Valletta Tonnage tax is compatible with European law
State Aid EU Commission approves the Maltese tonnage tax scheme subject to commitments in order to keep the continental shipowners under EU flag
The European Commission has conditionally approved under EU State aid rules the Maltese tonnage tax scheme for a period of 10 years that scheme will ensure a level playing field between Maltese and other European shipping companies, and will encourage ship registration in Europe.
“Tonnage tax systems are meant to promote the competitiveness of the EU shipping industry in a global market without unduly distorting competition. I am pleased that Malta committed to adapt its tonnage tax system to achieve this. Moreover, by encouraging the registration of ships in the EU, the scheme will enable the European shipping industry to keep up its high social and environmental standards” commented Commissioner Margrethe Vestager, in charge of competition policy.
In 2012, the European Commission opened an in-depth investigation into the Maltese tonnage tax scheme to examine its compatibility with EU State aid rules. With thiss decision, the Commission endorses the Maltese scheme, subject to the amendments introduced by Malta.
The Commission's in-depth investigation found certain features of the original scheme, such as tax exemptions applied to Maltese residents and the broad scope of the scheme extending to vessels not carrying out maritime transport activities, to be in breach of EU State aid rules.
As a result, Malta has committed to introduce a number of changes to its scheme to prevent any discrimination between shipping companies and to avoid undue competition distortions. In particular, Malta agreed to restrict the scope of the scheme to maritime transport and to remove those tax exemptions for shareholders which constitute State aid.
Under the Maltese scheme, a shipping company is taxed on the basis of ship net tonnage (i.e. based on its volume) rather than the actual profits of the company. In particular, tonnage taxation is applied to a shipping company’s: core revenues from shipping activities, such as cargo and passenger transport; certain ancillary revenues that are closely connected to shipping activities (which are, however, capped at a maximum of 50% of a ship's operating revenues); revenues from towage and dredging subject to certain conditions.
If a shipping company wants to benefit from the scheme, a significant part of its fleet must fly the flag of an European Economic Area (EEA) Member State. In addition, any new entrant to the scheme must have at least 25% of its fleet subject to tonnage tax with an EEA flag.
The Commission assessed the amended measures under EU State aid rules, in particular its Guidelines on State aid to maritime transport. It concluded that the amended Maltese scheme is in line with EU State aid rules, as the tax relief granted is an appropriate instrument to address global competition and will provide the right incentives to maintain maritime jobs within the EU, whilst preserving competition within the EU Single Market.
To address the risk of flagging out and relocating of shipping companies to low-tax countries outside of the EU, the Commission's 2004 Guidelines on State aid to maritime transport allow Member States to adopt measures that improve the fiscal climate for shipping companies.
One of the most important measures is tonnage tax, whereby shipping companies can apply to be taxed based on a notional profit or the tonnage they operate, instead of being taxed under the normal corporate tax system. Only companies that are active in maritime transport are eligible for such measures under the Maritime Guidelines. Shareholders in shipping companies are excluded from preferential tax treatment.
Since 2004, the Commission's decision-making practice under the Maritime Guidelines has further clarified the eligible transport activities and compatibility conditions to ensure that the main objectives of the Maritime Guidelines are met. The Commission has to ensure that there are no spill-over of the favourable tax treatment of shipping companies into other sectors unrelated to maritime transport and there is no discrimination of other EEA State registries and flags.