State Aid: European Commission approves Malta Tonnage Tax Regime subject to commitments
Deloitte Malta Tax Alert
19 February 2018
Following an announcement by the European Commission (the ‘Commission’) on 19 December 2017, in which the Commission conditionally approved the Maltese tonnage tax regime, the Commission’s decision has now been made publically available, providing further insight on their decision.
The conditional approval of Malta’s tonnage tax regime brings an end to an in-depth investigation and further evidences the Commission’s commitment to further promote the European maritime industry in light of increasing global competition. The decision has been welcomed by the Maltese authorities, who note that Malta already holds the largest maritime flag in the European Union (the ‘EU’).
Whilst the Commission’s investigation did find a number of inconsistencies between the Maltese tonnage tax regime and the EU Maritime Guidelines, these inconsistencies stemmed from the broad scope of the legislation. In fact, the Commission has acknowledged that in practice, the Maltese tonnage tax regime has been applied in a manner consistent with the functioning of the internal market and in line with the EU Maritime Guidelines. This is highlighted by the fact that a recovery of undue aid granted is only required in relation to the exemption of capital gains on shares in shipping companies, to the extent that the de minimis threshold of allowable aid is exceeded.
Some of the inconsistencies found by the Commission inter alia include:
- The perceived eligibility of certain types of vessels, not carrying out “shipping activities”, as tonnage tax ships (such as fishing vessels and pleasure yachts);
- The application of the tonnage tax regime, without limitation, to towage and dredging vessels;
- The application of the tonnage tax regime, without express limitation, in connection with the bareboat chartering-out of vessels;
- The eligibility, without restriction, to the benefits of the tonnage tax regime for revenues derived from activities which are ancillary to genuine maritime activities; and
- The discretion afforded to the responsible Minister to accept certain ships below the required threshold or to exempt certain classes of vessels from the payment of any tonnage tax due.
In light of the above, the Maltese authorities have committed to explicitly limit the application of the tonnage tax regime to genuine shipping operators carrying out genuine shipping activities. In particular, Malta has committed to regulate the eligibility of revenues considered as ancillary to the extent that such revenues shall only be entitled to the benefits of the tonnage tax regime in the event that they do not exceed 50% of the overall gross revenue of beneficiary company.
Furthermore, Malta has also committed to explicitly limit the application of tonnage taxation in connection with the chartering out of vessels on bareboat basis and similar transactions between third parties. In relation to the bareboat chartering out of vessels to third parties, such transactions may be eligible as ancillary activities of genuine shipping companies in the context of temporary overcapacity, subject to the following conditions:
- Only to deal with a situation of temporary excess capacity;
- For a maximum period of up to three years;
- Bareboat chartered out capacity will not exceed 50% of the shipping companies’ fleet, calculated on a group basis; and
- Excess capacity specifically acquired for chartering out cannot be eligible.
Other features which caught the eye of the Commission during the investigation were the wide-ranging tax exemptions granted by the tonnage tax regime. In particular the following exemptions were deemed to constitute State aid:
- The exemption from taxation of capital gains arising from the sale or transfer of tonnage tax ships;
- The exemption from taxation of capital gains in relation to shares in shipping companies;
- The exemption from taxation of interest or other income in relation to the financing of shipping companies or tonnage tax ships; and
- The exemption from certain duties on documents and transfers.
The Commission declared that the exemptions listed above should either be restricted or abolished altogether, and consequently Malta has committed to:
- Remove the possibility for pure financial institutions to benefit from the tonnage tax regime;
- Ensure that the exemption from taxation of capital gains arising from the sale or transfer of tonnage tax ships is limited to companies engaged in genuine shipping activities;
- Remove the exemption from the taxation of capital gains on shares in shipping companies for Maltese resident shareholders; and
- Remove the exemptions from duty on documents and transfers.
Despite the above inconsistencies between the Maltese tonnage tax regime and the EU Maritime Guidelines, in practice the majority of such inconsistencies have failed to result in any undue benefit being granted and consequently no recovery of aid is required in such circumstances. However, it was pointed out that while, there have been instances where Maltese residents have benefitted from the exemption from taxation of capital gains on shares in shipping companies, and in theory, this could result in the recovery of any such aid disbursed, a recovery of such undue aid is only necessary to the extent that a de minimis threshold is exceeded.
Following the decision, Malta now has three months from the date of the decision (19 December 2017) within which to introduce new rules aimed at making the tonnage tax regime compatible with the internal market and in line with the EU Maritime Guidelines. We therefore expect to see new rules published by Malta in the coming weeks which will be the subject of a subsequent shipping tax update.
The official text to the decision can be found here.
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