European Commission Approves Malta Tonnage Tax Rules

The European Commission (‘the Commission’) had opened a formal investigation on the Maltese Tonnage Tax Rules in 2012 to assess the compliance of the regime with European State Aid Rules. The conditional approval of the Maltese tonnage tax regime in December 2017 ended the thorough investigation.

On 7 February 2018, the Commission published recommendations on the regime – the decision was made publicly available and has been welcomed by the Maltese Authorities.

The Commission’s in-depth investigation found certain features of the original scheme to be in breach of the EU’s State Aid Rules, including the application of the tonnage tax regime to certain types of vessels not carrying out “shipping activities” in the same way as tonnage tax ships. Such ships include pleasure yachts, fishing vessels, vessels used for bare-boat chartering and towage and dredging vessels.

The Commission also highlighted that the benefits of the tonnage tax regime were very broadly being extended to revenues derived from activities which are ancillary to genuine maritime activities.

In response to these inconsistencies highlighted by the Commission, Malta has committed to introduce a number of changes to its scheme to prevent any discrimination between shipping companies and to avoid undue competition distortions.

The Maltese Tax Authorities have agreed to limit the application of the tonnage tax regime to genuine shipping operators carrying out genuine shipping activities and to regulate the eligibility of revenue derived from activities ancillary to shipping.

The Commission also pointed out during the investigation that the tax exemption on capital gains arising from the transfer of tonnage tax ships and from the transfer of shares in shipping companies were deemed to constitute State Aid. The tax exemption of interest in relation to the financing of shipping companies or tonnage tax ships, as well as the exemption from duty on documents and transfers was also mentioned by the Commission – their recommendation was to limit or remove these exemptions completely.

The Maltese Tax Authorities have therefore committed to ensure that the exemption from the taxation of capital gains on the transfer of tonnage tax ships is availed of by companies engaged in genuine shipping activities only and to limit the exemption for tax on capital gains on the transfer of shares in shipping companies to shareholders who are not resident in Malta. It was also agreed to remove the exemptions from duty on documents and transfers.

Despite the long period of uncertainty during the Commission’s investigation, the Maltese Flag still experienced a regular growth in terms of tonnage and number of yachts registered. This decision is very positive and will ensure that the Maltese Flag will continue to grow in the coming years.

New rules are expected to come into force in the next few weeks to implement the Maltese Tax Authorities’ commitments to make the tonnage tax regime compatible with EU guidelines.