The Merchant Shipping Legislation enacted as from 1 January 2010 places Cyprus in a very competitive position. Cyprus has become the only EU country with an EU approved TT system that:
- provides for TT on the net tonnage of the vessels rather than Corporation Tax on the actual profits, regulated by the DMS rather than the Tax Authorities
- grants total tax exemption of profits tax and distribution tax at all levels
- allows mixed activities within a company/group (shipping subject to TT and other subject to 12,5% corporation tax)
- supports an open registry
- allows split ship management activities (crewing or technical)
- In addition, the favourable income tax legislation compliments the excellent Merchant Shipping Legislation, creating a highly tax efficient harbour for shipping groups and an ideal holding company location.
The tax system is in full compliance with EU requirements and also within the Organisation for Economic Co-operation and Development (OECD) requirements against harmful tax practices. In a nutshell, the tax system provides to the investors:
- only 12,5% corporation tax – the lowest in the EU
- exemption from tax of dividend income (subject to easily met conditions)
- exemption from tax of profits from foreign permanent establishments (PE) (subject to certain conditions)
- exemption from tax of profits generated from transactions in titles
- exemption from withholding tax on the repatriation of income either in the form of dividends, interest and on almost all royalties
- extensive double treaties network
- access to EU Directives
- no controlled foreign corporation (CFC) legislation
- no thin capitalisation rules (funding by high debt/equity ratio possible)
- tax neutral reorganisations for both EU and non EU group companies
Cyprus plays a prominent role as a leading shipping and ship management centre and will continue to strengthen its position in the world economy by maintaining and enhancing its sound maritime infrastructure, favourable tax regime and competitive ship registration and annual tonnage tax rates.
The tax incentives combined with the economic and the other advantages provided, including the excellent infrastructure, make Cyprus the ideal choice for shipowners, charterers and ship managers.
The Cyprus shipping industry
The Cypriot maritime registry is today one of the largest in the EU and the 10th largest worldwide. Moreover, Cyprus is the biggest third party ship management centre in the EU.
The Republic of Cyprus was established in 1960 and the law dealing with the registration of ships, sales and mortgages was introduced in 1963. During the early years the number of ships registered in the Cyprus Shipping Registry was very small as it took some time for the shipping community to realise the opportunities offered by this legislation.
The double tax treaties signed and the numerous bilateral agreements in conjunction with the tax benefits introduced for both foreign and local shipowners, triggered the tremendous expansion of the Cyprus Shipping Registry, both in terms of number of vessels registered as well as gross tonnage. Good international relations have played an important role in the development of Cyprus as a shipping centre. Other than its good reputation as an international financial centre, Cyprus has the unique advantage of being a member of the United Nations, Council of Europe, Commonwealth, the Conference for Security and Co-operation in Europe and the Group of Non Aligned Countries.
Cyprus’ accession in the European Union (EU) in 2004 created new prospects for further development in shipping. Cyprus joined the EU with a strong fleet and a well founded and efficient maritime infrastructure and aims to continue the qualitative improvement of its fleet. The Cyprus Registry is one of the only two “Open Registries” within EU and is estimated to constitute 15% of the whole EU “fleet”.
The island has its own well-established maritime infrastructure comprising the admiralty courts, unions and Classification Society. It also has a specialised department, The Department of Merchant Shipping, which is operating under the Ministry of Communications and Works and offers a dedicated service to the shipping industry. The sector of commercial shipping is in the foreground of the interest of the EU, which is particularly sensitive about the level of safety of ships. Government policy on shipping is constantly upgraded to improve the safety standards and living and employment conditions of seamen on board Cyprus ships, and thus enhance the reputation of Cyprus as a maritime nation and a shipping power with high quality standards.
The Cyprus flag is in the white list of Paris Memorandum of Understanding demonstrating the government’s commitment to safety and maintenance of Cyprus as a reputable maritime centre.
A substantial percentage of the vessels in the Cyprus registry are currently managed by specialised ship management companies renowned for their expertise in this field. This promotes the proximity and close relationship between the Cyprus Government and the shipping community. However, the main force behind the rapid expansion of the shipping industry in the past almost half a century has been the tax legislation.
Cyprus offers complete tax exemption of all profits and dividends at all levels of distribution arising from qualifying shipping operations. This tax relief was introduced in 1963 for 10 years and has been extended a number of times. On 29 April 2010 the Cyprus Parliament enacted the long awaited new shipping legislation.
The new Merchant Shipping Law, which applies from 1 January 2010, extended significantly the scope of the Tonnage Tax (TT) regime and enhanced the position of Cyprus as a maritime centre. The legislation, a major success for the Cyprus shipping industry, offers new opportunities :
It introduced two new TT schemes applicable to shipowners of non-Cyprus flag vessels and charterers. It also extended the application of the TT regime (and exemption from profits tax) currently enjoyed by shipowners and ship managers. The European Commission considered that the scheme is in line with the European Union’s Guidelines on state aid to maritime transport and authorised the scheme until 31 December 2019. It is aimed at supporting the shipping sector in Cyprus and other EU countries with a strong maritime sector, providing incentives for the employment of EU seamen and registration of vessels in the EU and enhancing the competitiveness of shipowners, charterers and ship managers operating in the EU.
