Tax Update Shipping & Offshore - February 2020

Dear reader,

Welcome to the first Shipping & Offshore Update for 2020, in which we inform you about developments around the world that could be relevant for companies throughout the whole industry. 

Tax developments following the OECD’s global Base Erosion and Profit Shifting (BEPS) initiatives and EU rules had already significantly impacted the asset-heavy shipping and offshore industry; not to mention the increased burden of compliance deriving from, for example, ATAD II and the mandatory disclosure rules (DAC6, and yes they also apply to the industry!). Nowadays even well-known jurisdictions for asset-owning within the oil & gas and shipping industry, such as the Cayman Islands, have introduced substance rules (please click here). Similar new laws have also been introduced in the British Virgin Islands, Bermuda and other major offshore jurisdictions. For example, the definition of "shipping" in Bermuda no longer covers entities that own ships but do not operate them. In addition, it includes the operation of a ship anywhere in the world.

As a result of these developments, some companies are having to reconsider where (in which jurisdiction) it would make sense for them to increase their level of substance. This, in order to benefit from acceptable but favorable tax regimes, which is a must in terms of being competitive in a global market. Examples of such favorable tax regimes are the tonnage tax regimes present in a number of EU Member States as well as, for example, in Singapore..  That these countries have introduced favorable tonnage regimes is not surprising as a large number of shipping or offshore operating companies already have substance and operations in these jurisdictions. Many different types of vessels and offshore assets are used within the industry; the question is whether a tonnage tax regime can cover these assets.

The last couple of years various EU Member States have introduced tonnage tax legislation and acceptable maritime tax incentives or extend their present regimes in order to provide a level-playing field for companies operating from their jurisdictions. The question is whether the Member States are willing to assess the extent to which this level-playing field is needed and for which type of assets the European Commission will open up the tonnage tax regimes.  

In 2017 Denmark attempted to extend its tonnage tax regime to cover offshore mobile drilling rigs. The European Commission however took the view that tonnage tax regimes should not cover such types of vessels. Furthermore, other types of vessels would be acceptable under an EU tonnage tax regime, but then only if, for example, they spent a certain transportation time at sea. In addition, EU tonnage tax regimes also contain EU flagging requirements.

These restrictions put EU Member States at a competitive disadvantage compared to other non-EU jurisdictions. As a large number of offshore operating companies are still looking for a jurisdiction from which they can operate their (new or under construction) assets competitively worldwide, it will be interesting to monitor the developments taking place in the EU Member States during 2020. Especially in light of Brexit…

The Dutch government intends to amend the liquidation and cessation loss rules for corporate income tax purposes as of 2021 (see our October 2019 report). As the proposed rules especially relate to non-EU branches and participations of Dutch companies, the question that arises is how the Dutch-based offshore operating industry will prepare for this during 2020.

Ernst-Jan Bioch

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Australia: finalization of ATO offshore drilling PCG

The Australian Taxation Office (ATO) released PCG 2020/1 on transfer pricing issues. The guideline addresses the ATO's compliance approach to transfer pricing issues for projects involving the use of non-resident owned mobile offshore drilling units, such as drill ships, drilling rigs (including but not limited to submersibles, semi-submersibles and jack-up rigs), pipe-laying vessels and heavy-lift vessels in Australian waters. Feel free to contact us if you like to read the article about this.

China: ocean crew

Circular [2019] No.97: From  January 1, 2019 through December 31, 2023 only 50% of the employment income earned by crew working on a cross-ocean ship will be included in the tax base for personal income tax purposes, if they sail on a ship for more than 183 days during a tax year. Please contact us if you would like more information about this.

Italy: Commission opens in-depth investigation into tax exemptions for Italian ports

The European Commission has opened an in-depth investigation to assess whether tax exemptions granted under Italian law to ports are in line with EU State aid rules. The Commission also welcomes the commitment made by Spain to abolish the tax exemption benefitting Spanish ports as of 2020, allowing the Commission to close the procedure concerning Spain.

EU: European Commission approves maritime transport support schemes in Cyprus, Denmark, Estonia, Poland and Sweden

The European Commission has approved, under EU State aid rules, five schemes to support maritime transport in Cyprus, Denmark, Estonia, Poland and Sweden. The schemes encourage ship registration in Europe and contribute to the global competitiveness of the sector without unduly distorting competition.

The Commission adopted five separate decisions, concerning

•the introduction of a tonnage tax and seafarer scheme in Estonia,

•the prolongation of a tonnage tax and seafarer scheme in Cyprus,

•the introduction of a new seafarer scheme in Poland,

•the prolongation and extension of a seafarer scheme in Denmark, and

•the prolongation of a seafarer scheme in Sweden

The non-confidential version of the decisions will be published in the State aid register on the Commission's competition website (under case numbers SA.51809 Cyprus, SA.52069 Denmark, SA.53469 Estonia, SA.46380 Poland, SA.46740 Sweden) once any confidentiality issues have been resolved.

Slovenia: tonnage tax amendments proposed

Slovenia’s Ministry of Finance has proposed amending the tonnage tax rules. The proposed amendments seem to follow directly from the Dutch changes to the tonnage tax regime approved in 2019 and applicable as of 2020. The amendments relate to, for example:

• Ship management
• Ancillary maritime transport (50% cap)

United States: case law multi-purpose support vessel (oil & gas)

The U.S. Tax Court granted the IRS motion for a summary judgment with regard to whether a taxpayer’s charter income was subject to tax under the Internal Revenue Code or was exempt from tax by virtue of the provisions of the United States-United Kingdom income tax treaty. The Tax Court ruled that the taxpayer’s charter income from oil and gas-related work performed on the U.S. outer continental shelf was effectively related to carrying on a U.S. trade or business and that it was not exempt under the tax treaty. 

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