EU changes generate Tonnage Tax uncertainty

Leading shipping accountant and business consultant Moore Stephens say draft EU Guidelines on state aid to maritime industries are creating uncertainty and problems for the UK Tonnage Tax scheme. The new guidelines, which must be accepted by member states by June 30, 2004, and enter into force one year later, will oblige owners with fleets in the UK Tonnage Tax regime to increase the proportion of their vessels under an EU flag.

Sue Bill, shipping tax partner at Moore Stephens, says, "The new guidelines have some very positive aspects, such as the inclusion of dredging companies and shipmanagers into tonnage tax. But they are also a potential problem for UK owners who had to opt for tonnage tax in 2001 for a ten-year period. There were no specific EU flag requirements at that time in the UK rules.

Now the UK will be forced to introduce flag rules, which will change the conditions under which UK-based Tonnage Tax owners operate. As the tonnage tax election is for the long-term, the UK Government has so far left the rules unchanged, with the exception of certain anti-avoidance legislation. However, there is now uncertainty with regard to flagging. Moreover, it is clear that, despite the fact that owners have made a ten-year commitment, significant changes may be made to the rules after a commitment has been made. This EU move may not be good for owners, may not be good for UK shipping and may not be good for the future of the UK tonnage tax regime. The outcome will depend on how the UK authorities implement the final EU Guidelines."

The EU issued new guidelines on State Aid to Maritime Transport on 17 January 2004. Tonnage tax regimes in the EU are regarded as State Aid to Maritime Transport. The guidelines included some new rules which would mean that the UK Government has to change the UK Tonnage Tax Regime. These included:

1. EU Flag Requirement

The guidelines state that Member States should ensure that tonnage tax companies or groups increase or at least maintain the percentage of their tonnage flagged under an EU flag. If this is not the case, then any additional non-EU flagged vessels will be outside tonnage tax unless the UK Government can show that the percentage of EU flagged vessels in tonnage tax is not decreasing. This will not apply to companies or groups which have at least 60% of their tonnage under an EU flag.

It is not yet clear how the UK Government will implement these requirements. However, any changes are likely to cause problems in practice where the tonnage tax company or group time charters in vessels as it will be difficult to enforce a flag requirement in a time charter. Under the UK tonnage tax regime, a company or group can have up to 75% of its net tonnage time chartered in. The remaining 25% must be either owned or bareboat chartered in. Many UK companies in tonnage tax do not have any ships under either UK or EU flags, but are based here, as required by UK legislation. The new guidelines would make it more difficult them to charter or buy new ships, as they would fall outside the regime unless suitably flagged.

2. Ship Management Companies

The guidelines state that it seems appropriate to extend tonnage tax to ship managers. Ship management companies would however only qualify in respect of vessels for which they have been assigned the entire crew and technical management. In particular, ship managers would have to assume from the owner the full responsibility for the vessel's operation and take over from the owner all the duties and responsibilities imposed by the ISM code. Any other specialised services, even if related to vessel operation, would be excluded.

3. Dredging activities

Dredging activities are not eligible for tonnage tax. However, the guidelines say that tonnage tax regimes may be applied to dredgers whose activities include "maritime transport", that is, the transport at deep sea of extracted materials, for more than 50% of their annual operational time. UK aggregate dredgers would therefore be able to enter the tonnage tax scheme.

4. Towage activities.

Towage activities may be included in tonnage tax only if more than 50% of the towage activity carried out by a tug during any given year constitutes "maritime transport". The guidelines emphasise that towage activities which are carried out in ports, or which consist in assisting a self propelled vessel to reach port are not regarded as "maritime transport".

Member States are asked to confirm that they accept the proposals in the guidelines by 30 June 2004. The UK Government intends to confirm that it accepts the proposals. It is proposed that Member States amend their existing tonnage tax schemes so as to comply with the revised guidelines by 30 June 2005. The guidelines will be reviewed within seven years of their date of application.