Cyprus: Offshore Business Sectors
A new tonnage tax system was approved by the European Commission on March 24, 2010 under state aid rules for maritime transport. The simplified tonnage tax system extends the favourable benefits available to owners of Cyprus flag vessels and ship managers to owners of foreign flag vessels and charterers. It also extends the tax benefits that previously only covered profits from the operation of vessels in shipping activities, to cover profits on the sale of vessels, interest earned on funds used other than for investment purposes and dividends paid directly or indirectly from shipping-related profits.
The Merchant Shipping (Fees and Taxing Provisions) Law was enacted in May 2010 and introduces a new tonnage tax system in Cyprus from January 1, 2010. The tonnage tax system is available to any owner charterer or ship manager who owns, charters or manages a qualifying ship in a qualifying activity. The tonnage tax is calculated on the net tonnage of the ship according to a broad range of bands and rates prescribed in legislation. The rates applicable to ship managers are 25% of those applied for ship owners and charterers.
A qualifying ship is any seagoing vessel certified under applicable international or national rules and regulations and registered in the ship register of any member of the International Maritime Organization or the International Labour Organization that is recognized by Cyprus. The regime excludes certain types of ships, such as fishing vessels, ships primarily for sports or recreation, river vessels, non-self propelled floating cranes, and tug boats.
Any commercial activity that constitutes maritime transport, crew management, and/or technical management is considered a qualifying activity. The definition of maritime transport includes the traditional carriage of goods and passengers, as well as ancillary services such as all hotel, catering, entertainment and retailing activities on board a qualifying vessel, the loading and unloading of cargo, and the operation of ticketing facilities and passenger terminals. Towage, dredging and cable laying are also eligible for the tonnage tax.
Owners of Cyprus flag ships automatically fall under the new tonnage tax regime. Ship owners of EU/EEA flag ships or third country flag ships may opt to be taxed under the tonnage tax system.
Ship owners of third countries must satisfy certain requirements in order to qualify for the tonnage tax. These include the requirement that a share of their fleet be comprised of EU flag ships, provided that this share is not reduced over a three year period.
Any ship owner opting in to the tonnage tax regime must remain in the system for 10 years. Early withdrawal will incur penalties, calculated as the difference between the amount paid during the period the ship owner was under the tonnage tax system.