State Aid: European Commission approves Malta Tonnage Tax Regime subject to commitments

Deloitte Malta Tax Alert

On 19 December 2017, the European Commission (the ‘Commission’) conditionally approved the Maltese Tonnage Tax Regime for a period of ten years under the EU State Aid Rules.

Following the decision, Commissioner Margrethe Vestegar, in charge of competition policy, has stated, “I am pleased that Malta committed to adapt its tonnage tax system … The scheme will enable the European shipping industry to keep up its high social and environmental standards”.

This decision comes after a five year in-depth investigation by the Commission into whether the Maltese Tonnage Tax Regime was overly competitive with regards to EU State Aid Rules.

The Commission’s investigation found that certain features of the original scheme (pre-dating the investigation) were in breach of EU State Aid Rules. These included:

  • Tax exemptions applied to Maltese residents acting as shareholders of shipping companies; and
  • The broad range of ancillary shipping activities that were previously eligible to benefit from Malta’s Tonnage Tax Regime.

Malta has committed to introduce a number of changes to prevent any discrimination between shipping companies and to avoid undue competition distortions. In particular, Malta agreed to restrict the scope of its tonnage tax to maritime transport and to remove those tax exemptions for shareholders which constitute State Aid.

Under the Maltese Tonnage Tax Regime a shipping company is taxed on the basis of the ship’s net tonnage rather than actual profits of the company. 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 (capped at 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 tonnage tax, a significant part of its fleet must fly the flag of an EEA Member State. In addition, any new entrant to the scheme must have at least 25% of its fleet subject to tonnage tax within an EEA flag. In this respect, Malta notes that its flag is currently the most popular EU maritime flag and the sixth largest world-wide.

The Commission has reviewed these amended measures and has now concluded that these measures are in line with EU State Aid Rules and that the tax relief provided is a proper tool to address global shipping competition.

The in-depth decision is due to be published shortly and will be the subject of a further tax alert.

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