Schedule 18B

[Section 697A]

Tonnage Tax

Overview

This Schedule contains provisions which are supplemental to the principal tonnage tax provisions contained in Part 24A. The Schedule consists of 5 parts as follows:

Part 1: deals with matters relating to election for tonnage tax.

Part 2: is concerned with matters relating to qualifying ships.

Part 3: concerns capital allowances and balancing charges.

Part 4: deals with issues relating to groups, mergers and demergers.

Part 5: is concerned with miscellaneous and supplementary matters.

PART 1

Matters relating to Election to Tonnage Tax

Details

Part 1 provides the detailed rules relating to making a tonnage tax election, when such an election takes effect, the period on election is in force and related matters.

Method of making and giving effect to an election

The way elections are to be made is regulated by giving Revenue power to specify the information to accompany an election and require evidence to support the election.

par 1 An election is made by notice to the Revenue Commissioners on a prescribed form and will not come into effect until the necessary information required by the Revenue is provided to their satisfaction.

When election may be made

par 2(1) An initial period of 36 months, beginning from 28 March 2003, is provided within which a qualifying company must elect for tonnage tax (the initial period).

par 2(2) Provision is also made where an election for tonnage tax may be made after the expiry of the initial period.

par 2(3) If a company becomes a qualifying company after the end of the initial period and it was not a qualifying company before so becoming one, the company may elect for tonnage tax within the period of 36 months after becoming a qualifying company.

par 2(4) Similar provision is made in the case of groups. However, the extension of the time within which an election may be made does not apply in the case of a group which was previously a qualifying group (e.g. where a group company was a qualifying company in the initial period and subsequently became a non-qualifying company and another group company becomes a qualifying company after the initial period) or where a group of companies which becomes a qualifying group after the initial period but is still substantially the same as a group which was a qualifying group in the initial period. This could arise where a qualifying group became non-qualifying in the initial period by divesting itself of its shipping interest and then became qualifying by buying most of those interests back. Such a group would be “substantially” the same group as before.

par 2(5) This provision does not affect an election which is made under Part 4 relating to mergers, etc.

par 2(6) The Minister for Finance may by order to provide further periods within which an election may take place.

When election takes effect

par 3(1) & (2) An election will usually take effect from the start of the accounting period in which it is made. This is subject to a restriction which prevents an election taking effect for an accounting period beginning before 1 January 2002. Where this would be the result of an election, the election is to take effect from the beginning of the accounting period following that in which it is made.

par 3(3) Provision is also made giving Revenue discretion to allow an election to take effect from an earlier accounting period than would be the case under the general rule (but not for an accounting period beginning before 1 January 2002). This discretion would only be used where there was a legitimate commercial reason for using it.

par 3(4) There needs to be exceptional circumstances for Revenue to exercise its discretion to allow a postponement of an election until the beginning of the next following accounting period. By “exceptional circumstances” is meant circumstances which are such that it is commercially impracticable for the election to take effect under the normal rules. For example, contractual arrangements which are impossible to unravel in sufficient time in order to qualify under the limit on the amount of tonnage chartered in or unusually complex re-structuring. As a safeguard it is made clear that these circumstances cannot relate to avoidance or reduction of a tax liability.

par 3(5) Provision is also made for the application of this paragraph in relation to a group the members of which have different accounting periods.

par 3(6) An election under subparagraph (3) or (4) has affect from the time the company becomes a qualifying company. However, this is made subject to section 697E(4)(a) and (b), which overrules this provision if the 75% limit on the net tonnage chartered in, in the first and second accounting period for which the company elected into tonnage tax is breached. Where this happens the election is not to have effect for those accounting periods, but the election will have effect for subsequent accounting periods.

NOTE: Removal of the 75% limit, is under consideration in line with the liberalisation EU State Aid rules. Provisions have been made allowing for the deletion of section 697E and certain consequential amendments. However this is subject to Commencement Order which has not been made to date. Accordingly section 697E remains in place pending the making of this Order.

Period for which election is in force

par 4 A tonnage tax election is to have effect for a 10 year period unless it ceases to be in force as a consequence of the company or group ceasing to be a qualifying company or group or the election ceasing under Part 4.

Effect of election ceasing to be in force

par 5 A ceased tonnage tax election has no effect in relation to the company concerned. In other words, the company can no longer compute its profits on the basis of the tonnage tax profits calculation.

