Shipping in Cyprus

Cyprus has one of the largest registered merchant fleets of the World. This achievement has been accomplished due to the many advantages of the flag. Some of them are the following:

1. Is a member of the European Union since 2004.
2. Is a democratic country with a free market economy, in a strategic location at the crossroads of three continents.
3. Provides modern and efficient legal, accounting and banking services based on English practices, and a liberal Foreign Direct Investment regime allowing up to 100% foreign participation in most sectors of the economy.
4. Has double tax treaties with more than 50 countries.
5. Imposes no tax on profits from the operation or management of Cypriot registered vessels or on dividends received from a ship-owning company (applies to tonnage tax qualified vessels).
6. Imposes no capital gains tax on the sale or transfer of a Cypriot registered vessel or the shares of a ship-owning company (applies to tonnage tax qualified vessels).
7. Has a favourable tax regime for ship management.
8. Has low set up and operating costs for companies, excellent telecommunications and easy access by air and sea, and many others.

Eligibility of Ownership

According to article 5 of the Merchant Shipping (Registration of Ships, Sales and Mortgages) Law of 1965 (Law 45/1963) (hereinafter mentioned as “the Law”):

“A ship may not be registered in the Register unless:

1. More than fifty percent of her shares are owned
   1. By Cypriot citizens or;
   2. By Citizens of any other European Union Member State or any other contracting party to the European Economic Area Agreement who in the instance of not being permanent residents of the Republic of Cyprus, will have appointed and maintain, during the whole period of the registration of the ship in the Register of Cyprus Ships, an authorised representative in the Republic in accordance with the relevant provisions of the Law.

2. The total percentage (100%) of her shares are owned by one or more corporations, which have been established and operate:
   1. In accordance with the laws of the Republic and have their registered office in the Republic, or
   2. In accordance with the laws of any Member State and have their registered office, central administration or principal place of business within the European Economic Area and which will, during the whole period of the registration of the ship in the Register, have either:
      • Appointed and maintain an authorised representative in the Republic, in accordance with the relevant provisions of the Law or
      • Ensured that the management of the ship in respect of her safety is entrusted in full, to a Cypriot shipmanagement company or a Community shipmanagement company, having its place of business in the Republic, or
   3. Outside the territory of the Republic and outside the territory of any other Member State, but are controlled by Cypriot citizens or natural persons who are citizens of any other Member State and who will, during the whole period of the registration of the ship in the Register, have either:
      • Appointed and maintain an authorised representative in the Republic, in accordance with the relevant provisions of the Law, or
      • Ensured that the management of the ship in respect of her safety is entrusted in full, to a Cypriot shipmanagement company or a Community shipmanagement company, having its place of business in the Republic.”

Types of Registration

According to Article 23 of the Law, a ship can be registered to the Cyprus Registry “provisionally” first, provided that at the time of her registration she is out of the territorial waters of the Republic. Otherwise, when the ship is in the territorial waters of the Republic, there is no option other than to “permanently” register the ship directly.

The benefits of the “provisional” registration of the ship compared to the direct “permanent” registration relate to the documentation that needs to be submitted, and therefore the actions needed to be taken, in the course of each type of registration.

Provisional Registration

The provisional registration allows the owners of the subject ship to settle any administrative formalities with the vessel’s previous flag, to collect and submit all the relevant and applicable documentation to the Registrar and complete all the necessary surveys of the ship.

The duration of the provisional registration lasts for six months from the date of the issuance of the Provisional Certificate of Registry with the option, on the Registrar’s discretion, to be extended for three months and for an additional three month period if dictated by special circumstances.

It goes without saying that the provisional registration is as valid as the permanent registration and therefore the vessel enjoys immediately all the benefits the Cyprus flag has to offer.

Permanent Registration

In cases where the Vessel is initially registered provisionally, her Permanent Registration has to be completed before the expiration of the provisional registration, i.e. within 6 months from the date of her registration.

The physical presence of the ship in Cyprus is not obligatory. All the necessary inspections can take place at any port around the globe. However, all the related documentation has to be submitted either directly to the Department of Merchant Shipping or to any consulate of the Republic abroad.

It has to be noted that the term “permanent” has its literal meaning. In other words, the registration of a Cyprus ship can only be ceased if the vessel is deleted after the submission of the relevant application from her owners or in cases where the competent Authority decides her deletion in accordance with the provisions of the relevant Law.

Parallel Registration

Part VA of the Law allows the parallel registration of vessels in the Registry of Cyprus Ships. By parallel registration, a foreign vessel can be registered, for a certain period of time, under the Cyprus flag while at the same time she will continue to be registered, in parallel, in the foreign registry and vice versa.

