This is the third − and for 2021 − the last edition of our Tax Update for the Shipping & Offshore sector. The next edition follows at the beginning of 2022 to ring in the new year.
Tax is continually in motion. International pioneering projects led by the OECD and the EU are radically changing the tax landscape. As you have come to expect from us, this Tax Update brings you the latest news on national and international developments, diverse case law, bills and practical experience that are topical and relevant for the sector, so that you know what is going on.
In general terms, the tax landscape of the Shipping & Offshore sector is seeing a continuance of the introduction of tax incentives for green initiatives, such as a reduction of the fixed income for environmentally friendly ships under the tonnage regime (for example in Cyprus, Norway and Portugal). This may even be strengthened, because as of 2023 the European Commission wants to make shipping in the European Union pay for its greenhouse gas emissions by bringing the sector under the European Emissions Trading System (ETS).
Other measures we are seeing include an expansion of foreign tonnage regimes (Norway, the United Kingdom), as well as the introduction of similar favorable foreign regimes (Colombia).
Meijburg & Co, December 2021
Global: OECD/G20 Inclusive Framework Agreement on BEPS 2.0
In the previous edition of our Tax Update we informed you about Pillar 2 as part of the OECD/G20 Inclusive Framework Agreement; a historic agreement that was signed on July 1, 2021. In short, Pillar 2 will introduce a minimum effective tax rate for multinationals with revenues exceeding EUR 750 million.
On October 8, 2021 the Inclusive Framework (IF) on Base Erosion and Profit Shifting released details of an agreement which refines the statement of July 1, 2021. Of the 140 Inclusive Framework countries, 136 agreed to this release. The four countries that have not signed up are Kenya, Nigeria, Pakistan and Sri Lanka. In the October 8 release it became clear that the agreed global minimum tax rate is 15% (not “at least 15%”). In addition, the special tax rules for the shipping industry that were proposed in the July agreement, as well as the formulaic substance-based carve-out, were both included in the October 8 release. The Euro Tax Flash from our EU Tax Centre contains more information about this.
On December 20, 2021 the OECD published the Pillar 2 Model Rules. Pillar 2 is still in development and further guidance in the form of a Commentary and a detailed implementation framework are expected in the first half of 2022. Please see our client update for more information about the Pillar 2 Model Rules. In our coming Shipping & Offshore Tax Update we will further comment on the implications of Pillar 2 for the sector.
Europe: Questions by European Parliament about the scope of the tonnage tax exemption
On April 22, 2021 Karima Delli, member of the European Parliament, asked three questions about the scope of the EU guidelines on State aid to maritime transport. The European Commission responded on July 26, 2021. Based on this response, no direct changes are to be expected with regard to current guidelines. The answers are listed in full below.
- Does the Commission intend to put an end to the distorted competition brought about by its decision to allow some Member States to expand the scope of their tonnage tax schemes at the expense of freight forwarders and independent port operators?
The Commission is committed to ensuring that State aid rules in the maritime sector are applied in a consistent manner and minimize competition distortions and spillover effects. The Commission has consistently held that revenues from certain non-core maritime activities which are related to maritime transport may, depending on the circumstances and within certain limits, be subject to tonnage taxation. Certain safeguards can mitigate competition distortions in these cases, such as arm’s length obligations for intra-group transactions, eligibility of certain ancillary activities under specific strict conditions and only if directly related to maritime transport activities.
- Does the Commission plan to define the so-called auxiliary services while taking into account the competition between independent terminal operators and those contracted by maritime companies?
The Commission does not plan to set up an exhaustive list of ancillary activities; this depends on a case-by-case assessment and on market developments.
- Does the Commission regularly monitor the impact of extending the scope of tonnage tax exemption in certain Member States, and does it intend to take reports on the matter into consideration?
The Commission is committed to monitoring the impact of the scope of tonnage tax schemes across Member States in the context of the notification it receives as set out by Section 12 of the Maritime Guidelines. Indeed, under those Guidelines Member States are also required to communicate to the Commission the effects of their schemes and meet the applicable reporting obligations. Visit this Link for more information.
