The European Commission approves the Maltese tonnage tax scheme

The much-awaited European Commission decision on Malta’s tonnage tax system was published on February 7 2018. The European Commission has conditionally approved under EU State aid rules the Maltese tonnage tax scheme for a period of 10 years. The scheme will ensure a level playing field between Maltese and other European shipping companies and will encourage ship registration in Europe.

Commissioner Margrethe Vestager, in charge of competition policy, said “Tonnage tax systems are meant to promote the competitiveness of the EU shipping industry in a global market without unduly distorting competition. I am pleased that Malta committed to adapt its tonnage tax system to achieve this.

Moreover, by encouraging the registration of ships in the EU, the scheme will enable the European shipping industry to keep up its high social and environmental standards.”

In 2012, the European Commission opened an in-depth investigation into the Maltese tonnage tax scheme to examine its compatibility with EU State aid rules. With today’s decision, the Commission endorses the Maltese scheme, subject to the amendments introduced by Malta.

The Commission’s in-depth investigation found certain features of the original scheme, such as tax exemptions applied to Maltese residents and the broad scope of the scheme extending to vessels not carrying out maritime transport activities, to be in breach of EU State aid rules.

Under the Maltese scheme, a shipping company is taxed on the basis of ship net tonnage (i.e. based on its volume) rather than the actual profits of the company. In particular, tonnage taxation is applied to a shipping company’s:

  • core revenues from shipping activities, such as cargo and passenger transport;
  • certain ancillary revenues that are closely connected to shipping activities (which are, however, capped at a maximum of 50% of a ship’s operating revenues); and
  • revenues from towage and dredging subject to certain conditions.

If a shipping company wants to benefit from the scheme, a significant part of its fleet must fly the flag of a European Economic Area (EEA) Member State. In addition, any new entrant to the scheme must have at least 25% of its fleet subject to tonnage tax with an EEA flag.

The Commission assessed the amended measures under EU State aid rules, in particular, its Guidelines on State aid to maritime transport. It concluded that the amended Maltese scheme is in line with EU State aid rules, as the tax relief granted is an appropriate instrument to address global competition and will provide the right incentives to maintain maritime jobs within the EU, whilst preserving competition within the EU Single Market.

Essentially, nothing has changed with respect to the Maltese income tax exemption on core activities of maritime transport. Thus, the shipping industry in Malta welcomes the Commission’s decision as providing the necessary legal certainty to the Maltese tonnage tax system especially since Malta leads the largest shipping register in Europe.

Furthermore, the Commission agreed that the below mentioned activities are also exempt from Maltese income tax:

  • Income from the bareboat out of vessels to group companies. Bareboat out to third parties is possible only in case of short term (three years) over-capacity and provided the amount chartered out does not exceed 50 per cent of the total fleet calculated on a group basis;

Income from cruises and services ancillary to the cruise – provided that such ‘ancillary’ services (e.g. spa, hairdressing services etc.) do not exceed 50 per cent of total revenue for each ship. Income from betting/gambling and luxury goods must be less than 25 per cent of total revenue of the ship;

  • Income from yachts which are registered as ‘commercial yachts’ with Transport Malta;
  • Tugs and dredgers provided that more than 50 per cent of their operational time represents maritime transport;
  • Self-propelled barges that are designed and normally used for navigation in open seas;
  • Time/voyage chartering in of vessels is also possible provided that the flag link requirements are met;
  • Dividend distributions from shipping companies;
  • Capital gains on sale of tonnage tax ships which are engaged in genuine shipping activities; and
  • Interest derived from working capital of shipping companies.
  • On the other hand, the following do not fall within the scope of the Maltese tonnage tax system:
  • 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); and
  • Ships employed mainly for gambling/as casinos (floating or cruising casinos).

Malta has committed to introducing a number of changes to its scheme to prevent any discrimination between shipping companies and to avoid undue competition distortions. In particular, Malta agreed to restrict the scope of the scheme to maritime transport and to remove those tax exemptions for
shareholders which constitute State aid. Nexia BT in Malta are closely monitoring the issuance of the updates which shall be available in the coming weeks.

Contributed by
Karl Cini and Antoinette Scerri, Nexia BT