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Tonnage Tax for Shipping Business

Ireland offers a new ‘tonnage tax’ method for calculating the profits of shipping companies. The new regime is part of an initiative by the Government to promote Irish shipping, and to ensure that shipping companies are not forced to ‘flag out’ their ships to other countries operating a tonnage tax system. It also overcomes the problems arising in respect of provisions for deferred taxation, which may be encountered by companies taxed under the normal corporation tax rules. The introduction of tonnage tax offers shipping companies an alternative method of taxing their profits, however, it is not obligatory. If a shipping company wishes to remain subject to the normal corporation tax rules in order to calculate its profits, it may do so.

Advantages of Tonnage Tax

Certainty, since the level of tax will be known and minimal. This reduces the need for a company to make provision in its accounts for deferred taxation, thereby increasing earnings per share.

Flexibility, since companies will have more freedom to choose when to buy ships and how to finance them. These decisions will now largely be determined by commercial rather than tax considerations.

Clarity, a company’s tax position will now be more readily understood, consequently the company may become more attractive to investors and potential business partners. Finally, compatibility and competitiveness with the fiscal regimes of other countries. This is particularly important from the point of view of maintaining and developing our indigenous shipping industry.

Normal Rules

Shipping activities are subject to tax at 12.5% tax based on actual profits or gains of the period, and is calculated under the normal rules of corporation tax.

Tonnage Tax Method

The tonnage tax method allows shipping companies to calculate their profits on the basis of a specified notional profit per day depending on the tonnage of the ship concerned. The standard corporation tax rate for qualifying shipping activities is then applied to the amount of profit earned i.e. 12.5%.

Conditions to be met in order to qualify

In order to avail of the new rules, the company must be subject to:

  • Irish corporation tax,
  • operate qualifying ships
  • carry on the strategic and commercial management of those ships from the State.

The ship must be a sea-going vessel of a sufficient size to engage in reasonable commercial operations which complies with the requirements for navigation at sea. Certain vessels such as dredgers and recreational vessels are excluded from this definition. The shipping income is earned from various activities associated with the operation of a qualifying ship such as income from the carriage of cargo and passengers and the letting of a qualifying ship (where the shipping company retains control over the operation and management of the ship). The shipping profits subject to tax are the combined relevant shipping income and chargeable gains arising from assets used for the purposes of the activities covered by tonnage tax.

How is tonnage tax calculated?

Tonnage tax profits would be charged to corporation tax in place of the company’s relevant shipping profits. Losses accruing to the company in respect of its tonnage tax activities may not be set off against taxable profits subject to corporation tax. A company’s tonnage tax profits should be calculated with reference to the net tonnage of each qualifying ship operated by the company. The daily profit to be attributed to each qualifying ship operated by the company should be determined by reference to the net tonnage of the ship as follows: The nominal profit is calculated on a sliding scale, using the following rule:

  • 1.00 Euro per 100 net tons for the first 1,000 net tons
  • 0.75 Euro per 100 net tons from 1,000 up to 10,000 net tons
  • 0.50 Euro per 100 net tons from 10,000 up to 25,000 net tons
  • 0.25 Euro per 100 net tons over 25,000 net tons

There is no additional taxation at a later stage, unlike some other countries tonnage tax regimes where additional corporation tax is levied on profits when they are transferred out of the shipping industry.

Examples of tax calculations are as follows:

  • A 15,000 dwt chemical tanker of 5,890 net tons will have an annual tax liability of €2,129.55
  • A 45,000 dwt handymax bulker of 16,010 net tons will have an annual tax liability of €4,906.97
  • A 75,000 dwt panamax bulker of 19,455 net tons will have an annual tax liability of €5,692.86
  • A 170,000 dwt capesize bulker of 63,200 net tons will have an annual tax liability of €11,315.00
  • A 270,000 dwt VLCC of 79,920 net tons will have an annual tax liability of €13,222.13

There are additional provisions governing the calculation of the company’s shipping profits, which must be borne in mind. For example, gains on foreign currency transactions are included but income from investments should not be construed as relevant shipping income. The new method of calculating the profits means that smaller ships will have a higher proportionate tax charge than larger vessels, thus encouraging the development of the fleet size. An advantage of the new regime is that companies will now be able to budget for their tax liabilities since the taxable profits are predictable.

Byrne & McCall, together with our partners Maritime Management offer a complete service in relation to all aspects of International Ship Management.

If you require our assistance in relation to any of these matters please contact us here