Revenue Note for Guidance

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Revenue Note for Guidance

PART 24A

SHIPPING: TONNAGE TAX

Overview

This Part provides an alternative method (called “tonnage tax”) for calculating the shipping related profits of a company for corporation tax purposes.

The term “tonnage tax” while standard in the various countries which have introduced similar measures is something of a misnomer. Tonnage tax is not itself a tax, rather it is an alternative method by which shipping companies may calculate their shipping related profits for corporation tax purposes. The shipping related profits once calculated using the tonnage tax method are subject to the 12.5 per cent rate of corporation tax. The profits are calculated by reference to the tonnage of the ships used in a company’s shipping trade and hence the title. Essentially, the “tonnage” profits replace the accounting profits of the shipping company for tax purposes.

The purpose of Tonnage Tax is not specifically to provide a tax break for shipping. The intention behind tonnage tax is to provide a number of real advantages for all shipping companies which enter the regime. These include:

  • Certainty, since the level of tax will be known and minimal. This reduces the need for a company to make provision in its accounts for deferred taxation, thereby increasing earnings per share.
  • Flexibility, since companies will have more freedom to choose when to buy ships and how to finance them. These decisions will now largely be determined by commercial rather than tax considerations.
  • Clarity, a company’s tax position will now be more readily understood, consequently the company may become more attractive to investors and potential business partners.
  • Finally, compatibility and competitiveness with the fiscal regimes of other countries. This is particularly important from the point of view of maintaining and developing our indigenous shipping industry.

The tonnage tax scheme is elective, companies may choose whether to stay in the normal corporation tax system or move their shipping activities into tonnage tax. If a company enters tonnage tax it must stay in it for a minimum of 10 years. The commitment to stay in for 10 years can be renewed at any time.

The scheme came into operation with effect from 28 March 2003.

All qualifying companies in a group must enter the scheme. Cherry picking is not an option.

A qualifying company must meet 3 tests:

  • It must be within the charge to Irish corporation tax,
  • It must operate qualifying ships, and
  • It must carry on both the strategic and commercial management of these ships in the State.

The most important income sources which qualifies for shelter under the tonnage tax are:

  • Income from activities which are related to the actual operation of a qualifying ship (for example, profits from the carriage of cargo or passengers at sea).
  • Income from activities carried out on board qualifying ships which are ancillary to these activities such as the operation of cinemas, bars, shops, restaurants, etc. where the goods and services provided are consumed on board a qualifying ship.
  • Income from activities which are undertaken in order for these shipping operations to be undertaken (such as embarkation/disembarkation services, tickets sales, hire of containers, etc).
  • Income from the provision of ship management services for qualifying ships.

Capital allowances, balancing charges and capital gains are not a part of the tonnage tax scheme once a company is established in tonnage tax. However, these matters do come into play in relation to certain transitional arrangements which may leave companies open to some balancing charges and some capital gains charges in relation to assets acquired before entry into tonnage tax. These charges, however, will not arise until a ship is sold and even then reliefs are available which will defer any balancing charge if there is reinvestment in a new ship or reduce or eliminate any such charge by reference to either the time the company has been in tonnage tax or to unrelieved losses incurred before entry into tonnage tax.

There are extensive ring-fencing measures which are designed to ensure that advantage is not taken of the tonnage tax regime to include income from non-tonnage tax activities or to get tax relief for losses incurred on tonnage tax activities against other sources of income. These include arm’s length pricing (section 697LA) and anti-thick capitalisation measures (section 697LB). Anti-avoidance measures are also included to prevent the regime from being used for tax avoidance activities and transactions.

Enquiries concerning tonnage tax and election to tonnage tax should be addressed to:

Corporation Tax Unit 1,

Corporate Business and International Division,

Revenue Commissioners,

Dublin Castle,

Dublin 2.

Telephone: 01-7024102;

Fax: 01-6795814.

697A Interpretation (Part 24A)

Summary

This is the interpretation and construction section for both Part 24A and Schedule 18B.

Details

Definitions

(1) “bareboat charter terms” is defined for the purposes of paragraph 8 of Schedule 18B. This paragraph provides for the interpretation of the term “operating a ship”. This is relevant for the purposes of paragraphs (e) to (g) and paragraphs (i) and (j) of the definition of “relevant shipping income” (see below). Income from shipping activities will not be relevant shipping income and therefore subject to the tonnage tax shelter unless it is income derived from the operation of qualifying ships.

A “bareboat charter” means that the person chartering the ship can crew, provision and direct the ship. The owner has no responsibilities for these matters.

“chartered in” is defined for the purposes of section 697E which places a limit on the number of ships a shipping company may charter in if it is to qualify as a “qualifying company” for the purposes of tonnage tax. For this purpose ships “chartered in” means ships chartered in on terms other than bareboat charter terms. Therefore, the limit in section 697E does not apply to ships chartered in on bareboat charter terms.

“commencement date” is the date the scheme comes into operation and is 28 March 2003.