Parallel-in Registration

“Parallel-in” registration is used for cases of bareboat chartering where a bareboat charterer of a foreign ship wishes to register the ship in parallel under the Cyprus flag.

The relevant application has to be made by a person (legal or physical) who is eligible, under the Law, to own a Cypriot ship. Moreover, the laws and regulations of the country of the foreign registry must allow the parallel registration of ships registered in its registry and maintain its consent for all the period of the parallel registration.

The application will be examined once all the required documents are submitted, and if it is approved, the parallel-in registration will be effected. Immediately after, the subject ship will be registered in the Special Book of Parallel Registration, kept by the Registrar of Cyprus Ships, and the special Certificate of Cyprus Registry will be issued.

During the whole period of her parallel registration, the Vessel has to fly the Cyprus flag only and she will be subject to Cyprus Laws and Regulations. Additionally, she must be marked with her name and the Cyprus port of registry.

Parallel-out Registration

In contrast, “Parallel-out” registration is used when a bareboat charterer wishes to register in parallel a vessel, which is already registered permanently under the Cyprus flag, to a foreign Registry. Exceptionally, the Minister may approve the parallel-out registration of a vessel which is provisionally registered under the Cyprus flag at the time of filling the application. This form of registration allows the financing of a ship and her mortgaging under the Cyprus Laws and later her parallel registration in a foreign registry.

Moreover, the subject foreign registry must allow the parallel-in registration from a foreign registry and the vessel has to be chartered to a foreign person (physical or legal).

The relevant application has to be made by the owner of the Vessel who must submit all documents required to support the application.

According to the Law, the parallel-out registration stays in force as long as the subject bareboat charter party is valid and neither the Cypriot authorities nor the authorities of the foreign flag withdraw their corresponding consents. In any case, the parallel-out registration must be for a period no more than three years.

Finally, the subject vessel has to fly the flag of the foreign registry and the name of the foreign port of registry has to be marked on her stern. However, any matters relating to the ownership of the vessel or to any mortgages created against her are exclusively governed by the Cypriot legislation and handled by the Registrar of Cyprus Ships.

Conditions for Registration

Cypriot nationality is automatically acquired if a ship is successfully registered in the Cyprus Register.

Subject to the Minister’s statutory powers to revoke the Cypriot nationality from a registered vessel at any time after her registration, a ship is not eligible to be registered in the Cyprus Register if she:

• has an overall length less than thirteen meters and is employed solely in navigation on the coast of the Republic or of the Sovereign Case Areas. In that case, the subject vessel may be registered in the Small Ship Registry;
• does not have a whole or fixed deck and is employed solely in fishing, lightering or trading coastwise on the shore of the Republic or of the Sovereign Base Areas or within such a radius therefrom as may be prescribed;
• does not comply with the Government Policy which has been issued in accordance with sections 14A and 14B of the Law, as amended from time to time.

Government Policy on the Registration of Ships under the Cyprus flag

The Government Policy for the registration of ships, which has been issued by virtue of Articles 14A and 14B of the Law, adds some additional requirements or conditions which are deemed necessary for the achievement of a safe, secure and efficient shipping on clean waters and for safeguarding the interests of the Cyprus ships and of their owners, bareboat charters, managers and operators.

The Registrar of Cyprus Ships does not consider applications for registering ships either in the Register of Cyprus Ships or in the Special Book of Parallel Registration which:

1. At the time of the application for their registration, are banned on port State control grounds by a State member of any one of the Memoranda of Understanding on port State control, from entering the ports of the States party to that memorandum or which have been banned by a State from entering its ports;
2. Have been detained on port State control grounds on three or more occasions during the two years period prior to the date of application for registration by States of the Paris or the Tokyo or the Mediterranean Memoranda of Understanding on port State control or by the United States Coast Guard;
3. Have been constructed for exclusive use on inland navigation or to be used exclusively on inland navigation (e.g. in internal waters, rivers, inland waterways, canals, natural or artificial lakes, water reservoirs or dams); and

4. At the time of filing the application for their registration, satisfy the conditions related to their age.

Age Related Conditions

It should be noted that “Age” means the age of the ship which is calculated by deducting the year within which the keel of the ship was laid from the year in which the application for its registration was filed with the Registrar of Cyprus Ships.

In case a ship has undergone major conversion or reconstruction, the year in which the major conversion or reconstruction begun may be taken into account (in lieu of the year in which its keel was laid) for the calculation of the age of the ship, provided the ship, at the end of the major conversion or reconstruction, complied with all the requirements of the applicable international treaties to which Cyprus is a State Party, as if it was a new ship whose keel was laid in the year in which the major conversion or reconstruction begun. In such a case the application for the registration of the ship should be accompanied by documentation from the recognized organization which is surveying and certifying the ship on behalf of its flag State or from its flag State attesting so.

