Fiscal considerations play a crucial part when determining under which flag administration one would like to register a vessel. Various measures have been taken by the Member States in order to sustain the competitiveness of EU flag states. Among these measures has been the ability of Member States to do away with the traditional methods of taxation and introduce a system whereby the tax paid is dependent on the tonnage of the vessel or fleet belonging to a ship owner, that is, tonnage tax. Cargo and passenger ships trading internationally benefit freely from the tonnage tax regime. This regime is based on the EU’s 2004 Guidelines on State Aid to Maritime Transport (hereinafter the ‘Guidelines’), and dictates that all ships falling within the scope of this regime will be liable to pay a tonnage tax whilst being eligible for exemptions from other tax regimes, such as income tax.
In Malta, the Merchant Shipping (Taxation and Other Matters relating to Shipping Organisations) Regulations (hereinafter the ‘Regulations’) exempt from income tax any income derived by a licensed shipping organisation that owns, charters or operates a tonnage tax ship. In fact, regulation 3(1) of the said Regulations stipulates that:
“no further tax under…[the Income Tax] Act shall be charged or payable on the income, to the extent that such income is derived from shipping activities, of a licensed shipping organisation”.
For the exemption from income tax to apply, therefore, the company must qualify as a ‘shipping organisation’ and the ship must qualify as a ‘tonnage tax ship’:
A ‘tonnage tax ship’ is a ship of not less than 1000 net tonnage if it is registered under the Maltese Merchant Shipping Act; or it is registered in another EU/ EEA State and has paid the applicable Maltese tonnage tax; or the Minister declares a third country ship to be a tonnage tax ship provided certain conditions (similar to those found in the Guidelines) are satisfied.
A ‘shipping organisation’ is defined in the Merchant Shipping Act as an entity which:
The exemption from income tax is limited to income derived by a shipping organisation from ‘shipping activities’. ‘Shipping activities’ are defined in the Regulations as:
“the international carriage of goods or passengers by sea or the provision of other services to or by a ship as may be ancillary thereto or associated therewith including the ownership, chartering or any other operation of a ship engaged in all or any of the above activities or as otherwise may be prescribed”.
Legal Notice 83 of 2010 extended the tonnage tax regime to Maltese companies (and other legal persons) that own ships not registered in Malta. When a tonnage tax ship is not registered in Malta, registration fees/tonnage taxes are calculated by reference to the registration fees/tonnage tax that would have been paid in respect of the ship had it been registered in Malta. However, in the case of an EU ship, if registration fees/tonnage tax was paid in respect of that ship in another Member State/EEA State, relief may be provided against the Maltese registration fees/tonnage taxes, subject to a minimum charge equivalent to 25% of Maltese registration fees/tonnage tax.
Maltese law, however, does not extend the tonnage tax regime to shipping activities that do not consist of the carriage of cargo or passengers internationally. This effectively means that fishing vessels, oil rigs, or non-commercial leisure yachts are not eligible for the tonnage tax benefits under the existing legislation. Furthermore, although individuals may qualify to own Maltese ships in their own personal capacity they are not entitled to benefit from the tax exemptions referred to above since individuals are excluded from the definition of a ‘shipping organisation’ given by law.
Another advantage of the Maltese tonnage tax system is that distribution of profits derived from shipping activities are also exempt from tax in the hands of the shareholders. Furthermore, apart from the income tax exemptions, vessels undertaking commercial activities are generally subject to a wide VAT exemption.
The taxation benefits which were already enjoyed by shipping organisations have also been extended to persons carrying on ship management activities. Such ship management activities include technical management and crew management activities. Once certain conditions are satisfied, any income derived by a ship manager from ship management activities will be deemed to constitute income from shipping activities and will thus be exempt from tax under the Maltese Income Tax Act.
If the conditions for the tonnage tax system are not met, or the shipping company or ship manager opts to renounce to the benefits and concessions granted by the regime, then the profits from the shipping activities would be subject to the Maltese standard corporate rate of 35%. However, upon a distribution of the said taxed shipping profits, the shipping company’s shareholders may be entitled to claim a 6/7ths refund of the Malta tax suffered by the shipping company on the profits so distributed, thereby resulting in an effective tax rate of 5% on the distributed profits.
No duty is payable in respect of any instrument connected with or involving the registration of a tonnage tax ship, the sale or other transfer of a tonnage tax ship or any share thereof, the assignment of any rights and interests or the assumption of obligations in respect of any ship or share thereof. Moreover, any instrument connected with or involving the issue or allotment of any security or interest of a licensed shipping organisation or the purchase, transfer, assignment or negotiation of any security or interest of any licensed shipping organisation is also exempt from stamp duty. Additionally, no duty is payable in respect of any instrument connected with or involving the registration of any mortgage or other charge over or in relation to any ship or licensed shipping organisation, any transfer or discharge thereof, any receipt relative thereto, and any assignments granted in connection therewith.