Cyprus is a great Maritime hub and a Tax friendly destination allowing shipping companies worldwide to relocate their operations and bases.
The Cyprus Tonnage Tax System (TTS) applicable to merchant shipping was initially approved by the European Commission in 2010, for a 10-year period, as compatible with the requirements of the EU acquis and in line with the Guidelines on State aid to maritime transport. Cyprus was the first open registry within the EU to have a comprehensive, transparent and approved TTS by the EU.
According to the Scheme, qualifying owners of Cyprus and foreign ships, charterers and ship managers who are approved to be taxed under the TTS are subject to an annual tax referred to as tonnage tax, which is based on the net tonnage of the vessels rather than on their actual profits from maritime transport activities. The tonnage tax is considered as one of the key assets of the Cypriot shipping industry in its efforts to attract more ships and companies to the Cyprus maritime cluster.
The European Commission, following a formal assessment of the Cyprus TTS, decided on 16 December 2019, on the prolongation of the Cyprus TTS, for another ten years, until 31st December 2029. The scheme was unanimously approved, on 15 April 2020, by the plenary of the House of Representatives of the Republic of Cyprus, securing the viability of the Cypriot registry and shipping industry.
The Merchant Shipping (Fees and Taxing Provisions) Law of 2010 (Law 44 (I)/2010) has been amended by Law 39(I)/2020) accordingly to take into consideration the aforementioned decision of the European Commission. The scheme provides competitive advantages, including a wider list of eligible vessels and ancillary activities, discount rates for environmentally friendly vessels and, more importantly, the companies operating under the current TTS can continue to do so with no major changes.
A. Eligibility of vessels for Tonnage Tax
Qualifying ship is any seagoing vessel certificated under the applicable international or national rules and regulations and registered in the ship register of any member of the International Maritime Organization (IMO) and the International Labour Organization (ILO), which is recognized by the Republic of Cyprus.
According to the new law the below vessels are eligible to be taxed under the Cyprus' TTS and it is worth mentioning that the list of the 'qualifying vessels' is in line with the Maritime Guidelines and Commission's case practice.
- Vessels operating maritime transport activities, such as cargo and passenger ships;
- Cable-laying ships, pipe-laying ships;
- Ocean-going dredgers, ocean-going tug boats;
- Crane vessels, self-propelled barges;
- Research vessels;
- Mobile offshore drilling units (MODUS);
- Off-shore support/servicing vessels engaged in petroleum and gas activities;
- Multi-purpose break-bulk and other types of support/ servicing vessels;
- Cruise ships; commercial yachts;
- Rescue and marine assistance vessels;
- Guard vessels for maritime security and environmental clean-up purposes;
- Vessels for raising, repairing and dismantling windmills;
- Ice management vessels;
- Accommodation vessels for housing offshore workers at sea; and
- Any vessel engaged in the transportation of any UN/EU humanitarian aid or is involved in any UN or EU humanitarian relief operations.
The above-mentioned list of eligible vessels may be extended following the prior notification approval by the European Commission.
Conversely, the definition of"qualifying ship"expressly excludes the following vessels for the TTS:
- Fishing and fish factory vessels;
- Private yachts;
- Vessels constructed and used exclusively for inland waterway navigation;
- Fixed off-shore installations and floating storage units which are not used for maritime transport;
- Non-ocean going tug boats and non-ocean going dredgers;
- Floating hotels or restaurants;
- Floating or cruising casinos; and
- Non-propelled barges and any other vessels which may be determined as non-qualifying ships, following the prior notification approval by the European Commission.
B. Eligibility requirements of the beneficiaries of the Cyprus Tonnage Tax
a) Owners of Cyprus Ships
Eligible for the TTS is an owner of a Cyprus ship, who owns:
– a qualifying ship, which is
– engaged in a qualifying shipping activity.
Owners of Cyprus ships fall automatically within the scope of the TTS.
b) Owners of Foreign Ships
Eligible for the TTS is an owner of a foreign ship, who:
– is a tax resident of the Republic of Cyprus,
– has opted to be taxed under the TTS and
– owns a qualifying ship, which is
– engaged in a qualifying shipping activity.
Owners of foreign ships must comply with the following requirement:
- "Community–Flagged Share" Requirement.
c) Charterers
Eligible for the TTS is a charterer who charters ships under bareboat, demise, time or voyage charter and:
– is a tax resident of the Republic of Cyprus,
– has opted to be taxed under the TTS and
– charters a qualifying ship, which is
– engaged in a qualifying shipping activity.