Renewal election

par 6 A company, in respect of which a tonnage tax election is in force, can make a further election called a renewal election. This continues the period tonnage tax applies for a period of 10 years from the renewal election. The necessary adaptations of the provisions relating to the making of an election are made in relation to such a renewals election. A renewal election supersedes any existing election.

PART 2

Matters relating to qualifying ships

Overview

Part 2 to a large extent supplements the definition of “qualifying ship” in section 697A. It contains provisions relating to the meaning of operating a qualifying ship; the effect on a company of ceasing to operate a qualifying ship; and the use of a qualifying ship for activities which are excluded from the tonnage tax system.

Company temporary ceasing to operate a qualifying ship

par 7 Rules are set out for determining when a company is to be taken as ceasing to operate a qualifying ship. The intention is to allow a company to remain within tonnage tax even where it temporarily ceases to operate qualifying ships. These provisions are particularly directed at small companies where as a result of a loss of a ship at sea, a company may cease to operate a qualifying ship. Without this provision such a company could otherwise be excluded from tonnage tax for 10 years under the rule in section 697O. It could also apply to a group where the group decided to sell all its qualifying ships at once. A cessation of 3 months or less will be treated as a temporary cessation, unless there is evidence to the contrary. A company that takes advantage of this provision will calculate its tonnage tax profits for an accounting period as though it still operated the same ships as immediately before the temporary cessation.

Meaning of operating a ship

par 8(1) to (5) A company is regarded as operating any ship owner by or chartered to it. A company does not operate a ship chartered out by it on a bareboat charter unless the charter out is to a company which is both a qualifying company and a member of the same group as the group the owner of the ship belongs to. In such a case, the owner is regarded as operating the ship. Also a company, does not cease to operate a ship it charters out on bareboat charter if the ship is temporarily surplus to the company’s requirements and the charter terms do not exceed 3 years.

par 8(6) The meaning of operating a qualifying ship in the context of providing ship management services is clarified. Real economic activity is required before the provision of ship management services is to be regarded as operating a qualifying ship. The intention here is to minimise the possibility of “brass plate” style operations. All elements must be present in order for the company to be regarded as operating a qualifying ship. Regardless of whether a company is regarded as operating a qualifying ship under this provision the company, to be a qualifying company, must carry on the strategic and commercial management of those ships within the State.

Qualifying ship used as vessel of an excluded kind

par 9 A means for determining when a qualifying ship begins to be used as a vessel of an excluded kind is provided for by this paragraph. Relief is provided for a company where a ship temporarily ceases to be a qualifying ship.

PART 3

Capital allowances, balancing charges and related matters

Overview

Part 3 is concerned with matters relating to capital allowances. Paragraphs 10 and 11 provide for transitional measures governing the capital allowance treatment of plant and machinery acquired before entry into tonnage tax. Paragraphs 12, 13 and 14 deal with the capital allowance treatment of plant and machinery acquired after entry into tonnage tax. Paragraphs 15 to 18 are concerned with balancing charges and reliefs relating to such charges in relation to plant and machinery. Paragraph 19 deals with the capital allowance treatment of plant and machinery following exit from tonnage tax. Paragraph 20 provides for the capital allowance treatment of industrial buildings.

Plant and machinery used wholly for tonnage tax trade

This paragraph has three aspects. Firstly, it provides rules for the capital allowance treatment of machinery and plant acquired before entry into tonnage tax and taken into tonnage tax by a company. Secondly, it provides rules for the capital allowance treatment of such assets which following use wholly and exclusively for the purposes of the company’s tonnage tax trade begin to be used wholly for other purposes. Thirdly, it deals with the situation where such assets begin to be used partly for tonnage tax purposes and partly for other purposes.

par 10(1) Where machinery or plant is taken into the tonnage tax regime by a qualifying company and the machinery or plant is to be used wholly and exclusively for the purposes of the tonnage tax trade, then—

• neither a balancing charge or balancing allowance is triggered as a result of the machinery or plant starting to be used for the purposes of the tonnage tax trade (the provisions of section 697O(1) which prevent a tonnage tax trade from being treated as a trade for the purposes of the capital allowances provisions combined with the provisions of section 288 in particular the event described at section 288(1)(b), could, without this provision, trigger a balancing charge or balancing allowance once the machinery or plant was taken into the tonnage tax trade),
• any capital allowance which would normally be due in respect of capital expenditure on the machinery or plant is not to be made for any accounting period in which the company is within tonnage tax (it is likely that the provisions of section 697O(1) already referred to would prevent the making of any such allowances but this provision is included for the sake of emphasising that capital allowances are not to be made in respect of assets used for purposes of a tonnage tax trade),
• the provision (section 288) which deems a normal wear and tear allowance to have been taken in circumstances where machinery or plant has been used by a person and no wear and tear allowances have been given in respect of it is not to apply as respects any accounting period for which the asset is used wholly and exclusively for the company’s tonnage tax trade (this effectively freezes the capital allowances situation of assets taken into tonnage tax).

