MEMO Tax Treatment of Tugboats

The tax treatment of tugboats in Cyprus is governed by the Merchant Shipping (Fees and Taxing Provisions) Law (LAW 44(1)/2010) hereon to be referred to as the Law.

Article 2 of the Law which states what constitutes a “qualifying ship” for the purposes of the new Cyprus Tonnage Tax System specifically excludes, amongst others,  “inland waterway navigation vessels”, “harbour, estuary and river ferries and tugboats” and “non ocean-going tugboats”.

For the purposes of the same law, it is provided that a “qualifying shipping activity” would be “any commercial activity that constitutes maritime transport or shipmanagement (crew and technical)”. Maritime transport includes the traditional carriage of goods and passengers by sea outside the territorial waters of the Republic of Cyprus between a Cyprus port and a foreign port or an offshore facility or between foreign ports or offshore facilities including:

–       Cable laying activities

–       Towage activities provided that the ocean going tug is a community ship and spends at least 50% of its time in towage or salvage activities at sea.

The definition of “maritime transport” in para b (1) of the Merchant Shipping (Fees and Taxing Provisions) Law (LAW 44(1)/2010) specifically refers the qualifying towage and dredging activities to The Tonnage Tax (Towage and Dredging Activities) Notification of 2010 issued by the Director of the Department of Merchant Shipping (DMS)  by virtue of that paragraph and published in the official Gazette of the Republic.

In accordance with paragraph 3 (1) of the Notification to qualify for the new Tonnage Tax System a tugboat must be an ocean going tug which during a specific fiscal year will spend “at least 50% of its yearly operational time in towage or salvage activity at sea.

As per (2) of the same paragraph a tugboat’s waiting time for a specific activity is considered part of the time for that activity.

Moreover, paragraph 3 (3) of the Notification provides that to qualify for admission to the new Tonnage Tax System the ocean going tug must be a “community ship” which is not used for the exclusive purpose of assisting ships or other floating structures in and out of ports or for “movement within the confines of a port area or for the towage of barges on inland waters or in estuaries.”

Tug boats for the raising of wrecks however, will qualify for admission to the Tonnage Tax System but profits from selling abandoned goods salvaged will be taxable under the Cyprus Income Tax regime.

The Notification also provides for the documents that will be requested by the Director of DMS at the end of every fiscal year to determine if the towage activities of an interested tonnage tax company satisfy the qualifying criteria.

1. 1. Written statement based on the standard form found in Schedule 1 of the Notification declaring the fulfilment of the qualifying criteria and the tug’s engagement in qualifying towage activities.
2. On a case to case basis other information may be required such as:

• The tugboat’s construction plans (picture);
• Log book extracts;
• Company’s internal records extracts;
• Port authorities’ confirmation of the tugboat’s activities;
• Contracts relating to the “assumption of qualifying towage activities”;
• Any other information deemed necessary by the Director of the DMS.

AHTS (anchor handling tug supply) vessels – type of support vessels used for the oil industry but differ from the platform supply vessels as they are fitted with winches for towage services.

Whether these qualify or will be considered a tug will be determined on the facts of each case.

Summary

• Article 2 Merchant Shipping (Fees and Taxing Provisions) Law specifically excludes “harbour tugboats” and “non ocean going tugboats” from qualified ships under the new Tonnage Tax System.
• Towage activities of “ocean going” tugboats which are “community ships” and spend at least 50% of their time in towage or salvage activities at sea are included in the maritime transport definition and are qualified activities under the system.
• Maritime transport definition refers to The Tonnage Tax (Towage and Dredging Activities) Notification of 2010 with regards to towage and dredging activities which effectively states that such a ship will be qualified if it satisfies the following characteristics:
  • ocean going tug;
  • which is a community ship;
  • which spends at least 50% of its yearly operational time in towage or salvage activity at sea (waiting time included);
  • not used exclusively to assist ships / floating structures in and out of ports or for movement within the port area or for to tow barges on inland waters / estuaries.
• Tugboats which raise wrecks qualify under  the new system;
• Whether  AHTS vessels  qualify is determined on a case to case basis;
• Tugboats which do not qualify to be admitted under the new Tonnage Tax System will be subject to the Cyprus Income Tax Regime (i.e. at the basic rate of 12.5%).

*Information derived from Guide to Cyprus Tonnage Tax System (TTS) issued by Cyprus DMS, The Merchant Shipping (Fees & Taxing Provisions) Law of 2010 (LAW 44(1)/2010) and The Tonnage Tax (Towage and Dredging Activities) Notification of 2010 published in the Official Gazette of the Republic of Cyprus  No.4444 30.07.2010.

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The information contained herein does not constitute legal or investment advice and may not be relied upon as such. The author shall not be responsible for any damage or loss incurred directly or indirectly by any person acting upon or refraining from acting wholly or partially in reliance upon it.

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