Section 15 of the Merchant Shipping (Fees and Taxing Provisions) Law of 2010 (the Tonnage Tax Law) allows owners of mixed fleets, comprising Community-flagged ships and non-Community-flagged ships to benefit from inclusion in the tonnage tax scheme provided that:
- at least 60% of the fleet in terms of tonnage comprises Community ships; or
- part of the fleet comprises Community ships; and
- the percentage share of the fleet in tonnage terms represented by Community-flagged ships is not reduced for three years from the date of entering the tonnage tax scheme; and
- the commercial and strategic management of the fleet is carried out from the territory of the EEA.
Sections 25 and 35 of the Tonnage Tax Law include similar provisions for charterers and managers respectively of mixed fleets, apart from the requirement for the ships to be managed from the EEA.
Failure to maintain the percentage share of the fleet represented by Community-flagged ships results in the imposition of surcharges and disqualifications.
In December 2010 the Department of Merchant Shipping issued the Tonnage Tax (Special Provisions for the Calculation of the Community Flagged Share) Notification of 2010 which sets out the detailed method for calculation of the relevant percentages and includes illustrative calculations. The Department of Merchant Shipping has now issued further guidance on calculation of the Community-flagged share in Circular 13/2011.
Reference date for calculation of the Community-flagged share
For the purposes of calculating the Community-flagged share for a given fiscal year only the net tonnage of the ships owned, chartered or managed as at 31 December of that year will be taken into account.
The Department of Merchant Shipping will carry out a calculation of the Community-flagged share at the end of the third year (on 31 December) after entry into the tonnage tax system and every three years from that date for as long as the tonnage tax scheme is in place. A company which opted to enter the tonnage tax system on 1 January 2011 will be assessed on 31 December 2013 and every three years thereafter. A newly established company which opted to enter the tonnage tax system on 13 May 2011 (upon establishment) will be assessed for the first time on 31 December 2014 and every three years thereafter.
31 December is also the reference date for calculating the minimum percentage set out in section 33 of the Tonnage Tax Law regarding the economic link between the managed ships and the Community.
Minimum share of the fleet in ownership
Section 47 of the Tonnage Tax Law allows charterers to enter the tonnage tax scheme only if the total net tonnage of ships chartered-in and included in the tonnage tax scheme is no more than 75% of the total net tonnage of all ships chartered-in or operated by the charterer and included in the tonnage tax system. The limit is increased to 90% provided that every chartered-in ship flies an EEA flag or is entirely managed from within the EEA. Temporary increases in the chartered-in percentage after entry are permitted but if the percentage of net tonnage chartered-in reaches 100% (i.e. no vessels are owned or bareboat chartered) the charterer will be ineligible for tonnage tax and will be taxed under the Income Tax Laws.
The share of the fleet in ownership in a given fiscal year is calculated on the basis of the net tonnage of each ship chartered-in or operated as at 31 December which is included in the tonnage tax system, on a pro rata basis according to the number of days chartered-in or operated.
For further information please contact Costas Stamatiou or any member of our shipping department.