Cyprus’ position as a viable maritime centre is solid. But what sets it apart from other established maritime hubs and how do these aspects benefit shipping companies?
Cyprus has joined the EU with a strong fleet, a well-founded and efficient maritime infrastructure and a flag that is included in the white list of the Paris Memorandum of Understanding. Such undertakings demonstrate the government’s commitment to safety and cements Cyprus as a reputable maritime centre. The country also works with a specialised department, The Department of Merchant Shipping (DMS), which operates under the Ministry of Communications and Works and offers a dedicated service to the shipping industry.
Cypriot policy on shipping is consistent irrespective of the political party in government at any one time. This has created a culture of stability and trust within the country. Cyprus is also constantly looking to upgrade and improve the safety standards and living and employment conditions of seamen on board Cypriot ships, thus enhancing the reputation of Cyprus as a trustworthy maritime nation and a shipping power which strives to maintain high-quality standards.
Today, Cyprus has probably the best fully approved Tonnage Tax (TT) regime in the EU, which in combination with a very attractive tax system offers unique opportunities to ship owners, charterers and ship managers to structure their activities in an extremely tax efficient way.
To keep Cyprus ahead of its competition, the country can currently lay claim to:
- a combination of shipping, chartering and ship management in a friendly environment with an excellent maritime infastructure;
- stability due to consistent shipping-friendly government policy;
- the best TT system in the EU;
- total tax exemption of shipping profits at all levels of distribution;
- a totally tax-free exit route;
- the possibility of mixed activities;
- taxation of income that does not qualify for TT with several exemptions and a low corporate income tax (CIT) rate of 10 percent;
- a long history as a successful maritime centre of the highest quality.
To explore the area further, World Finance met with Cleo Papadopoulou, Partner, Direct Tax Services at PwC.
What role does PwC play in the local shipping arena, and how has the company evolved over time to accommodate the fast-moving shipping and port industry?
Our Transportation & Logistics (T&L) practice is composed of a global network of more than 4,200 industry professionals across 153 countries, covering all modes of transport as well as related services such as warehousing, handling, stevedoring, and finally value-added services like packaging, labelling, assembling and many more. The combination of our global and local knowledge, first-hand experience and linkage with functional PwC specialists allows us to efficiently address all aspects of the business.
PwC’s Shipping & Ports practice within the T&L network has grown in step with the industry, supporting our clients through industry restructurings, regulatory transformations, technological advances and changes in financial reporting and corporate governance requirements. We provide services for deep sea, short sea and inland shipping companies, port authorities and terminal operators in the areas of audit and assurance, business advisory and global tax.
PwC offers the benefit of insights gained from years of experience working with the leading shipping and port companies in the world. Our investment in the shipping and ports industry provides our clients with professionals who understand the nuances of the industry and bring a continually fresh perspective to our clients’ organisation.
The shipping terrain can be challenging at times. What problems do contenders in the industry typically face?
Advancing globalisation, more flexible tax regimes and an increasingly mobile workforce are creating opportunities and challenges for the shipping industry. The wide range of taxes falling on shipping businesses can be a major burden. Industry volatility and complex rules can make it difficult to manage the group’s taxation. Shipping companies are therefore forced to look at effective ways to align their corporate, operational and tax structures.
Whatever the reason – mandatory, passport to the world’s capital markets, transparency and comparability – embedding International Financial Reporting Standards (IFRS) in the organisation requires more than technical knowledge of the standards themselves as they fundamentally change the company’s reporting processes and procedures.
Furthermore, a total of 45 percent of organisations in the T&L industry have reported having experienced fraud over the past two years – the actual incidence of fraud may be even higher as detection can be difficult. The most popular acts of fraud committed are cargo theft, misappropriation of assets, revenue leakage, unsupported payments and the falsification of shipping and customs papers.
Current economic conditions are pushing the industry towards consolidation and vertical integration, which are driving increased mergers and acquisitions activities in both the shipping and ports sectors. Tax issues, legal risks, conflicts of interest as well as fluctuations in the shipping and ports markets all need to be taken into account when each decision is being made.
The shipping business is capital intensive: technical and environmental developments trigger an ongoing need for investment. Tax optimised financing models help lower the cost of capital investment. Finally, piracy is the latest headache for the industry which is currently been tackled with legislation allowing armed and security forces on board of vessels going through all EU member states.