Under this legislation, qualifying shipping activities are fully exempt from corporation tax. Tonnage tax on the net tonnage of the vessels is imposed instead of corporation tax on the actual profits. Qualifying persons are also regulated completely by the Department of Merchant Shipping rather than the Tax Authorities.
It is possible, and quite common, for shipowners, charterers and shipmanagers to invest surplus funds and have non shipping income. Such income, that is not subject to TT, is subject to corporation tax at the normal rate of 12,5%, the lowest corporation tax rate in the EU.
The tax legislation provides for several exemptions that may reduce the effective tax rate on non shipping income to well below 12,5%.
If mixed income is earned (TT and corporation tax), separate books must be kept. Also transactions with related parties who are not in the TT system should be made at arms’ length.
The tonnage tax system
The law provides full exemption to shipowners, charterers and ship managers from all profit taxes and imposes tonnage tax on the net tonnage of the vessels at the following rates.
|Ship owners & charterers||Ship managers|
|Units of net tonnage||€TT per 100 units||€TT per 400 units|
|0 – 1.000||36,50||36,50|
|1.001 – 10.000||31,03||31,03|
|10.001 – 25.000||20,08||20,08|
|25.001 – 40.000||12,78||12,78|
The conditions applicable to each of the three categories, as well as the taxation regime are analysed separately below.
The regime covers qualifying persons performing qualifying activities in relation to qualifying vessels.
Qualifying persons are shipowners, charterers (bareboat, demise, time and voyage) and ship managers providing technical and/or crewing services.
Qualifying activity for ship owners and charterers means maritime transport of goods or people between Cyprus ports and foreign ports / offshore installations, or between foreign ports or offshore installations and specifically includes towage, dredging and cable laying.
Qualifying activity when applied to ship managers means services provided to a shipowner or bareboat charterer on the basis of written agreement in relation to crew and/or technical management.
Qualifying vessel is a sea-going vessel that:
- has been certified in line with international principles and legislation of the flag country, and
- is registered in the register of a member country of the International Maritime Organisation (IMO) and International Labour Organisation (ILO)
The definition includes vessels that transport humanitarian aid but excludes the following vessels:
- fishing boats
- boats that are primarily used for the athletic and entertaining purposes boats that have been constructed exclusively for domestic navigation,
- ferry and trailer boats that are used in ports, mount of rivers and / or rivers,
- fixed offshore constructions that are not used for maritime transport,
- non self-propelled floating cranes,
- non sea-going trailers,
- floating hotels and restaurants,
- floating or movable casinos.
- Persons in the TT system are granted annually with a certificate by the Department of Merchant Shipping (DMS), a copy of which is sent to the Tax Office.
- A list is kept by the DMS of all Cyprus flag vessels and their owners that are not considered to carry out a qualifying activity
- Similar lists are kept by the DMS of all shipowners / charterers / shipmanagers for foreign flag vessels that either do not carry out a qualifying activity or the choice was not made to enter the TT system
- Remuneration of crew aboard a Cyprus flag vessel is exempt from income tax
- Provisions relating to safety apply to ship owners and ship managers
The TT regime applies to any owner of qualifying vessels that carry out a qualifying activity:
- Cyprus flag vessels
- EU/European Economic Area (EEA) flag vessels that exercised the option to be taxed under the TT regime
- Fleet of EU/EEA and non EU/EEA vessels that exercised the option to be taxed under the TT regime
The new legislation introduces the definition of a fleet. A fleet consists of two or more vessels that belong directly or indirectly to the same person(s) or companies of the same group. A group is defined as at least two companies that are directly or indirectly in a parent/subsidiary relationship or that are directly or indirectly subsidiaries of the same parent company.
The legislation allows non EU/EEA vessels to enter the TT regime provided the fleet is composed by at least 60% EU/EEA vessels.
If this requirement is not met, the non EU/EEA vessels may still qualify if certain criteria are met.
The tax exemption covers:
- Profits from the use of a qualifying vessel
- Profits from the disposal of a qualifying vessel and/or share and/or interest in it
- Profits from the disposal of shares in a shipowning company
- Dividends paid out of the above profits at all levels of distribution
- Interest income relating to the financing/maintenance/use of a qualifying vessel and the working capital, excluding interest on capital used for investments.
Where an option is exercised to enter the TT system, the shipowner must be a Cyprus tax resident and the option must remain in force for at least 10 years.
As with shipowners, the TT regime applies to qualifying vessels that carry out a qualifying activity. An option exists for all vessels (Cyprus/EU/EEA/fleet) chartered under bareboat, demise, time, voyage charter, provided the charterer is a legal person tax resident in Cyprus. If the choice is not made, profits are taxable under 12,5% corporation tax.