“control” is defined for the purposes of the definition of “group of companies” by reference to subsections (2) to (6) of section 432. Under those provisions a person controls a company if the person is able to control or to acquire control, either directly or indirectly of the company’s affairs. Under section 432(2) a person is regarded as having control of a company if the person has or is entitled to acquire—

  • the majority of the issued share capital or voting power,
  • such part of the capital as would entitle the person on a total distribution of income to more than 50 per cent of such distribution, or
  • such rights as would entitle the person on a winding up or otherwise to more than 50 per cent of the distributable assets. Subsections (4), (5) and (6) of section 432 provide for supplementary matters.

“group of companies” is defined as all the companies controlled by an individual or, in a case where a company is not controlled by any other person, that company and all other companies which that company controls. This definition goes further than the normal definition of group for corporation tax purposes. Provision is also included for construction of various types of references to “group of companies”. “Group of companies” is one of the more important concepts in “tonnage tax”. All qualifying companies which are members of a group must elect for tonnage tax as a group by way of a group election. It is not possible for one group company which qualifies for tonnage tax to stay out and for another group company which qualifies to elect into tonnage tax. For this reason extensive provision is made in Part 1 (matters relating to election for tonnage tax) and Part 4 (matters relating to groups and the merging and de-merging of companies and groups) of Schedule 18B in relation to groups of companies.

“Member State” is defined for the purposes of section 697H (relevant shipping income: distributions of overseas shipping companies).

“qualifying company” has to be a company which is chargeable to Irish corporation tax on any profits which accrue to it. It must also operate qualifying ships (ownership is not a requirement). Finally, and most importantly, the company must carry on the strategic and commercial management of these ships in Ireland. Strategic and commercial management is left undefined as any such definition may prove too restrictive and inflexible. Indeed, it can mean different things depending on the context. For example, strategic and commercial management of ships in the context of providing ship management services will differ from the meaning of the term in the context of a company which actually owns the ships it is operating. All elements of management activity relevant to the ships in question will be taken into account in determining whether strategic and commercial management is carried out in the State. Basically what is envisaged is that a company will, in the case of strategic management, take decisions in Ireland on significant capital expenditure and disposals (although in the case of ship management services this factor will have no relevance), the award of major contracts, agreement on strategic alliances, etc. In assessing these matters the extent to which foreign based personnel work under the direction of, and report to, personnel based in Ireland would be important. Also important in assessing whether the strategic function is carried out in Ireland would be location of headquarters, including senior managers; location of decision making of board of directors; location of decision making of operational board. In the case of commercial management, matters relating to route planning, taking bookings for passengers or cargo, managing the bunkers, provisioning and victualling requirements of ships, personnel management, training, technical management of ships including the taking of decisions on the repair and maintenance of vessels should take place in Ireland. Also relevant might be the maintenance of support facilities such as training centres, terminals, etc. in Ireland and the extent to which foreign offices/branches work under the direction of personnel based in Ireland. The fact that a ship is flagged, classed, insured or financed in Ireland may add further weight to the indicators set out above. Both aspects of the test (i.e. both strategic and commercial management in Ireland) must be complied with.

“qualifying group” is a group of companies where at least one member of the group is a qualifying company.

“qualifying ship” is a seagoing vessel of an adequate size to engage in reasonable commercial operations and which complies with all the requirements for navigation at sea imposed by the competent authorities of any country or territory. Acceptance of a ship as seagoing will normally require the ship to be certificated as such under the International Load Line or the SOLAS (Safety of Life at Sea) Convention. Excluded from the definition are vessels which are:

  • Fishing and fish factory vessels.
  • Vessels used primarily for sport or recreation (other than vessels operated for commercial purposes with an overnight passenger capacity of 50 or more, excluding crew).
  • Harbour, estuary and river ferries.
  • Various types of offshore installations which are not for the purposes of transporting cargo or passengers by sea.
  • An oil tanker used for the purposes of delivering oil from an offshore oil field to an on-shore storage facility. This is excluded as the profits attributable to such activities are already subject to a special tax regime under Part 24.
  • Dredgers, working platforms such as seagoing cranes and cable laying vessels.
  • Non-ocean going tugs.

Regardless of the activities which a vessel of an excluded kind is engaged in, income from such ships cannot be “relevant shipping income” and therefore cannot be sheltered within tonnage tax. Paragraph 9 of Part 2 of Schedule 18B makes provision for a case where a qualifying vessel is used as a vessel of an excluded kind.

“tonnage tax” is the description given to the method provided for by section 697C of calculating the profits of a tonnage tax company (i.e. a qualifying company which has elected for the tonnage tax method of calculating its profits). It is also used in section 697D in requiring companies to elect for the application of tonnage tax.

“tonnage tax activities” are such trading activities of a tonnage tax company as are described in paragraphs (a) to (g) and paragraphs (i) and (j) of the definition of “relevant shipping income”. This term is defined for the purposes of the definition of tonnage tax trade. In this context, the term is particularly of importance in relation to the ring-fence on losses incurred in relation to tonnage tax activities provided for in section 697C(2) and the separate trade provisions in section 697L. It is also used in section 697K where income sources (other than those specified) which gives rise to investment income are specifically excluded from being part of a company’s tonnage tax activity and in section 697N (chargeable gains) where an asset must be used for tonnage tax activities in order to avail of the capital gains exemption (such an asset is referred to as a “tonnage tax asset”).