EU: Public country-by-country reporting
On November 11, 2021 the European Parliament formally adopted the EU Public Country-by-Country Reporting directive. EU Member States have until June 2023 to transpose the directive into local law. The provisions in the directive will apply to multinationals with annual revenues of more than EUR 750 million and that are active in more than one EU country. In‑scope companies will have to provide information on the amount of tax they pay in each EU country, as well as in countries included in the EU’s black and gray lists. In addition to the taxes paid, companies will need to disclose information on the nature of their activities, the number of employees per country, and their profits/losses before taxes. The information is to be made publicly available online in standardized formats. See the newsflash from our EU Tax Centre for more information.
Colombia: Special shipping tax regime
Colombia has introduced a reduced income tax rate for income derived from the provision of international maritime transport services. Income realized from the services provided by ships and naval vessels registered in the Colombian registry is taxed at a 2% income tax rate (currently, 31%). Please see this link.
Germany: EU Commission approves modification German tonnage tax regime
Germany has modified its tonnage tax regime. The following modifications have been made:
- Prolongation until December 31, 2027
- Extension of regime to all eligible vessels registered in any EEA country shipping register
- EUR 2.5 million increase in budget for the tonnage tax regime.
These modifications have now been approved by the European Commission, meaning that the European Commission considers these modifications to be in line with the Guidelines on State aid to maritime transport. The decision by the European Commission can be found here.
Luxembourg: Green shipping orientation
The Luxembourg Minister of Economy recently announced that the Luxembourg government is planning to promote renewable energy sectors and wants to attract shipping companies that are using and/or engaged in research and development of sustainable vessels, thus promoting a Green Shipping orientation for the Luxembourg fleet.
The Netherlands-Bulgaria treaty
On January 1, 2022 the treaty between the Netherlands and Bulgaria will enter into force. In deviation from Article 5 of the OECD Model Convention, the treaty between the Netherlands and Bulgaria deems a permanent establishment to be present in the case of offshore activities, unless the activities amount to less than 30 days over a 12-month period. This is thus no longer included in a separate offshore provision, which is in line with Dutch treaty policy.
Netherlands officially applies reduced rate to electricity provided to vessels berthed in ports
On July 16, 2021 the Netherlands officially announced a reduced tax rate of EUR 0.50/MWh for the shore-side supply of electricity to maritime and inland waterway vessels moored in ports as of October 1, 2021. This is in accordance with the decision of the Council of the European Union dated June 7, 2021 to authorize the Netherlands to apply such a reduced tax rate for the period July 1, 2021 through June 30, 2027.
VAT adjustment (Regulation Table II): VAT rate for jackable offshore drilling rigs
Regulation Table II has been amended in response to the CJEU judgment of June 20, 2019, which ruled that the supply of a jackable offshore drilling rig is not exempt from VAT, given that a jackable offshore drilling rig is not a ship within the meaning of the VAT exemption for international traffic. The amended decree will take effect on January 1, 2023. Its publication in the Government Gazette can be found here.
Interpretation of ‘international traffic’ in the Netherlands-France treaty
The Amsterdam Court of Appeals has ruled in a case concerning the application of the Netherlands-France treaty to personal income tax. According to the Court of Appeals, in the case in question the expression ‘international traffic’, which is not defined in the treaty, has the meaning of that expression as used in Dutch legislation. The Court of Appeals concluded that a flight between different countries qualifies as international traffic, while a flight within the borders of one country (France) does not. Purely domestic traffic therefore cannot be regarded as international traffic (notwithstanding potential exceptions). Read the judgment that is important for the shipping industry, which uses the same concept of international traffic.
Tonnage tax flag exemption 2022
The Dutch tonnage tax regime includes flag requirements. In short, a vessel that is added to the fleet (operated in ownership, bareboat charter-in) should sail under an EU/EEA flag, unless one of the three exemptions apply. The national exemption will not apply in 2022. Please note that the national exemption still applies in 2021! Please also note that since 2020 the flag requirements, as well as the exemptions, also apply to ship management activities.
United Kingdom: Tonnage tax developments
The United Kingdom has announced a proposal to reform its tonnage tax regime for the first time since it was introduced. The measures are expected to make it easier for shipping companies to move to the UK. Legislation will be introduced to reduce from ten years to eight years the period for which a tonnage tax election remains in force from the beginning of the accounting period in which it is made. In addition, HMRC will be given the power to admit elections made outside the normal period allowed for election where there appears to be a good reason to do so. The proposed legislation will remove the flagging rules introduced in 2005 and simplify the rule which, subject to conditions, includes dividends or other distributions by overseas shipping companies in relevant shipping profits. See the announcement.
