14 August 2019

The Merchant Shipping Legislation provides for exemption from all direct taxesand imposes taxation under tonnage tax regime (“tonnage tax regime”, TT regime) of qualifying shipowners, charters and shipmanagers flying a flag of an EU or EEA member country, and foreign ships (subject to certain conditions), in qualifying activities.

According to the Law, foreign vessels may enter the tonnage tax regime provided the fleet is composed by at least 60% EU / EEA community vessels. Even if this requirement is not met, then non community vessels can still qualify if certain conditions are met.

The legislation includes an “all or nothing” rule, meaning that if a shipowner/ charterer/ shipmanager of a group decides to be taxed under the Tonnage Tax regime, all shipowners/ charterers/ shipmanagers of the group should choose the same.

Exemption is also given in regard to the salaries of officers and crew aboard a Cyprus ship.

Shipowners taxation

The exemption from taxation applies to:

• profits derived from the use/chartering out of the ships
• interest income relative to the working capital of the company
• profits from the disposal of ships that meet certain conditions
• dividends received from the above profits at all distribution levels
• profit from the disposal of the shipowning company's shares and its distribution

The law grants the exemption provided that the Tonnage Tax regime is exercised for all vessels and that a composition requirement is met: at least 25% (reduced to 10% under certain conditions) of the net tonnage of the vessels owned or bare boat chartered in. The exemption also applies to the bareboat charterer of a vessel flying the Cyprus flag under parallel registration (see also ( Government Policy on the Registration of Vessels Flying the Cyprus Flag: Basic Amendments )

Shipmanagers

The exemption from taxation is applicable to:

• Profits from technical and/or crew management
• Dividends paid out of these profits at all levels of distribution
• Interest income related to the working capital of the company

To be applied the Tonnage Tax regime, shipmanagers must meet the following additional requirements:

The company must maintain a fully equipped office in Cyprus with personnel sufficient to carry out the company's activities:

• at least 51% of all onshore personnel must be EU / EEA citizens
• at least 2/3 of total tonnage under management must be managed within the EU / EEA territory (any excess of 1/3 of total tonnage of the cargo will be imposed corporation tax)

The application of the Tonnage Tax regime is obligatory for owners of ships flying the Cyprus flag and optional for owners of non Cyprus flag ships, charterers and shipmanagers. Companies that choose to enter the Tonnage Tax regime must remain in the system for at least 10 years unless they had a reasonable excuse to exit, such as disposal of their vessels and cessation of their activities.

Based on the materials of PWC clarifications (Cyprus)