The much-awaited European Commission decision on Malta’s tonnage tax system was published on February 7 – more than five years after the investigation procedure was initiated, following a complaint by an ‘interested party’ in October 2011.

By and large, Malta’s tonnage tax system was found to be in line with the maritime guidelines issued by the Commission itself in 2004 in that income derived from vessels engaged in maritime transport (which comprise the overwhelming majority of the Malta-flagged vessels falling under the scheme), such as general cargo, car carriers, bulk carriers, container and passenger vessels, were, are and remain exempt from Maltese income tax.

This exemption is subject to compliance with certain administrative conditions, for example the payment of the relevant fees to Transport Malta and maintenance of separate accounts meant to ring fence activities subject to the exemption from non-exempted ones. The fees payable to Transport Malta were also reviewed by the Commission and found to be of an acceptable level.

Essentially, nothing has changed with respect to the Maltese income tax exemption on core activities of maritime transport. Thus, the shipping industry in Malta welcomes the Commission’s decision as providing the necessary legal certainty to the Maltese tonnage tax system especially since Malta leads the largest shipping register in Europe.

Furthermore, the Commission agreed that the below mentioned activities are also exempt from Maltese income tax:

– Income from the bareboat out of vessels to group companies. Bareboat out to third parties is possible only in case of short term (three years) over-capacity and provided the amount chartered out does not exceed 50 per cent of the total fleet calculated on a group basis;

The much-awaited European Commission decision on Malta’s tonnage system was published on February 7

– Income from cruises and services ancillary to the cruise – provided that such ‘ancillary’ services (e.g. spa, hairdressing services etc) do not exceed 50 per cent of total revenue for each ship. Income from betting/gambling and luxury goods must be less than 25 per cent of total revenue of the ship;

– Income from yachts which are registered as ‘commercial yachts’ with Transport Malta;

– Tugs and dredgers provided that more than 50 per cent of their operational time represents maritime transport;

– Self-propelled barges that are designed and normally used for navigation in open seas;

– Time/voyage chartering in of vessels is alsopossible provided that the flag link requirements are met;

– Dividend distributions from shipping companies;

– Capital gains on sale of tonnage tax ships which are engaged in genuine shipping activities; and

– Interest derived from working capital of shipping companies.

On the other hand, the following do not fall within the scope of the Maltese tonnage tax system:

– Fishing and fish factory ships;

– Private yachts and ships used primarily for sport or recreation;

– Fixed offshore installations and floating storage units;

– Non-ocean going tug boats and dredgers;

– Ships whose main purpose is to provide goods or services normally provided on land;

– Stationary ships employed for hotel and or catering operations (floating hotels or restaurants); and

– Ships employed mainly for gambling/as casinos (floating or cruising casinos).

To ensure proper compliance with the rules, shipping companies are expected to submit information to the Maltese authorities such as the type of vessel, the activities performed with the vessel, the net tonnage, days in use, flag state and types of operation. More detailed information is expected to be found in Maltese domestic rules which Malta committed to publish by March 19. Directors of shipping companies are encouraged to remain updated on these developments.

Paul Pace Ross is a director specialising in International Tax and Corporate Services at KPMG in Malta and may be contacted on PaulPaceRoss@kpmg.com.mt.  Stephan Piazza is a manager specialising in Tax – Shipping & Yachting at KPMG in Malta and may be contacted on StephanPiazza@kpmg.com.mt.