In identifying a potential flag administration under which to register a vessel, fiscal considerations play a significant role. Malta is the smallest European country with the largest ship register in Europe and the sixth largest worldwide. As at end of December 2014, the registered gross tonnage was 57.9 million gross tons with over 2,500 merchant vessels flying the Maltese flag. The success of the Maltese flag is arguably due, in no small measure, to the application of a favourable tonnage tax regime introduced by virtue of the Merchant Shipping Act, 1973.
As at end of December 2014, the registered gross tonnage was 57.9 million gross tons with over 2,500 merchant vessels flying the Maltese flag
Operating a vessel under the tonnage tax regime essentially imposes an obligation on the owner of the vessel to settle an amount of tax which is linked to the tonnage of the vessel as opposed to the income generated by the vessel. Indeed, in accordance with the relevant shipping regulations, income derived from shipping activities by a licensed shipping organisation and income derived by a ship manager from ship management activities are exempt from income tax in Malta. Nonetheless, shipping organisations may opt out of the tonnage tax regime and choose instead to be subject to the standard corporate tax regime applicable in Malta. Moreover, if a shipowner operates a fleet of vessels, the tonnage tax system need not apply to all of them.
In terms of Maltese shipping regulations, in order for the tonnage tax system to apply and for the income derived from shipping activities to be tax exempt, two main conditions must subsist, namely that: (i) the shipping company must be licensed as a ‘shipping organisation’; and (ii) the ship must qualify as a ‘tonnage tax ship’.
The Merchant Shipping Act defines a ’tonnage tax ship’ as either a ship declared to be a tonnage tax ship by the Minister of Finance, or a Community ship of not less than 1000 net tonnage which is owned entirely, chartered, managed, administered or operated by a shipping organisation. In turn, a ‘shipping organisation ’qualifies as such, if (i)its principal objects are, inter alia, the ownership, operation (under charter or otherwise), administration and management of a ship or ships registered as a Maltese ship and the carrying on of all ancillary financial, security and commercial activities in connection therewith; and (ii) it obtains and maintains a licence from the Registrar-General to enable it to carryon such activities.
income derived from shipping activities by a licensed shipping organisation and income derived by a ship manager from ship management activities are exempt from income tax in Malta
Once the above-mentioned conditions are satisfied, the income generated by a shipping organisation would effectively be exempt from tax, provided that the annual registration and tonnage tax fees are duly settled with the Registrar of Shipping. It is noteworthy that the exemption from income tax would be limited to that income generated specifically through the carrying on ‘shipping activities’, that is to say, the international carriage of goods or passengers by sea or the ownership, chartering or any other operation of a ship engaged in the said activities. To this end, separate accounts must be kept for the relevant accounting period, clearly distinguishing the payments and receipts related to shipping activities, from payments and receipts in respect of any other business carried on by the ship owner.
Malta’s solid reputation as a global Maritime hub is also bolstered by the exemption of tax on income derived by a ship manager from ship management activities under the Maltese tonnage tax system. In order to qualify for the said exemption the ship management company must be a licensed shipping organisation which is established in the EU / European Economic Area (EEA) and which carries out activities consisting of, inter alia, the entire crewing of a tonnage tax ship and/or the provision of technical management thereto.
Other fiscal incentives which keep Malta’s flag flying high include the following:
- Distribution of exempt shipping profits from a Maltese shipping company to its shareholders are in principal not subject to any further tax;
- No tax is chargeable on any profits or gains derived from the sale or other transfer of a tonnage tax ship or from the disposal of any rights to acquire a tonnage tax ship;
- The transfer of any shares, securities or any other interest, including goodwill, held in any licensed shipping organisation that owns, charters, operates, administers or manages a tonnage tax ship is exempt from tax on capital gains and stamp duty;
- No tax is chargeable on interest income in relation to any financing of the operations of licensed shipping organisations, or the financing of any tonnage tax ship;
- In the event that the shipping company chooses to be regulated by the standard corporate tax regime, any income derived by the said shipping company would be subject to Malta tax at the rate of 35%, subject to the possibility of claiming double taxation relief. Nevertheless, upon a distribution of the profits, the shareholders would be entitled to claim a refund of six-sevenths of the Malta tax suffered by the shipping company on the taxed profits distributed to the shareholders. Accordingly, a tax efficient regime is still available in the maritime industry even if the tonnage tax system is not applied;
- Interest or other income payable to a person in relation to any financing of the operations a of licensed shipping organisation is exempt from income tax;
- In the case of a licensed shipping organisation, which has no income whatsoever or has no income other than income from shipping activities, a declaration may be submitted to the Commissioner of Inland Revenue by a certified public accountant/auditor or an advocate in lieu of a tax return.
Malta’s sound legislative framework and compliance with major international maritime conventions, its efficient flag administration, relatively straightforward procedures for registration, preferential treatment in certain ports … have all played a determining role in maintaining Malta’s pole position as the ship owners flag of choice
Of course, aside from the numerous fiscal incentives available to ship owners, other factors have contributed towards Malta’s solid reputation and its success in the maritime industry. It has often been cited that Malta’s main attraction is its position in the heart of the Mediterranean commercial activity, facilitating trade between Europe and Africa. Malta’s sound legislative framework and compliance with major international maritime conventions, its efficient flag administration, relatively straightforward procedures for registration, recognisable registry requirements to main international shipyards and classification societies, preferential treatment in certain ports and absence of nationality restrictions in respect of ship owners, master, officers and crew, have all played a determining role in maintaining Malta’s pole position as the ship owners flag of choice. Indeed, our future in shipping is looking bright.
This article was first published on the Times of Malta, July 2015.
Dr Doran Magri Demajo is a Partner at Be. Legal Advocates and is primarily responsible for the firm’s maritime, corporate and commercial law practice.