Cyprus

Andreas Athinodorou and Cleo Papadopoulou
Aspen Trust Group/PricewaterhouseCoopers
Cyprus

Andreas Athinodorou of Aspen Trust Group and Cleo Papadopoulou of PricewaterhouseCoopers explain some tax structuring techniques available to the shipping industry in Cyprus to achieve full exemption

Advancing globalisation, more flexible tax regimes and an increasingly mobile workforce are creating opportunities and challenges for the shipping industry.

New corporate strategies and processes are required to deal with an industry which is being reshaped through market consolidation and shifts in the balance of world trade. Sustained profitability in many sectors, increasingly international operations and ever more sophisticated tax authorities are leading shipping companies to look at effective ways to align their corporate, operational and tax structures.

The wide range of taxes falling on the shipping business can be a significant burden. Industry volatility and complex rules can make it difficult to manage a group's taxation. A flexible and efficient structure, as well as clear procedures, are essential.

The shipping business is capital intensive: technical and environmental developments trigger a continuing need for investment. Tax-optimised financing models help lower the cost of capital investment.

Since 1963, Cyprus has created a well established shipping industry with well founded infrastructure and services able to meet the growing demands of today's globalised shipping business successfully. Cyprus tax legislation has been the main force behind the rapid expansion of the shipping industry in the past half a century.

Tax helps shipping

Double tax treaties 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.

Today, Cyprus has one of ten largest shipping fleets in the world, with ships representing a gross tonnage of 22 million. The Cyprus merchant fleet, the third largest in the EU, represents about 6% of the merchant fleets under EU flags.

Tax incentives

Favourable tax and other incentives have played an important role in the development of Cyprus as an international business, shipping and ship management centre.

Shipping activities – Cyprus flag

Cyprus offers complete tax exemption on all profits and dividends arising from shipping operations. This tax relief was introduced in 1963 for 10 years and has been extended a number of times. The next expiry date is December 31 2020. Essentially the relief provides that:

no income tax is payable on the profits derived from any shipping activity by a Cyprus shipping company which owns or charters ships under the Cyprus flag or on dividends paid out of such profits at all levels of distribution.
the exemption extends to the bareboat charterer of a foreign flag ship under parallel registration in Cyprus
no capital gains tax is payable on the sale or transfer of a ship or shares in a shipping company
no income tax is payable on the salaries of officers and crew of Cyprus ships which operate in international waters
no stamp duty is payable on bills of sale and mortgages on ships and related documents
See relevant diagram 1 and diagram 2.

Diagram 1: Tax regime for Cyprus shipping (1)

Diagram 2: Tax regime for Cyprus shipping (2)

Diagram 3: Tax regime for ships owned by Cyprus companies and flying a foreign flag

Shipping activities – Foreign flag

Cyprus company profits generated from the operation of foreign flag ships are subject to corporation tax at 10%. Dividends distributed from such profits:

have no withholding tax if paid to non Cyprus residents
are fully exempt from tax in the hands of a Cyprus holding company

Capital gains from the disposal of ships or shares in shipping companies are exempt from tax. See relevant diagram 3

Ship management activities

Cyprus ship management companies that manage Cyprus flag vessels pay no tax, whereas the ship management of foreign flag vessels is subject to tonnage tax at 25% of the tonnage tax rates payable by the ship owner or subject to 4.25% tax on the profits.

In particular, these are the main characteristics of the ship management tax regime:

The taxation regime covers the three types of internationally accepted ship management services, that is, crewing, technical and commercial management of ships, rendered under a contract with the owner or bareboat charterer of a ship, by persons that have an office in Cyprus manned with sufficient personnel in number and qualifications (at lease five employees for managing up to ten vessels).
Ship management companies are taxed in accordance with the provisions of the Merchant Shipping (Fees and Taxing provisions) Law, unless they elect to be taxed for a specific tax year in accordance with the provisions of the Income Tax Law.
In accordance with the provisions of the Income Tax Law, any profit arising from the provision of ship management services is subject to a special tax rate of 4.25%.
In accordance with the provisions of the Merchant Shipping (Fees and Taxing Provisions) Law, and for the period ending December 31 2020, any income arising from the provision of ship management services is subject to a tax rate equal to 25% of the tonnage tax rates of the vessels under management. This tax is applicable to foreign flag vessels under management and is calculated based on the annual tonnage tax these vessels would have to pay if they were registered in the Cyprus Register of Ships. Ship management services offered to Cyprus flag vessels are exempt from tonnage tax.
In accordance with the same legislation, no tax will be withheld from dividends distributed out of profits generated from ship management activities and the recipient shareholders do not pay tax on these dividends at all levels of distribution.
See relevant diagram 4.

Diagram 4: Tax regime for ship management

The appeal of Cyprus

These general tax provisions in Cyprus tax legislation enhance the attractive shipping tax regime and render Cyprus an ideal location for non shipping activities as well:

General corporate tax rate of 10% (lowest in the EU)
Full tax exemption on disposal of shares and similar titles
Zero taxation on dividends received (subject to minor conditions)
Zero WHT all all payments of dividends, interest and royalties to non residents
No controlled foreign company legislation
No thin-capitalisation rules
Tax-neutral reorganisations for both EU and non-EU group companies
Full adoption of all EU directives
Extensive double tax treaty network

Good for shipping

The tax incentives combined with the economic and the other advantages provided, including the excellent infrastructure, make Cyprus the ideal investment choice for ship owners and ship managers. After the country's accession to the EU, Cyprus has experienced an influx of new investors particularly from the Nordic countries.

Cyprus plays a prominent role as a leading shipping and ship management centre and will continue to strengthen its position in the world's economy by maintaining and enhancing its sound maritime infrastructure, favourable tax regime and competitive ship registration and annual tonnage tax rates.

Andreas Athinodorou (andreas.athinodorou@aspentrust.com) and Cleo Papadopoulou (cleo.papadopoulou@cy.pwc.com)