Annual Tonnage Tax

In 2010 Cyprus introduced by virtue of the Merchant Shipping (Fees and Taxing Provisions) Law of 2010 (Law 44(I)/2010), a new Tonnage Tax System (hereinafter mentioned as “the TTS”), by which every qualifying owner of a Cyprus or foreign ship, charterer and/or ship manager may be subject to an annual tax referred to as tonnage tax and calculated based on the net tonnage of the qualifying ship that he owns, charters or manages. Ship managers, however, are required to pay only the 25% of the amount applicable to ship-owners or charters who own or charter a qualified ship with the same net tonnage.

Beneficiaries

Owners of Cyprus Ships

Any owner of a Cyprus Ship falls automatically within the scope of the TTS if:

1. Owns a “Qualifying Ship” (defined further below), which is;
2. Engaged in a “Qualifying Shipping Activity” (also defined further below).

Owners of Foreign Ships

Eligible for the TTS is an owner of a foreign ship, who:

1. Is a tax resident of the Republic of Cyprus;
2. Has opted to be taxed under the TTS;
3. Owns a “Qualifying Ship”; and
4. The ship is engaged in a “Qualifying Activity”.

Moreover, the owner of foreign ships must also comply with the following:

1. Satisfy the “Community – Flagged Share” Requirement, which means that the ship-owner has to have a share of his fleet, registered under one or more EU flag(s). This share has to remain invariant for a period of three years following the exercise of the option to be taxed under the TTS.
2. In case the Community ships are less than sixty per cent of the fleet in terms of tonnage, the commercial and strategic management of the fleet must be carried out from the territory of the European Union/EEA.

Charterers

A Charterer is eligible for the TTS if he charters ship(s) under bareboat, demise, time or voyage charter and:

1. Is a tax resident of the Republic of Cyprus.
2. Has opted to be taxed under the TTS.
3. The chartered ship is a qualifying ship; and
4. The ship is engaged in a qualifying shipping activity.

Moreover, the Charterer must comply with the following requirements:

1. Minimal Share of the Fleet in Ownership 75% of chartered-in ships or 90% if the sips chartered are EU/EEA ships or their crew and technical management are carried out from the EU/EEA;
2. “Community – Flagged Share” Requirement, (as above).

Ship Managers

A Ship Manager is eligible for the TTS if he:

1. Is a tax resident of the Republic of Cyprus.
2. Has opted to be taxed under the TTS.
3. Provides ship management services (crew and/or technical) to qualifying ships and meets at any time the following requirements:
   1. Maintain a fully fledged office in Cyprus;
   2. Employ a sufficient in number and qualified personnel;
   3. At least 51% of the total number of that personnel must be EU/EEA citizens;
   4. “Community – Flagged Share” Requirement, (as above);
   5. Economic link of managed ships with the Community – “The 2/3 Rule” which provides that at least 2/3 of the management activities are entirely carried out from the territory of the EU/EEA;
   6. Provision of crew management services in accordance with the MLC 2006 requirements for crew managers (Notification P.I. 511/2010)
   7. Certified under the ISM Code (DOC) by the competent authority of the flag States of the Ships under its technical management.

Calculating the Tonnage Tax

The owner of a ship which cannot be considered as a qualifying ship and/or does not carry a qualifying shipping activity, is excluded from the provisions of Tonnage Tax System and is required to pay income tax under the provisions of the Income Tax Laws.

Contrary, the owner of a qualifying ship engaged in a qualifying shipping activity is obliged to pay an annual tax calculated in the ship’s net tonnage as follows:

Definitions

Qualifying ship

Any seagoing vessel certified under applicable international or national rules and registered in the ship register of any member of the International Labour Organisation, which is recognised by Cyprus.

The TTS excludes certain types of vessels, such as:

• Fishing Vessel.
• Ships used primarily for sports or recreation.
• River vessels.
• Non-self-propelled floating cranes.
• Non-ocean going tug boats.
• Floating Hotels, Restaurants, Casinos and others.

Qualifying activity

A qualifying activity is considered as any commercial maritime activity, including transport, crew management and/or technical management.

By “maritime transport” is meant, the traditional carriage of goods and passengers, as well as ancillary services such as hotel, catering, entertainment and retailing activities on board a qualifying vessel, the loading and unloading of cargo, the operation of ticketing facilities and passenger terminals. Towage, dredging and cable lying are also eligible for tonnage tax.

In conclusion, Cyprus offers a very attractive package of economic advantages and a wide range of professional services and therefore is classified among the best shipping countries in the world.

Antonis Karitzis

Advocate — Legal Consultant

Managing Director

A. Karitzis & Associates L.L.C.