The charterer must comply with the following requirements:
- Minimal Share of the Fleet in Ownership – % of Chartered-in ships,
- "Community–Flagged Share" Requirement.
d) Ship Managers
Eligible for the TTS is a ship manager who:
– is a tax resident of the Republic of Cyprus,
– has opted to be taxed under the TTS,
– provides ship management services (crew and/or technical) to qualifying ships and meets at any time the following requirements:
i. Maintain a fully fledged office in Cyprus;
ii. Employ a sufficient in number and qualifications personnel;
iii. At least 51% of the total number of the personnel employed ashore must be EU/EEA citizens;
iv. "Community – Flagged Share" Requirement;
v. Economic link of managed ships with the Community (EU/EEA) – The "2/3 Rule";
vi. Provision of crew management services in accordance with the MLC 2006 requirements for crew managers (Notification P.I. 511/2010 and Forms MS TT 5-N and MS TT 6-N);
vii. Certified under the ISM Code (DOC) by the competent authority of the flag States of the ships under its technical management (Notification P.I. 511/2010 and Form MS TT 7-N).
C. Qualifying shipping activity
Any commercial activity that constitutes maritime transport or ship management (crew management and/or technical management) is considered a qualifying shipping activity.
D. Maritime Transport
The definition of maritime transport includes the carriage of goods and passengers by sea, outside the territorial waters of the Republic of Cyprus, between a Cyprus port and a foreign port or an off-shore facility, or between foreign ports, or off-shore facilities, including:
i. Ancillary activities to maritime transport, provided that the revenues from such activities shall not exceed fifty per cent (50%) of the total gross revenues from the operation of each qualifying ship under tonnage tax by a qualifying owner or qualifying charterer; (For more information on ancillary activities, see Notification P.I. 182/2020).
ii. Towage activities, provided that the ocean going tug is a Community ship and spends at least 50% of its time in towage or salvage activity at sea (Form MS TT 3-N);
iii. Dredging activities, provided that the dredger is self propelled, has carrying capacity for dredged material, is a Community ship and spends at least 50% of its time in the carriage of dredged goods (Form MS TT4-N);
iv. By analogy cable-laying activities. (For more information on Towage and Dredging Activities see Notification P.I. 353/2010).
E. Ancillary activities
Ancillary activities to maritime transport means:
a) the activities related to a qualifying ship under tonnage tax, which have a substantial connection with the core maritime transport activities of a qualifying owner or a qualifying charterer but which exclude commercial activities that form part of an operation of a port carried on for profit, or
b) where the qualifying owner or the qualifying charterer of a qualifying ship under tonnage tax is a member of a group of companies, the activities related to such qualifying ship's core maritime transport activities provided by another member of that group which is a tax resident of the Republic.
F. Crew and technical management services to a qualifying ship
I. Crew management services means among others:
- selecting and engaging the vessel's crew, including payroll arrangements and insurances for the crew;
- ensuring compliance with the requirements of the law of the flag of the vessel in respect of manning levels, rank, qualification and certification of the crew;
- ensuring that the crew has undergone a medical examination and possesses a valid medical certificate issued in accordance with the appropriate flag State requirements;
- arranging transportation of the crew, including repatriation;
- training of the crew and supervising their efficiency.
II. Technical management services means among others:
- the provision of competent personnel to supervise the maintenance and general efficiency of the vessel;
- the arrangement and supervision of dry dockings, repairs, alterations and the upkeep of the vessel to the standards required by the law of the flag of the vessel and of the places where she trades, and all requirements and recommendations of its classification society;
- the arrangement of the supply of necessary stores, spares and lubricating oil.
Commercial management does not fall within the scope of the TTS.
G. Reduced Tonnage Tax rates
Reduction of the tonnage tax is granted for Owners and Charterers of Cyprus and Community ships in the cases listed below:
a) Laid-up ships
If a ship is laid up for a period of at least 3 months the tonnage tax payable is equal to 25% of the tonnage tax rates for the period during which the ship is laid-up, provided that the Shipping Deputy Ministry is duly notified not later than 3 months from the commencement of the lay- up period.
b) Inoperative Ships
If the ship is rendered inoperative for a period of at least 3 months due to her judicial arrest, or by act of piracy, or armed robbery, or by force majeure, then the tonnage tax payable is equal to 25% of the tonnage tax rates for the period during which the vessel is inoperative.
Section 8 of the Merchant Shipping (Fees and Taxing Provisions) Laws, 1992-2007 provides for the reduction and refund of the tonnage tax in the cases listed below.
c) Laid-up ships
If the ship is laid up for a period of more than 3 consecutive months the tonnage tax payable is reduced by 75 percent for the period during which the vessel is laid-up, provided that the Department of Merchant Shipping is duly notified not later than 3 months from the commencement of the lay up period.
d) Environmentally friendly ships
Tonnage Tax Reductions are eligible of up to 30% for environmentally friendly ships (Cyprus Green Incentives Programme). Under the Law of 2020, a reduction of up to 30% of the tonnage tax is possible in the case of a Cyprus ship or EU/EEA ship using mechanisms for the environmental preservation of the marine environment and the reduction of the effects of climate change.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
