The Merchant Shipping Legislation fully approved by the EU provides for exemption from all direct taxes and taxation under tonnage tax regime of qualifying ship-owners, charterers and ship managers, from the operation of qualifying community ships (ships flying a flag of an EU member state or of a country in the European Community Area) and foreign (non-community) ships (under conditions), in qualifying activities.

The legislation allows non community vessels to enter the tonnage tax regime provided the fleet is composed by at least 60% community vessels. If this requirement is not met, then non community vessels can still qualify if certain criteria are met.

The legislation includes an ‘all or nothing’ rule, meaning that if a ship-owner/charterer/ship manager of a group elects to be taxed under the Tonnage Tax regime, all   ship-owners/charterers/ship managers of the group should elect the same.

Exemption is also given in relation to the salaries of officers and crew aboard a Cyprus ship.

 

• Ship-owners

The following are exempt from taxation in accordance with the provisions of the Merchant Shipping Legislation and are subject to tonnage tax:

• The profits from the operation of such ship in any shipping activity between Cyprus and ports abroad or between ports abroad.

 

• Interest income relating to the working capital of the company

 

• Profit from the sale of qualifying ships

 

• Profit from the sale of a ship owning company

 

•  Dividends paid to the shareholders of a ship owning company

 

• Charterers

 

• Profits derived from the operation of Charterers in ships
• Interest income relating to the working capital of the company
• Dividends received from the above profits at all distribution levels

 

• Ship managers

 

The exemption covers:

 

• Profits from technical and/or crew management
• Dividends paid out of these profits at all levels of distribution
• Interest income relating to the working capital of the company.

In order to qualify ship managers must satisfy the following additional requirements:

• Maintain a fully-fledged office in Cyprus with personnel sufficient in number and qualifications
• At least 51% of all onshore personnel must be community citizens
• At least 2/3 of the total tonnage under management must be managed within the community (any excess of 1/3 taxed under cooperation tax)

 

The application of the tonnage tax system is compulsory for owners of Cyprus flag ships and optional for owners of non-Cyprus flag ships, charterers and ship managers. Those who choose to enter the Tonnage Tax regime must remain in the system for at least 10 years unless they had a valid reason to exit such as disposal of their vessels and cessation of their activities.