Taxation of Shipping Enterprises: Malta’s Revised Tonnage Tax Regime

  • By:Melissa Speigner

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.

On 17 December, 2017 the European Commission approved the Maltese Tonnage Tax Rules for a period of ten years, subject to the implementation of certain changes to the existing regime. Those changes were transposed into Maltese legislation by means of amendments to legal notices 127 and 128 of 2018. 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, as amended in 2018 (hereinafter the ‘Regulations’) exempt from income tax any income derived from shipping activities. In fact, regulation 5 of the said Regulations stipulates that:

“No further tax under the Income Tax Act shall be charged or payable on the income of that shipping organisation, to the extent that such income is derived from shipping activities”.

For the exemption from income tax to apply, the vessel has to be operated through a genuine shipping organisation which has assumed risks and responsibilities related to the operation of a tonnage tax ship or to carrying out of shipping activities. The vessel must also declared a tonnage tax ship. A ‘tonnage tax ship’ is a ship of any net tonnage, which is engaged in shipping activities.

Shipping activities’ are defined in the Regulations as the international carriage of goods or passengers by sea in terms of the EU Maritime State Aid Guidelines and such other activities that have been approved or considered as eligible for tonnage tax purposes by the European Commission and activities as are integral or directly linked to the business of operating tonnage tax ships, when carried out in conjunction with activities of international carriage of good or passengers, including commercial yachts, as well as ancillary activities qualifying in terms of the Regulations.

The regulations include the following eligible vessels: cable laying, pipe laying, research vessels and multi-purpose, break-bulk and other types of support vessels. Specifically excluded vessels are: fishing and fish factory ships, private yachts and ships used primarily for sport or recreation;  fixed offshore installations and floating storage units; non-ocean going tug boats and dredgers, ships whose main purpose is to provide goods or services normally provided on land, stationary ships employed for hotel and or catering operations (floating hotels or restaurants), ships employed mainly as gambling and/or casinos (floating or cruising casinos), non-propelled barges.

A shipping organisation must own, operate, administer or manage at least 60% of its total tonnage under the flag of an EU/EEA state. The Regulation allows ships registered in any EU/EEA state other than Malta to qualify for the regime if an amount equivalent to the Malta tonnage tax is paid to the Malta ship registry. Non-EEA ships will be able to benefit from the Malta tonnage tax when their commercial and strategic management takes place from an EU/EEA country.

Separate accounting must be kept for receipts and payments relating to shipping activities and activities relating to any other business.  Tax returns and other documentation should also distinguish clearly eligible and non-eligible income; and Respective ship registration fees and tonnage tax should be paid.

Main benefits of the Malta Tonnage Tax Regime

  1. Shipping organisations are exempt from paying tax on income derived from shipping activities under the Income Tax Act. No minimum tonnage requirement applies.
  2. Qualifying shipping organisations may also file a simplified tax declaration instead of a regular income tax return.
  3. The regulations also provide that the profits derived from shipping activities are exempt from tax in the hands of the shareholders following a distribution thereto.
  4. The transfer of shares in a shipping organisation is subject to capital gains and stamp duty exemptions.
  5. Commercial shipping activities are generally subject to extensive VAT exemptions.
  6. Ship management activities (technical management and crew management activities) will continue to benefit from the exemption under the Income Tax Act.
  7. The Regulations also grant an exemption from tax under the Income Tax Act on any income, profits or gains derived from the sale or other transfer of ship tonnage tax ship which had been acquired or sold whilst under the tonnage tax system or from the disposal of any rights to acquire a ship which when delivered would qualify as a tonnage tax ship.

Taxation when the Tonnage Tax System is not applied

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.

Posted in: Shipping & Yachting