| | | | | | | International Shipping Sector | | | | | | | Tonnage Tax: | | | Introduction
Finance Act 2002 introduced a new ‘tonnage tax’ method for calculating the profits of shipping companies, similar to the regimes currently in force in Holland, UK, Germany and Spain. 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.
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| | | | 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. | | | 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 and 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:
· For each 100 tons up to 1,000 tons €1.00
· For each 100 tons between 1,000 tons and 10,000 tons €0.75
· For each 100 tons between 10,000 tons and 25,000 tons €0.50
· For each 100 tons above 25,000 tons €0.25
| | | | Example of Calculation: | | | | The 'MV Frea', a 16,000 Tonne DW chemical carrier, recently transferred to the Irish flag. The tonnage tax for this ship based on 5,102 net tonnage will be €1,860. | | | | | 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 would like to find out how your shipping business can qualify and benefit from the Irish tonnage tax system, please contact us for an assessment of your business. | | | |
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