par 10(2)(a) & (b) Where an asset is taken into tonnage tax and used wholly for purposes of the tonnage tax trade and subsequently begins to be used wholly for purposes other than the company’s tonnage tax trade, then —

• no balancing allowance, if one might be possible, is to be made on the change of use,
• for the purposes of making a balancing charge, if such a charge would arise, a deemed wear and tear allowance is not to be made under section 296 for any accounting period in which the asset was used for the purposes of the tonnage tax trade (The effect of this is that the period for which the asset is used in the tonnage tax trade is disregarded for the purposes of determining the amount of capital allowances made in respect of the expenditure on the asset. This means that the amount of the capital expenditure un-allowed as capital allowances is frozen at the amount un-allowed on entry into tonnage tax. Where this amount (i.e. the amount of capital expenditure still un-allowed) is less than the disposal proceeds or, if the machinery or plant is not sold, the open market price of the asset, a balancing charge arises. Under normal rules the amount of the balancing charge is the excess of the proceeds or open market price over the un-allowed expenditure.),
• for the purposes of tonnage tax, instead of taking the proceeds or open-market value for the purposes of calculating the balancing charge, the least of the actual cost of the machinery or plant, the open-market value on entry to tonnage tax and the proceeds or open-market value on disposal is to be taken.

par 10(2)(c) The effect of the above is that any clawback of capital allowances by way of a balancing charge will only be in respect of capital allowances granted when the asset was used outside of tonnage tax.

Similar provision is made where an asset begins to be used partly for purposes of a tonnage tax trade and partly for other purposes. Where this happens the asset is to be treated as two separate assets, one in use for the purpose of the tonnage tax trade and one in use for other purposes. The provisions in subparagraph (2)(b) apply in relation to that part of the asset treated as in use wholly and exclusively for the purposes of the company’s tonnage tax trade. The part of the asset which is treated as in use wholly and exclusively for purposes other than the company’s tonnage tax trade may itself be used in another trade of the company (in which case capital allowances would again be appropriated) or may be used for purposes other than a trade (in which case capital allowances would not be made).

Plant and machinery used partly for purposes of tonnage tax trade

par 11 This provision deals with the capital allowances situation of machinery or plant which on entry to tonnage tax is used by a company partly for the purposes of the company’s tonnage tax trade and partly for purposes other than the company’s tonnage tax trade.

In such situations, the asset is to be treated as two separate assets one in use wholly and exclusively for the purposes of the company’s tonnage tax trade and the other part in use wholly and exclusively for other purposes.

As respects the part treated as in use wholly and exclusively for the purposes of the tonnage tax trade, paragraph 10(1)(b) and paragraph 10(2)(b) apply to modify the capital allowance position to cater for the introduction of the part of the asset into the tonnage tax trade of the company and its disposal out of the tonnage tax trade.

As respects the part treated as in use for purposes other than the tonnage tax trade, if this part is in use for the purposes of another trade carried on by the company capital allowances and balancing charges are to be made on such a basis as would be just and reasonable in the circumstances.

Plant and machinery: change of use of non-tonnage tax asset

par 12 This provision gives the rules relating to the capital allowance treatment of assets acquired by a company in the period in which it is subject to tonnage tax and used partly for purposes of the tonnage tax trade and partly for other purposes.

It is not necessary to make separate provision for assets acquired while the company is within tonnage tax and used wholly for purposes of the tonnage tax trade as the general provision in section 697O(1) ensures that no capital allowance can be given in such circumstances. If no capital allowances are given, no balancing charge can arise when the asset is disposed of. Where the asset is retained until the company comes out of tonnage tax, paragraph 19 makes provision for the capital allowance treatment of the asset after the company leaves tonnage tax.

For a similar reason, there is no need to make provision for such assets being diverted or part of such an asset being diverted to non-trade use as there are no capital allowances consequences because the asset once acquired for the purposes of the tonnage tax trade is outside of the capital allowances regime.

