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Shipping and ship management activities are also very often structured through foreign special purpose vehicles.
1. Reasons for setting up foreign shipping- and ship-management companies
There are various reasons for setting up foreign shipping or ship-management companies (hereafter jointly referred to as ‘shipping companies’, shipping- and ship management activities being jointly referred to as ‘shipping activities’). An important reason for using special purpose vehicles may be risk insulation; companies often strive to separate risk-bearing activities legally from their other operations and valuable assets.
For commercial reasons or for reasons of convenience, ship-owners may have a preference to operate under a certain flag. The use of a company incorporated under the laws of the flag’s country is then logical, and it may even be a requirement in order to be allowed to operate such flag in the first place.
Fiscal reasons for setting up foreign shipping companies are mainly the possibility to qualify for a low tax rate (or tax exemption) for profits derived from the activities in question. Given the fact that, in case of shipping activities, all the related activities usually take place offshore, companies engaged in this kind of business have a high flexibility in structuring these activities through special purpose vehicles in low-tax jurisdictions, since the risk of a successful challenge of the shipping vehicle’s place of residence is relatively low.
2. Important characteristics for a country to be regarded as tax advantageous jurisdiction for shipping companies
A country should meet the following criteria in order to be regarded as tax efficient jurisdiction for shipping activities¨
it should have a low general (effective) corporate income tax rate tax rate or it should have a special low taxation regime for shipping activities
the country’s special taxation regime for shipping activities, if available, should have a wide scope in the sense that it should also cover important sources of income such as interest income from deposits and gains upon the sale of vessels
in certain (albeit exceptional) cases the availability of a double tax treaty network may be helpful for reduction of withholding tax over payments made to the shipping companies, or to make use of the special transportation article in the treaty in question (article 8 of the OECD Model Tax Convention on Income and Capital)
ideally, the country of establishment of the company would not have withholding taxation over dividend payments (or it should be relatively easy to circumvent such taxation).
3. Issues to consider
In our experience, a crucial element in tax advisory on shipping activities is the separation of two issues; one is the issue of whether a certain vehicle used in international waters qualifies as ‘ship’ and the other issue is whether the activities for which the vehicle is used are qualifying activities for purposes of the shipping regime of the country in question.
Cyprus is an example of a country with a very broad interpretation of the term ‘ship’. It speaks for itself that the vehicle in question should at the same time be used for qualifying (i.e. ‘shipping’) activities in order to be able to qualify for Cyprus’ shipping regime.
At the same time it should also be noted that, even if a vehicle, albeit qualifying as ship, is not used for qualifying (shipping) activities by a Cyprus company, there may be other ways to qualify for income tax exemption for the activities in question (this may for example apply for companies operating FPSO vehicles outside Cyprus’ territorial waters)
It is recommendable to seek tax consultation in each specific situation.
4. What Consulco can do for you
Consulco has developed unique expertise in the field of servicing shipping companies, for clients from various countries, including Norway (where Consulco has for years had a strong foothold; this applies for Scandinavia in general), India, Russia and Singapore. We are able to assist clients using this kind of companies in all the relevant areas, such as incorporation, domiciliation, tax issues, legal issues and accounting services.