The tax system can be complicated. What tax services does PwC offer to help companies overcome practical hurdles?
Unfortunately, for a variety of reasons – tax strategies, tax objectives, tax policies, poorly organised tax functions – tax matters are often not dealt with in a systematic way by shipping groups. As a consequence, tax opportunities may be lost and risks are identified too late. The Cypriot TT system, in combination with the corporate tax regime, the application of the EU Directives and the double tax treaties signed by Cyprus, offer many advantages to shipping and port companies.
Through our shipping and ports industry experience we can help our clients apply best services and solutions to tackle some of the key tax challenges, such as optimising their worldwide tax position by taking a global view of the business, managing the many company and employee taxation risks associated with cross-border operations and employment and developing a company’s global tax strategy by designing a tax risk management model. There are other useful services too, like assessing tax risks in M&A situations, enhancing control of global tax compliance and lowering the cost of capital. We just ask to be given an opportunity to show how passionate we are about our work.
A new TT system has come into force. Please explain how it will affect the industry.
Cyprus offers complete tax exemption of all profits and dividends at all levels of distribution arising from qualifying shipping operations. This tax relief was introduced in 1963 for a duration of 10 years and has been extended a number of times. The new Merchant Shipping Law, applicable from January 1, 2010 extended significantly the scope of the TT regime and enhanced the position of Cyprus as a maritime centre.
The legislation offers new opportunities. It introduces two new TT schemes applicable to shipowners of non-Cypriot flag vessels and charterers. It also extends the application of the TT regime (and exemption from profits tax) previously enjoyed by shipowners and ship managers. The legislation has been fully-approved by the European Commission and is probably the best TT regime in the EU/EEA: If it’s in the EU Guideline on State Aid to maritime transport, Cyprus has it.
Can shipping companies look forward to any particular tax benefits as a result of the newly introduced tax system?
The new legislation places Cyprus in a unique position. Cyprus has become the only EU country with an EU-approved TT system that provides for TT on the net tonnage of the vessels rather than corporation tax on the actual profits, regulated by the DMS rather than the tax authorities. It also grants total tax exemption of profits tax and distribution tax at all levels and allows mixed activities within a company or group – shipping subject to TT and other subject to 10 percent corporation tax.
Furthermore, Cyprus’ TT system supports an open registry, allows split ship management activities (crewing or technical), and offers a totally tax exempt exit, as sale of vessels, sale of shares in ship owning companies or the liquidation of such companies is totally exempt from tax. Taking advantage of the opportunities offered by the new shipping legislation does not necessarily entail complex group restructurings or the transfer of mortgaged vessels that are difficult to implement. There are other ways of achieving substantial tax savings, such as changing the flag of vessels, redomiciliation or changing the residence of existing companies, as well as the restructuring of the existing operations that are easier and quicker to implement.
Cyprus boasts solid oil and gas resources and is also situated at the crossroads of major international energy routes. What other advantages make it a leading energy spot?
The probable existence of significant quantities of oil and gas resources in the exclusive economic zone of Cyprus and the exploration process that was started for them is a big opportunity for the island. In addition to the legislative framework and the bilateral agreements signed with neighbouring countries, the government is planning the construction of an energy centre which will eventually include a terminal for the storage of the island’s strategic and operational oil stocks, facilities for their transit, and for the import of and prospective exploitation of natural gas. Options are also being considered for the construction of a pipeline. If the quantities are confirmed and managed properly, Cyprus can definitely be an important energy centre for the EU and possibly non-EU countries, solving at the same time its own energy dependency.
According to the International Energy Agency (IEA), gas production in the UK and the Netherlands is expected to reduce sharply, leaving Norway as the sole EEA supplier at a time when the demand for gas in the EU is expected to increase. Outside the EU the main supplier is Russia, a country with which Cyprus has excellent economic relations and a best double tax treaty, making Cyprus the obvious investment gateway to and from Russia (Cyprus has been the number one investor in Russia for many years).
Cyprus’ favourable tax regime makes it an ideal location for the hosting activities of those in the energy sector. Important players in the sector have already acknowledged this by establishing a presence in Cyprus.
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