The only situation which needs to be addressed is where the asset is wholly or partly put to use in another trade of the company. In such a case the asset is treated as two separate assets and the part used for the purposes of the other trade of the company is given capital allowances on the basis of a just and reasonable apportionment.

Plant and machinery: change of use of tonnage tax asset

par 13 This paragraph makes provision for the capital allowance treatment of assets acquired after entry to tonnage tax but which subsequently begin to be wholly or partly used for the purposes of another trade.

Provision is not needed where the asset begins to be used for non-trade purposes either wholly or partly as there are no capital allowances consequences in such an event.

Where the asset is either sold or put to use in another trade of the company, capital allowances will be available as if the company had acquired the asset in the accounting period in which the asset is first put to such use. The amount of expenditure qualifying for capital allowances will be the lesser of the actual cost of the asset (either to the tonnage tax company or any other company which acquires the asset) and the open market value of the asset at the time it is diverted to such use.

Where such an asset begins to be used partly for the purposes of the tonnage tax trade and partly for other purposes, the asset is treated as two separate assets. Where this happens the capital allowances to be made in respect of the part treated as in use for the other trade of the company are made on a just and reasonable basis.

Plant and machinery: change of use of non-tonnage tax asset

par 14 This provision deals with a situation where a company diverts either wholly or partly an asset used for the purposes of another of its trades into its tonnage tax trade. Where this happens on the basis that the asset begins to be used wholly for the purposes of the tonnage tax trade—

• no balancing charge or allowance is to be made as a consequence,
• where a balancing charge arises subsequent to the change of use, any such charge shall only be made in respect of capital allowances made in respect of that asset for periods in which the asset was in use for the purposes of a trade other than the company’s tonnage tax trade.

Where only part of such an asset begins to be used for purposes of the company’s tonnage tax trade, similar provisions apply so as to ensure that any balancing charge arising on a subsequent change of use of that part will be made in respect of the part so used.

Plant and machinery: provisions relating to balancing charges

par 15(1) & (2) This paragraph makes administrative provisions in relation to balancing charges to be made on a tonnage tax company as a consequence of this Schedule.

par 15(3) & (4) Relief against any such balancing charge is only available under either paragraph 16 or 17, but not both. On the first occasion on which a balancing charge arises the company must irrevocably elect for one or other relief and only this relief can apply on the occasion of any subsequent balancing charges arising.

par 15(5) Relief under paragraph 16 or 17 is not available unless an election under this paragraph is in force.

Reduction in balancing charge by reference to time in tonnage tax

par 16 Relief against a balancing charge by reference to the time the company has been in tonnage tax is provided. The balancing charge is reduced by 20% for each full year the company is within tonnage tax.

Set-off of accrued losses against balancing charge

par 17 Any losses which accrued to the company before its entry into tonnage tax and which are referable to the activities taken into tonnage tax may be set against any balancing charge arising on a tonnage tax asset.

Deferment of balancing charge on re-investment

par 18(1) to (3) The deferment of a balancing charge is allowed where within the stated period the company or another qualifying company which is a member of the same group as the company which disposes of the ship re-invests in one or more qualifying ships (other assets do not qualify). The deferred balancing charge is the amount as reduced using either of the reliefs provided by paragraph 16 or 17. Any balancing charge so deferred is recovered on the disposal of the new asset, if no further re-investment is made, by way of a new balancing charge. Technically the original balancing charge is cancelled on re-investment and once the group ceases to re-invest in qualifying ships a new balancing charge in made on whichever company incurred the expenditure on the new asset.

par 18(4) The existing re-investment relief in section 290 does not apply where this relief applies.

par 18(5) Where the tonnage tax company leases a ship in such circumstances that the burden of wear and tear falls on the company and as a consequence the company would have obtained the capital allowances to be made in respect of the capital expenditure before entry into tonnage tax and as a consequence would be liable for any balancing charge on disposal, then this relief applies in respect of any replacement asset.

Exit: plant and machinery

This paragraph provides for the capital allowance treatment of a company following its exit from tonnage tax on the expiry of its election (i.e. after 10 years).

par 19(1) As respects assets acquired at a time when the company is subject to tonnage tax and used in the tonnage tax trade, they are to leave the tonnage tax regime at the lower of the actual cost or market value at the date of exit.

par 19(2) For the purposes of making capital allowances in respect of these assets for the on-going trade of the company, allowances are to be made as if the deemed cost were expenditure incurred by the company on the day following the date the company left the tonnage tax regime.

par 19(3) As respects machinery or plant taken into tonnage tax and still held by the company on exit, all allowances that would have been made for such assets for any period in which the company was subject to tonnage tax are to be made once the company leaves tonnage tax. In other words, the capital allowances ‘frozen’ on entry are made available to the company on exit.

