Shipping (Fees and Taxing provisions) Law, unless they elect to be taxed for a specific tax year in accordance with the provisions of the Income Tax Law.
- In accordance with the provisions of the Income Tax Law, any profit arising from the provision of shipmanagement services is subject to a special tax rate of 4,25%.
- In accordance with the provisions of the Merchant Shipping (Fees and Taxing Provisions) Law, and for the period ending 31 December 2020, any income arising from the provision of shipmanagement services is subject to a tax rate equal to 25% of the tonnage tax rates of the vessels under management. This tax is applicable to foreign flag vessels under management and is calculated based on the annual tonnage tax these vessels would have to pay if they were registered in the Cyprus Register of Ships. Shipmanagement services offered to Cyprus flag vessels are exempt from tonnage tax.
- In accordance with the same legislation, no tax will be withheld from dividends distributed out of profits generated from shipmanagement activities and no tax is imposed to the recipient shareholders in respect of these dividends at all levels of distribution.
Other important general tax provisions
The following general tax provisions in the Cyprus tax legislation, enhance the attractive shipping tax regime and render Cyprus an ideal location for non shipping activities as well:
- General corporate tax rate of 10% (lowest in the EU)
- Full tax exemption on disposal of shares and similar titles
- Zero taxation on dividends received (subject to minor conditions)
- Zero WHT all all payments of dividends, interest and royalties to non residents
- No CFC legislation
- No thin capitalisation rules
- Tax neutral reorganistaions for both EU and non EU group companies
- Full adoption of all EU directives
- Extensive double tax treaty network
Conclusion:
The tax incentives combined with the economic and the other advantages provided, including the excellent infrastructure, make Cyprus the ideal investment choice for shipowners and shipmanagers. Following Cyprus accession to the EU, Cyprus has experienced an influx of new investors particularly from the Nordic countries.
Cyprus plays a prominent role as a leading Shipping and shipmangement centre and will continue to strengthen its position in the world economy by maintaining and enhancing its sound maritime infrastructure, favourable tax regime and competitive ship registration and annual tonnage tax rates.