“tonnage tax asset” is an asset used for the purposes of the tonnage tax activities of a tonnage tax company. The definition is used in section 697N to identify those assets which will benefit from the tonnage tax shelter in respect of any chargeable gains which may arise on disposal.

“tonnage tax company” and “tonnage tax group” are used throughout this Part and Schedule 18B to refer to qualifying companies or qualifying group of companies which have elected for tonnage tax.

“tonnage tax profits” are the profits of a tonnage tax company calculated according to the tonnage tax method set out in section 697C. These profits displace the normal profits of the company for the purposes of corporation tax.

“tonnage tax trade” defines the trade of a tonnage tax company by reference to the tonnage tax activities carried on by the company. These activities are treated as a separate trade carried on by the company by virtue of section 697L if more than just these activities constitutes the activities carried on by the company.

“relevant shipping income” lists the sources of a tonnage tax company’s income which are to be sheltered from taxation by the tonnage tax profits of that company.

The sources of income covered are —

  • income from the transport by sea of cargo and passengers in a qualifying ship operated by the company. Any income referable to the transport of such cargo or passengers by land or referable to any other purpose (for example, the provision of holiday accommodation) is excluded from this definition;
  • income from towage, salvage and marine assistance services provided by a qualifying ship operated by the company but does not include income from such work which is undertaken in a port or port area. It is to be noted that profits from the sale of salvaged goods would not be relevant shipping income;
  • income from transport services provided by a qualifying ship operated by the company in connection with other activities carried out at sea. The type of activities envisaged are diving support, cable laying, construction work in the marine environment. It will be necessary to apportion the profits or losses from the operation of such vessels between that attributable to transport and that attributable to the other activities. In practice, it is envisaged that any method of apportionment which produces a result which is just and reasonable will be acceptable;
  • income from the provision by the company operating the qualifying ship of services such as the operation of cinemas, bars and restaurants, shops, etc, which are ancillary to the transport of cargo and passengers where the goods and services concerned are consumed on board the qualifying ship. Where these activities are not ancillary to the transport of cargo or passengers the provisions of subsection (2) may serve to disqualify the ship from being a qualifying ship and any income arising from these activities would accordingly not be relevant shipping income;
  • income from the contracting out or franchising to specialist operators of the on-board services just described;
  • income from ship related activities which are a necessary and integral part of the business of operating the company’s qualifying ships. By “necessary and integral” is meant activities which are both required for the business of operating the company’s qualifying ships and which enable the company to carry on its business of operating those ships. These activities include —
    • ship management operations such as purchasing fuel and hiring crew,
    • commercial management operations such as booking cargo or passengers,
    • administrative and insurance services related to the transport of people or cargo,
    • transport on another ship if there is a single contract which includes transport on a qualifying ship operated by the company,
    • provision of excursions for passengers on qualifying ships operated by the company,
    • the sale of a holiday under a single contract which includes transport on a qualifying ship operated by the company,
    • embarkation and disembarkation of passengers from a qualifying ship operated by the company,
    • loading and unloading of cargo on a qualifying ship operated by the company, including the moving of containers within a port area immediately before or after the voyage,
    • consolidation or breaking of cargo carried on on a qualifying ship operated by the company immediately before or after the voyage,
    • rental or provision to customers of containers for goods to be carried on a qualifying ship operated by the company.
      It may be necessary for Revenue to look at the facts in relation to a particular company in order to decide in any one case whether or not particular activities are necessary and integral to the company’s core business. It may be necessary for Revenue to specify limits in relation to particular activities. If the limit were to be breached the whole of the income from that activity may fall outside of relevant shipping income.
  • income from the leasing of a qualifying ship where the company retains control over the operation and crewing of the ship;
  • income from ship management services provided in respect of qualifying ships operated by the company. The meaning of “ship management services” in the context of operating a ship is provided for by paragraph 8(6) of Part 2 of Schedule 18B;
  • distributions from overseas companies which are referable to income which if it had arisen to the company would have been relevant shipping income and certain gains arising from foreign exchange transactions are also included.

“relevant shipping profits” covers the company’s relevant shipping income plus so much of the company’s chargeable gains as are to be excluded from taxation by section 697N. The company’s “relevant shipping profits” is the amount which would normally be brought within the charge to corporation tax in respect of the income from the activities sheltered by tonnage tax and the gains on assets used for the purposes of these activities disposed of by the company.

Construction

(2) A ship which is used to provide “goods or services” of a kind normally provided on land is prohibited from being a qualifying ship. This would include businesses such as retailing, restaurants, hotels, radio stations, casinos, financial services. This is not an exhaustive list.

(3) The construction of references to a company or group entering or leaving tonnage tax and to a company or group being subject to tonnage tax is set out.

(4) Schedule 18B is applied for the purposes of Part 24A.

Relevant Date: Finance Act 2021