The European Commission concluded in its decision dated 16 December 2019 that the Cyprus tonnage tax scheme is in line with EU State and rules.
On 16 April 2020, the law Ν39(Ι)/2020 was published in the Official Gazette of the Republic of Cyprus which amends the Merchant Shipping (Fees and Taxing Provisions) Law of 2010. An unofficial consolidated translation of the new Law (Law 44(I)/2010 as amended by Law 39(I)/2020) is available on the web site of the Shipping Deputy Ministry.
By virtue of the amended Law of 2020, the validity period of the Cyprus Tonnage Tax Scheme has been prolonged until 31st December 2029 (from 31st December 2019).
The Law of 2020 has introduced the following amendments to the Basic Law:
1. Extension of the definition of ‘qualifying ship’
The definition of qualifying ship has been amended and now includes both a list of eligible vessels as well as a list of the vessels which are excluded from the definition.
The vessel types which are included in the definition ‘qualifying ship’ are described below:
(i) Vessels operating maritime transport activities, such as cargo and passenger ships
(ii) Cable-laying ships, pipe-laying ships
(iii) Ocean-going dredgers, ocean-going tug boats
(iv) Crane vessels, self-propelled barges
(v) Research vessels
(vi) Mobile offshore drilling units (MODUS)
(vii) Offshore support/servicing vessels engaged in petroleum and gas activities
(viii) Multi-purpose break-bulk and other types of support/servicing vessels
(ix) Cruise ships
(x) Commercial yachts
(xi) Rescue and marine assistance vessels
(xii) Guard vessels for maritime security and environmental clean-up purposes
(xiii) Vessels for raising, repairing and dismantling windmills
(xiv) Ice management vessels
(xv) Accommodation vessels for housing offshore workers at sea
(xvi) Any vessel engaged in the transportation of any UN/EU humanitarian aid or is involved in any UN or EU humanitarian relief operations
(xvii) Any other type of vessel following the prior notification approval by the European Commission
The definition ‘qualifying ship’ excludes the following vessels:
(i) Fishing and fish factory vessels
(ii) Private yachts
(iii) Vessels constructed and used exclusively for inland waterway navigation
(iv) Fixed off-shore installations and floating storage units which are not used for maritime transport
(v) Non-ocean going tug boats and non-ocean going dredgers
(vi) Floating hotels or restaurants
(vii) Floating or cruising casinos
(viii) Non-propelled barges
(ix) Any other vessel which may be determined as non-qualifying ships, following the prior notification approval by the European Commission
2. Amendment of the definition ‘maritime transport’
The basic definition remained the same. That is, ‘maritime transport’ means the carriage of goods or passengers by sea outside the territorial sea of the Republic, between a Cyprus port and a foreign port or an off-shore facility, or between foreign ports, or off-shore facilities.
In addition, the definition of maritime transport includes:
a) Ancillary activities to maritime transport, provided that the revenues from such activities shall not exceed 50% of the total gross revenues from the operation of each qualifying ship under tonnage tax by a qualifying owner or qualifying charterer;
b) The following eligible for tonnage tax activities:
- towage activities and dredging activities, under conditions determined by Notification
- by analogy cable – laying activities.
3. ‘Ancillary activities to maritime transport’
In order to give effect to the new definition of ‘maritime transport’, a new definition ‘ancillary activities to maritime transport’ has also been introduced by the amended law.
By virtue of this amendment, ‘ancillary activities to maritime transport’ are defined as:
- 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
- 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.
4. Restrictions on bareboat chartering
In order to give effect to the recent decision practice of the European Commission, section 6 of the Basic Law has been amended so that an owner of a ship which is bareboat chartered out shall be deemed to be a qualifying owner, if the ship is bareboat chartered to a charterer forming part of the same group as the owner (intra-group transaction). In other words, with the introduction of this amendment, intra-group transactions are eligible for tonnage tax without restrictions.
As of 1st January 2020, non-intra group bareboat charter agreements will be eligible for tonnage tax provided that they meet all the following conditions included in section 6 of the new Law:
- the owner demonstrates that the ship was bareboat chartered out due to short-term over-capacity and the term of the charter does not exceed 3 years,
- at least 50% of the tonnage tax fleet, during a fiscal year, must still be operated by the tonnage tax beneficiary (owner) and
- The term ‘short-term over-capacity’ shall refer solely to ships acquired, bought or chartered, by the owner for the purposes of carrying out its own maritime transport activities and shall not include any ships specifically acquired, bought or chartered, for the purposes of chartering out on a bareboat basis.
The above conditions will not apply to existing bareboat charter agreements until their date of expiration or until 31 December 2022, whichever takes place earlier.
5. Reduction of tonnage tax for environmentally friendly vessels
Under the amended Law, 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 eligibility criteria for such reduction as well as the level of reduction may be set by a relevant Order of the Council of Ministers published in the Official Gazette.
6. Tax exemptions for Seafarers
The tax benefits existing for seafarers of Cyprus ships have been extended to seafarers of Community ships.
More specifically under, section 55 of the new Law, the tax exemption applies to seafarers who are:
- Liable to income tax in Cyprus and
- Employed on board a Community ship which is a qualifying ship engaged in a qualifying shipping activity
Where the vessels provide scheduled passenger services between ports of the Community, only seafarers who are citizens of the EU/EEA are eligible to benefit from scheme. In all other cases, the exemptions apply to all seafarers (citizens of a Member State or a non-Member State).
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