Estonian Tonnage Tax instead of Corporate Tax for maritime companies - no income tax on crew members' remuneration
Contributed by Larssen
14 May, 2020
It is widely known that in many countries in the world various tax incentive measures are being implemented to develop maritime and other sectors of the economics connected with ship transportation of cargoes and passengers. Generally, these measures are focused on applying tonnage tax instead of corporate tax for the income of ship owning / ship management companies and tax benefits (up to exemption) for crewmembers' salaries.
In Estonia until recent time a standard approach has been applied to the income of such companies and crewmembers: corporate tax was (in case of withdrawal of profit) 20%, income tax - 20% and social security tax - 33%.
Apparently, such policy did not contribute to the development of the industry, and Estonia was persistently losing to other maritime countries - competitors who have already applied tax incentives in some extent. Particularly Cyprus, Malta, Greece and some others. As a result, in 2018 the Estonian government initiated legislative amendments in order to liberalize the taxation of maritime shipping income and crew income.
Ten legal Acts have been amended, including the Law of Ship Flag and Ship Registers Act, as well as Income Tax Act.
The application of the special taxation procedure for the above-mentioned profits is the "state support" in the meaning of the Article 107 of the Treaty on the functioning of the EU and requires the approval of the European Commission. On December 16, 2019, the European Commission approved the proposed support scheme for Estonian maritime transport.
As a result, important changes in the Income Tax Act related to maritime taxation will come in force from 01.07.2020 in Estonia.
These amendments are aimed at simplifying the process of ships registration under the Estonian flag in bareboat chartered ships register, and establishing special tax regime for vessels eligible for the new tonnage scheme. The special regime will be applied to cargo ships of gross tonnage at least 500 engaged in international maritime shipping, and partly to passenger ships of gross tonnage at least 500 operating outside the EEA.
In accordance with the tonnage taxation procedure, the tax obligation of an enterprise is calculated on the basis of the net displacement of the vessel owned by the enterprise, and it does not depend on the amount of profit obtained by the enterprise.
As a result, the "traditional" income tax (corporate tax) is not paid, including profit-sharing. In most cases, dividend tax also does not arise.
The amendments will also improve the situation with seafarers. All Estonian seafarers will be granted access to the state health insurance scheme, including those employed under foreign flags, and who have no health insurance so far. In order to raise the competitiveness of Estonian shipping, the income tax rate 0 % will be applied to seafarers working on ships eligible for the special tax regime.
Contact Larssen to see how you can benefit from registering your company in Estonia.
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