Industrial Buildings

par 20(1) Where any part of an industrial building is used for the purposes of a company tonnage tax trade, that part effectively ceases to be treated as an industrial building. The result is that industrial buildings writing down allowance will not be available in respect of that part for the period the company is within tonnage tax.

par 20(2) Provision is made for balancing charges to be made in respect of capital allowances made in respect of such a building before the company entered tonnage tax.

The reliefs available under paragraphs 16 and 17 for balancing charges arising on a company while in tonnage tax apply also to a balancing charge under this paragraph.

par 20(3) & (4) Once an industrial building is sold out of tonnage tax or following exit of a company from tonnage tax, the quantum of capital allowances available is to be the same as if the industrial building had ceased to be used for trade purposes for the duration of the time the building was used for tonnage tax purposes.

PART 4

Groups, mergers and related matters

Company not to be treated as member of more than one group

par 21 Rules are set out for determining what group a company should be treated as a member of where, under the definition of group in section 697A it could be treated as a member of more than one group.

Arrangements for dealing with group matters

par 22 This is an administrative measure authorising Revenue to enter into arrangements with groups so as to simplify and streamline the application of the tonnage tax rules in relation to groups.

Meaning of “merger” and “demerger”

par 23 Meanings are provided for the terms “merger” and “demerger” for the purposes of this Schedule.

Merger: between tonnage tax groups or companies

par 24 Where two or more tonnage tax groups, two or more tonnage tax companies or two or more tonnage tax groups and companies merge the group resulting from the merger is treated as a tonnage tax group as if the resultant group had made a group election. This deemed election has effect for a period which is the same as the period which has longest left to run of the pre-existent tonnage tax elections made by any of the merged groups or companies.

Merger: tonnage tax group/company and qualifying non-tonnage tax group/company

par 25 Where a tonnage tax group or company mergers with a qualifying non-tonnage tax group or company, the resultant group may elect to be treated as if a group election had been made (with the deemed election treated as having effect for the period for which the original group or company election would have had effect) or for the original tonnage tax election made by the group or the company to cease to have effect from the date of the merger.

Merger: tonnage tax group or company and non-qualifying group or company

par 26 Where there is a merger between a tonnage tax group or company and a non-qualifying group or company, the resultant group is treated as a tonnage tax group by virtue of the original election of the group or company.

Merger: non-qualifying group or company and qualifying non-tonnage tonnage tax group or company

par 27 Where a non-qualifying group or company mergers with a qualifying non-tonnage tax group or company, the resultant group may make a tonnage tax election with effect from the date of the merger. Any such election is to be made jointly by all qualifying companies in the merged group within 12 months of the merger.

Demerger: single company

par 28 Where a tonnage tax company ceases to be a member of a tonnage tax group and does not become a member of another tonnage tax group, the company is treated as if it had made a single company election to tonnage tax. This deemed election has effect for the same period as the period left for the original group election to remain in force. If there are two or more companies left in the original group and any of them are qualifying companies, they are to be treated as a tonnage tax group by virtue of the original group election which continues in force in respect of the remaining group.

Demerger: group

par 29 Where a tonnage tax group splits into two or more groups, each of the groups (if it contains a qualifying company) are to be treated as tonnage tax groups in the same way as if the resultant group had made a group election. This deemed election has effect for the same period as remains for the original group election to have effect.

Duty to notify Revenue Commissioners of group changes

par 30 An obligation is imposed on a tonnage tax company to inform Revenue if it ceases or becomes a member of a group. Failure to give this notice will be an offence subject to the penalties provided for in respect of the various provisions listed in column 2 of Schedule 18.

PART 5

Miscellaneous and supplemental

Measurement of tonnage of ship

par 31 The rules for determining the gross and net tonnage of a ship are set out.

Second or subsequent application of sections 697P and 697Q

par 32 Sections 697P and 697Q are adapted where they are to apply on a second or subsequent occasion on which a company ceases to be a tonnage tax company.

Delegation of powers and functions

par 34 The Revenue Commissioners are authorised by this provision to delegate to their officers their functions in relation to tonnage tax.

Relevant Date: Finance Act 2021