On the 19th December 2017, the European Commission issued a conditional approval of the Maltese tonnage tax scheme, which approval is valid for a period of 10 years. European Commissioner for Competition, Margrethe Vestegar stated that the scheme “will enable the European shipping industry to keep up its high social and environmental standards”.
This decision has come after a 5-year investigation which was initiated in 2012 in order to determine whether the Maltese tonnage tax scheme runs contrary to EU State Aid Rules.
The tonnage tax system allows companies incorporated under the Merchant Shipping Act of Malta to be taxed on the basis of a ship’s net tonnage, rather than on the actual profits derived by the company. The shipping company will pay a flat-rate of tonnage tax upon registration. Tonnage tax is restricted to those shipping companies which carry out shipping activities, that is, those whose activities include the international carriage of goods or passengers by sea or the provision of other ancillary or associated services.
In its decision, the European Commission determined which provisions of the Maltese tonnage tax scheme are considered to be incompatible with the internal market and which should therefore be abolished. These include, amongst others:
- The eligibility for tonnage taxation of income which has been generated from the operation of non-propelled barges, oil rigs, fishing vessels, towage and dredging vessels, bareboat chartering out without restrictions and those vessels under time/voyage chartering without restriction;
- The exemption from taxation of capital gains derived from the sale or transfer of ships (applicable to Maltese residents); and
- The exemption from taxation of capital gains from the sale of share in shipping companies (applicable to Maltese residents).
In its opening decision, the European Commission also raised concerns over the applicability of the tonnage tax scheme to commercial yachts due to the fact that these are mainly used for local trips which are often leisure trips. The European Commission decided that commercial yachts may be covered by the tonnage tax scheme, on the condition that the activities being conducted constitute maritime transport activities which are carried out for remuneration.
In order to comply with the decision, Malta has agreed to amend the scheme and abolish those parts of the rules thereby ensuring a level playing field between Maltese shipping companies and other European shipping companies. Changes in line with this decision are expected to be implemented in March 2018.