The five-year-long investigation into Malta’s tonnage tax system by the European Commission has finally come to a positive conclusion with the release of its Decision of the 19^th December 2017 in which the EU considered the scheme as largely compatible with the internal market. It has, however,  subjected Malta to commit to certain changes which Malta has, in turn, pledged to provide.

The purpose of the investigation was primarily to ensure that no seepage of the benefits granted by the favourable tonnage tax scheme found its way into unrelated sectors.  The EU needed to ascertain that a level playing field was being kept by all of its Member States, including Malta.

The Maltese tonnage tax scheme provides for the payment of fixed tonnage dues on an annual basis which are calculated according to the net tonnage and age of a vessel.  The payment of the said tonnage tax and the applicable registration fees exempt a licensed shipping organisation from income tax which would otherwise be payable on income arising from shipping activities.  All other income which is not derived from shipping activities is subject to the normal tax rate applicable in terms of the Malta Income Tax Act.

The in-depth examination carried out by the EU into Malta’s Tax and Maritime laws,  particularly the scrutiny into the manner in which such laws were being implemented, revealed that whilst, prima facie, certain elements of Maltese law provided for a wider scope of interpretation of the rules than those strictly afforded by the EU guidelines, in practice the EU found that very few aspects of the scheme were in fact incompatible.  This is evidenced by the fact that in its decision, the EU ruled against recoverability on most of the elements that fell under its scrutiny.  It limited recovery of i) any State aid disbursed in relation to the exemption from taxation of capital gains from the sale of shares in shipping companies applied to Maltese residents; and ii) on duty on documents and transfers for the transfer of shares in shipping organisations for Maltese residents and this to the extent it exceeds the de minimis threshold!

The Commission thus proceeded to endorse Malta’s tonnage tax scheme on the understanding that Malta committed itself to introduce a number of amendments to its laws so as to ensure clarity of the parameters of its scheme, thereby preventing any discrimination or undue competition distortions.

In its Decision, the European Commission ruled that unrestricted State aid was to be eliminated and that Malta commits to limit its scheme to core activities relating to Maritime Transport.  The following include a number of changes which Malta has committed to introduce into its laws so as to ensure that its tonnage tax scheme is fully compatible:

• The elimination of certain vessels from applicability of the scheme such as vessels not strictly involved in the carriage of goods or passengers by sea eg. oil rigs, fishing vessels, pleasure yachts;
• A limitation on towage and dredgers is to be introduced;
• A restriction on vessels being bareboat chartered out by owners is to be introduced;
• A 50% cap is to be introduced to ancillary activities emanating from passenger vessels;
• The exemption from taxation on capital gains from the sale of shares in a Maltese shipping company applying to Maltese residents is to be removed;
• The exemption from duty on documents and transfers for the transfer of shares in a Maltese shipping company applying to Maltese residents is also to be removed;
• The exemption from taxation on capital gains on the interest income from financial institutions is to be removed;
• The Ministerial discretionary power to exempt the payment of fees is to be removed;

This decision, which has been welcomed by the Maltese maritime industry, has reaffirmed Malta’s dominant position as market leader in the Maritime field as the largest maritime flag in Europe and the sixth largest in the world.