The fleet qualifying criteria are the same as for shipowners and so is the minimum 10 year duration.
The tax exemption covers:
- Profits from the use of a qualifying vessel
- Dividends paid out of such profits at all levels of distribution
- Interest income relating to the working capital / qualifying activity provided such interest is used to pay expenses arising from the charter, excluding interest on capital used for investments.
The law grants the exemption provided a composition requirement is met. That is, at least 25% of the net tonnage of vessels subject to tonnage tax are owned or are bareboat chartered. The percentage can be reduced but not for more than three consecutive years.
The percentage is reduced to 10% if all the vessels of the charterer:
- carry EU/EEA flags or
- are managed (crewing and technical) in the EU/EEA.
A qualifying ship manager is a legal person tax resident in Cyprus providing technical and/or crewing services in respect of qualifying vessels (Cyprus/EU/EEA/fleet). Commercial management is taxable under corporation
An option exists to pay TT at 25% of the rates applicable to shipowners and charterers, for all vessels under management. If the choice is not made, profits are taxable under 12,5% corporation tax.
The fleet qualifying criteria are the same as the shipowners / charterers and so is the minimum 10 year duration.
Ship managers have to meet some additional requirements, namely:
- The ship manager is obliged to maintain a fully fledged office in Cyprus with personnel sufficient in number and qualification
- At least 51% of all onshore personnel must be EU/EEA citizens.
- At least 2/3 of the total tonnage under management must be managed within the EU/EEA (any excess of 1/3 taxed under 12,5% corporation tax).
The tax exemption covers:
- Profits from technical and/or crew management,
- Dividends paid out of the above profits at all levels of distribution,
- Interest income relating to the working capital / qualifying activity provided such interest is used to pay expenses relating to ship management, excluding interest on capital used for investments.
Registration of ships
Permanent and provisional registration
Cyprus merchant shipping legislation allows for the provisional registration of a vessel (in case the vessel concerned was not previously a Cyprus ship) and most owners usually opt to have their ship provisionally registered first.
The provisional registration is deemed to be a full registration for a period of up to six months and it can be extended further for three months with an application prior to the expiration of the six-month period. This will allow
the owners time (up to nine months, including the three month extension) during which they will be able to complete the administrative formalities for permanent registration.
The permanent registration of a vessel registered provisionally under the Cyprus flag must be completed within nine months, including the three-month extension period, which is the maximum provisional registration period. It is not necessary for the ship to be present in a Cyprus port.
Once the necessary documents are submitted and formalities completed the Registrar of Cyprus Ships will issue the “Certificate of Cyprus Registry” and the vessel will be permanently registered under the Cyprus flag.
Under Cyprus legislation the possibility of parallel (bare boat) registration of vessels exists. The legislation provides for the two forms of internationally accepted bare boat registration: “parallel in” registration and “parallel-out” registration. These two options offer some very interesting opportunities for leaseback, hire purchase and finance arrangements. The administrative practice of the Department of Merchant Shipping has confirmed that the parallel (bare boat) registration of vessels under the Cyprus regime may be effected with more than 20 states whose legislation is compatible with Cyprus legislation.
“Parallel-in” registration offers the possibility to a foreign flag vessel on bare boat charter to a Cyprus shipping company to be registered in “parallel” under the Cyprus flag for a period, usually two years, which is renewable.
Cyprus ships may be bare boat chartered to a foreign person or company and registered “parallel” in a foreign register for the duration of the charter party. This so-called “parallel-out” registration allows the financing of a ship and her mortgaging under the Cyprus flag and then her registration in a foreign registry through a bare boat charter arrangement.
Types of shipping activities
Most of the Cyprus registered ships are owned by Cypriot companies with a wide range of foreign interests. Due to the fact that every limited liability company is a separate legal entity, it is very common to incorporate a ship owning company for every ship to be registered.
Bare boat chartering
As already mentioned it is possible to have parallel registration of the vessel under the Cyprus flag by bare boat chartering a vessel to a company formed in Cyprus and for a vessel registered under the Cyprus flag to be bare boat chartered-out to a foreign corporation for parallel registration under a foreign flag, provided the law of the other country recognises the concept of bare boat charter registration.
Ship management headquarters
Ship management companies are finding Cyprus increasingly attractive as a base for managing ships under various flags. These companies offer full management services to shipowners worldwide and are engaged in chartering, crewing, ship-broking and similar activities. In order to encourage the establishment of ship management companies and other shipping headquarters in Cyprus, the existing legislation grants such companies and their foreign employees various tax advantages and other incentives.
Service companies and facilities
Today, Cyprus can claim numerous shipping agencies, classification societies, marine surveyors, average adjusters, marine insurance and P & I brokers, ship-brokers, bunkering facilities, a small ship repair facility and the possibility of a larger one in the future, as well as an underwater survey service. In addition, a growing number of international banking units are willing to offer their services for ship financing while there is a considerable number of UK trained lawyers and accountants specialising in shipping. The influx of service companies underlines the faith in the continued growth of Cyprus as a shipping centre.