The new Merchant Shipping Legislation approved by the EU from 1 January 2010 is in force which provides exemption from all direct taxes and taxation under tonnage tax of qualifying ship owners, charterers and ship managers, from the operation of qualifying EU / EEA (European Economic Area) ships (and foreign ships under conditions) in qualifying activities.The legislation allows non EU / EEA vessels to enter the tonnage tax regime provided the fleet is composed by at least 60% EU / EEA vessels. If this requirement is not met, then non EU / EEA vessels can still qualify if certain criteria are met.Exemption is also given in relation to the salaries of officers and crew aboard a Cyprus ship.
The Ship owners are entitled to curtained exceptions as follows:On the income of a qualifying ship owner from the operation of a qualifying Cyprus, community and/or foreign (under certain conditions) ship, in a qualifying shipping activity· On the profits from the disposal of qualifying ships· On the profit from the disposal of ship owning companiesThe exemption also applies to the bare boat charterer of a vessel flying the Cyprus flag under parallel registration
The Charterers are entitled to exception from profits derived from the operation of chartered ships.The law grants the exemption provided that the option to register for Tonnage Tax is exercised for all vessels and provided a composition requirement is met (at least 25% - reduced to 10% under conditions – of the net tonnage of the vessels owned or bare boat chartered in).
The ship manager has two alternatives: either to be subject to income tax at the ordinary rate of 10% or to pay tonnage tax at 25% of the rates applicable to ship owners and charterers for the qualifying ships under management provided the below criteria are satisfied:a) ship manager is resident for tax purposes in Cyprus,b) maintains a fully fledged office in Cyprus with personnel sufficient in number and at least 51% of all personnel should be EU / EEA citizens,c) manages at least 2/3 of the total tonnage of the qualifying ships in a given fiscal year within the EU / EEA member stated) has a fleet comprising for a sufficient part or with sufficient consistency of EU flag ships and complies with relevant international standards. Depending from the service provided additional criteria might apply.The ship managers profit from technical crew management is exempt.In all the above three cases the interest income relating to the working capital of the company and the dividends paid out of the profit mentioned above are also exempt.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. Early withdrawal will result in penalties and in such case the ship manager cannot return to the tonnage tax system until the initial 10 year period has lapsed.