Italy: VAT rules for zero-rating of ocean-going vessels, pleasure boats
In our previous Tax Update, we informed you about the changes to the VAT treatment of ocean-going vessels and related components and services. Shipowners or operators will not be able to buy or lease VAT-free vessels, unless they submit a zero-rating application to the Italian tax authorities. On August 6, 2021 the Italian Tax Authority published a resolution (no. 54/2021) which includes clarifications on the form to be used to apply zero-rating to the purchase/lease of vessels and related components and services. This is a mandatory form to apply zero-rating.
Read this report prepared by our KPMG colleagues in Italy, for more details.
Finland: Finnish Tax Administration updates Guidance on Tonnage Tax
An updated version of the guidance on tonnage tax was issued by the Finnish Tax Administration, in which new legislation that was enacted on July 16, 2021 was implemented. Accordingly, with effect from January 1, 2021, a vessel that a company leases without a crew and equips and operates itself could qualify for the Finnish tonnage tax regime. This updated guidance is only available in Finnish.
Tonnage tax developments
The Ministry of Finance has submitted a proposal for changes to the tonnage tax regime for a public consultation hearing. The proposal would allow certain types of shipping activities that are currently not permitted within the regime and would, among other things, have an impact on shipping related to aquaculture and the transport of petroleum. According to the proposal, the use of a vessel in the future would be decisive for determining whether the business is tax-free or taxable. A combination of tax-free and taxable shipping activities would be referred to as “shared activities”. Revenue from activities that does not qualify for tax exemption would be subject to standard tax at a rate of 22%. The Ministry emphasized four types of situations when shared activities are relevant for shipping companies within the system, and when shared activities would be allowed:
- When a shipping company undertakes an assignment with a vessel, but the activity related to the assignment does not qualify for tax exemption according to the system.
- When a shipping company undertakes an assignment with a vessel and the activity occasionally qualifies for tax exemption in accordance with the tonnage tax regime.
- When a shipping company undertakes an assignment with a vessel that transports goods, and there is activity on board that is closely related to the use of the vessel but that, by its nature, does not qualify for tax exemption according to the tonnage tax regime.
- When a shipping company uses a vessel for stationary activities, port traffic or other activities over a limited area of operation when the distance sailed does not exceed 30 nautical miles for parts of the year.
Read this report prepared by our KPMG colleagues in Norway, for more details
Proposed amendments to petroleum tax law
The government had proposed significant amendments to the petroleum tax law before the recent parliamentary elections.
The proposal would amend the current rules on accelerated depreciation and the “uplift allowance” under the special petroleum tax regime and replace these measures with an immediate tax deduction in the year of investment, effective 2022.
In addition, it is proposed that the rules allowing a refund of the tax-value of exploration losses and on cessation of petroleum activities would be repealed.
Read this report, prepared by our KPMG colleagues in Norway, for more details.
Supreme Court judgment on the interpretation of the offshore clause and the taxation of employees
The Norwegian Supreme Court rendered an important judgment on the territorial scope of the offshore clause and how to count the 30-day requirement applicable to employees.
1. Territorial scope
The term ‘offshore’ in tax treaties that Norway has concluded encompasses the area all the way from land to where the Norwegian continental shelf ends. Consequently, based on the judgement of the Supreme Court it is now clear that the term ‘offshore’ does not have an independent meaning in the offshore clause.
2. 30-day requirement
For many years now the Norwegian tax office has taken the position that paid leave should be included for the purposes of counting days under the 30-day rule in Norwegian treaties. For example, if someone has 20 offshore working days and a 1:1 rotation, then 20 paid leave days must be added to the 20 working days, and consequently the crew member will exceed 30 days (20+20=40).
On July 1, 2021 the Norwegian Supreme Court ruled that paid leave days may not be taken into account, meaning that if the actual days worked in Norway do not exceed 30, the crew will be tax-protected. If a crew member exceeds 30 days, the salary covering paid leave will also be taxable in Norway.
We would like to emphasize that the judgment is not relevant for crew resident in the UK (tax from day 1). For Dutch-resident crew the judgment should also have no practical effect given that the Netherlands already applies an approach in which the paid leave days are excluded from the count. For other nationalities, it will be possible to file for amendments back to 2018.
The judgment offers no relief from the payroll requirement. Payroll will be undertaken for all crew in Norway, regardless of the number of days. The tax protection will be addressed in connection with the filing of the annual tax return for the following year.