Focus on: Shipping in Cyprus

Montanios & Montanios LLC

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Introduction

Cyprus, a full member of the European Union, has been in the forefront of international shipping for over 6 decades and today it:

  • has the 3rd largest merchant fleet in Europe and the 11th largest globally, and
  • is the largest third-party ship management centre in Europe and amongst the top three worldwide.

The Cyprus flag is a high-quality sovereign flag, which is included in the “White List” of both the Paris and Tokyo MoUs.

Cyprus is an international maritime centre with a constantly growing shipping cluster, hosting more than 200 shipping related companies, including ship owners, charterers, managers and numerous related shipping services, employing more than 5,000 people on shore and 55,000 seafarers aboard Cyprus flag ships.

The Cypriot government has recently established the Shipping Deputy Ministry, to expand the functions and capacity of the ex-Department of Merchant Shipping. Its establishment has been a great success and signalled the government’s dedication to the shipping cluster which accounts to 7% of the country’s GDP. The Deputy Ministry has further enhanced its already excellent level of offered services and now offers a 24/7 service from dedicated maritime specialists in 7 maritime offices around the Globe.

Legal framework

Cyprus is a business-friendly common law jurisdiction.

The registration of ships under Cyprus flag is governed by the Merchant Shipping (Registration of Ships Sales and Mortgages) Law of 1963, as amended, which was based on the similarly named English law.

Matters relating to seamen onboard Cyprus flag vessels are governed by the Merchant Shipping (Master and Seamen) Law of 1963, as amended, and all matters relating to working conditions by the Maritime Labour Convention 2006 (Ratification) and for Matters Connected Therewith Law of 2012, as amended.

The last major merchant shipping statute is the Merchant Shipping (Fees and Taxing Provisions) Law of 2010, as amended, which deals with all financial matters including the Cyprus tonnage tax system (explained below), which was recently approved by the European Union.

Finally, EU Regulations relating to shipping apply to Cypriot flag vessels and Cyprus has adopted most international shipping conventions.

Registration under Cyprus flag

Pursuant to the Merchant Shipping Law there are two types of ship registrations in Cyprus:

  • ownership registration (provisional and permanent), and
  • bareboat charter (parallel) registration,

and such registrations are effected by the Registrar of Cyprus Ships at the Deputy Ministry of Shipping.

It is also possible when a vessel is not in a Cyprus port at the time of her registration, for provisional (ownership) registration to be effected through a Cyprus Maritime or Consular office abroad (by specific authority of the Registrar of Ships). However, permanent registration and parallel registration can only take place in Cyprus.

A ship may be registered with the Registrar of Cyprus Ships if (a) more than 50% of the shares in the ship are owned by a Cypriot citizen or a citizen of any other EU/ EEA state, or if (b) all 100% of the shares of the ship are owned by a Cyprus or an EU/EEA company or a third Country Company controlled by Cypriot or EU citizens (on certain special conditions).

Furthermore, a vessel may be registered in parallel under Cyprus Flag provided that she is bareboat chartered by a person or entity qualified to own a Cyprus Flag vessel, as per the abovementioned requirements.

Most types of vessels up to 15 years of age are registrable under Cyprus flag but certain restrictions, conditions or additional requirements may be imposed for certain types of older vessels.

Related details are contained in the Government Policy on the Registration of Ships, available in the website of the Deputy Ministry.

No fees are charged by the Registrar for the registration of a vessel under Cyprus Flag. Upon registration, the Registrar may however request for the pre-payment of any applicable tonnage tax, annual maintenance fees and radio license fees.

Tonnage tax system

The Cyprus Tonnage Tax System (TTS) was approved by the European Commission (firstly in 2010 for an initial 10-year period and in 2019 for an additional 10-years period) as compatible with the requirements of the EU acquis and in line with the Guidelines on State aid to maritime transport.

According to the Scheme, it is possible for (a) qualifying owners of Cyprus and foreign ships, (b) charterers, and (c) ship managers, who are approved, to be taxed under the TTS and to therefore be subject to an annual tax referred to as tonnage tax, in lieu of taxation under income or corporate tax. This is calculated on the basis of the net tonnage of the qualifying ships which such persons (physical or legal) own, charter or manage, and be exempted from payment of income tax on their profits.

The following physical or legal persons are eligible for the Cyprus TTS:

(a) An owner of a Cyprus ship who owns a qualifying ship which is engaged in a qualifying shipping activity (and who automatically falls within the TTS scope).

(b) An owner of a foreign ship who owns a qualifying ship which is engaged in a qualifying shipping activity and who:

  • is a tax resident of Cyprus,
  • has opted to be taxed under the TTS, and
  • complies with the “Community–Flagged Share” requirement.

(c) A charterer who charters a qualifying ship engaged in a qualifying shipping activity under bareboat, demise, time, or voyage charter and who:

  • is a tax resident of Cyprus,
  • has opted to be taxed under the TTS, and
  • complies with the “Minimal Share of the Fleet in Ownership – % of Chartered in ship” and the “Community–Flagged Share” requirements.

(d) A ship manager who provides ship management services (crew and/or technical) to a qualifying ship and:

  • is a tax resident of Cyprus,
  • has opted to be taxed under the TTS,
  • maintains a fully-fledged office in Cyprus employing a sufficient (in number and qualifications) personnel, at least 51% of which are EU/EEA citizens, and
  • Complies/satisfies the “Community-Flagged Share” requirement as well as a number of additional requirements.

Vessel Mortgaging

A Cyprus flag vessel may be mortgaged as security for a loan or a guarantee or the obligations of a third party.

The instrument creating such mortgage must take one of two statutory forms, that of securing “Principal Sum with Interest” or an “Account Current”, the latter of which is used in the vast majority of cases.

There must be attached to such mortgage instrument a collateral deed of covenants dealing with all matters relating to the mortgage. The mortgage instrument is signed by the shipowner/mortgagor and the deed of covenants by both the mortgagor and the mortgagee.

A mortgage must be filed for registration in the Ship Register (either directly at the Deputy Ministry or through a Cyprus maritime or consular office abroad – on the instructions of the Deputy Ministry) and its priority is determined according to the date and time of such registration.

Recent developments

The Shipping Deputy Ministry recently announced a new range of green incentives with the aim of rewarding vessels demonstrating effective emissions reductions.

By introducing a host of incentives, they encourage and simultaneously reward shipowners who opt for lower emissions or use alternative drives.

From the fiscal year 2021, annual tonnage tax will be reduced by up to 30% for each vessel that successfully demonstrates proactive measures to reduce its environmental impact, ensuring shipowners are rewarded for sustainable shipping efforts.

Furthermore, the Deputy Ministry is currently undergoing a widescale digitalisation project which is expected to increase both its efficiency and the range of services available through its online portals.

Finally, the Deputy Ministry acted swiftly to adapt to the difficulties arising from the Covid-19 pandemic and has issued several circulars taking proactive steps to alleviate many negative aspects of the ongoing crisis. An important development on this front, has been a newly implemented procedure of conducting crew change in Cypriot ports or marinas.