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Norway's Tax Blog - tax, VAT and legal matters

ESA has approved the Norwegian tonnage tax regime for a new 10 years period

By Hilde Thorstad , 18-Dec-2017 15:00:14

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ESA approved the Norwegian Tonnage Tax Scheme for another 10 years. The approved scheme implies certain amendments, including limitations for bareboat chartering out of vessels and inclusion of windmill farm entrepreneurial vessels to the scheme. An overview of the most significant changes is presented below.

Limitations on chartering out on bareboat terms

The tonnage tax scheme approved by ESA requires that limitations on chartering out vessels on bareboat terms are introduced.

The announced limitations will not apply for intra-group bareboat chartering. Neither will the limitations apply for situations where staffing services to the charterer are supplied by a related company. In this context a related company is a company with at least 25% common ownership/control.

The limitations on bareboat chartering out in the approved scheme are different for vessels in the offshore sector and vessels outside the offshore sector (traditional shipping). These limitations are presented in more detail below.  

The following vessels are considered part of the offshore sector:

  • Support vessels for petroleum activities,
  • Windmill farm vessels,
  • Shuttle tankers operating from petroleum installations,
  • Live fish carriers (well boats),
  • Cable laying vessels,
  • Tugboats for offshore activities beyond petroleum activities, and not used in traditional shipping, and
  • Seismic vessels

Traditional shipping comprises all other maritime vessels, mainly for transportation of passengers and goods between two or more harbours.

Limitations on bareboat chartering out in the offshore sector

The limitations on bareboat chartering out in the offshore sector are in accordance with the limitations earlier announced by the Ministry of Finance:

  • Chartering out on bareboat terms may not exceed 50% of the company’s fleet during an income year, alternatively over a period of four years,
  • Bareboat chartering out must not exceed a contract period of five years, with a possibility to extend the contract by another three years, and
  • The strategic management of vessels chartered out on bareboat terms must be carried out from an EEA state

Limitations on bareboat chartering out outside the offshore sector (traditional shipping)

On bareboat chartering out outside the offshore sector, a distinction must be made between contracts regarded as operational lease and financial lease.

Chartering out on contracts regarded as financial lease will not be permitted under the tonnage tax scheme.

The definition of financial lease is based on accounting standards. In the approval letter from ESA, a number of characteristics for classification as a financial lease are listed. The companies must make a separate assessment based on the elements explicitly stated in the approval, and a final assessment when the legislation is adopted.

Bareboat contracts regarded as operational lease are allowed with the following limitations:

  • Chartering out on bareboat terms may not exceed 40% of the fleet per income year, alternatively over a period of four years,
  • The chartering period may not exceed one half of the vessel’s life-time,and
  • The strategic management of vessels chartered out on bareboat terms must be carried out from an EEA state

For both the offshore sector and traditional shipping, the share of allowed bareboat chartering out is measured on group level, as the ownership of the vessels is often organised through separate companies.

According to ESA’s approval, companies in the offshore sector may, as an alternative, choose to apply the restrictions for bareboat charter outside the offshore sector. The Ministry  of Finance has in its communication regarding the ESA approval indicated that the amended legislation will be drafted so that the limitations as described for traditional shipping will apply as a main rule, i.e. also for vessels within the offshore sector. Vessels within the offshore-sector may, however, choose to apply the alternative limitation rule, as described in relation to the offshore sector above.

Effective date and transitional provisions

The updates will enter into effect from 1 January 2018.

The limitations on bareboat chartering out will not apply to existing contracts which are not regarded as long-term. The assessments of what constitutes a long-term contract are different in and outside the offshore sector. The following contracts will not be covered by the new rules:

In the offshore sector:

  • The remaining contract period of the bareboat charter is five years or less, provided that chartering out on bareboat terms does not exceed 50% of the total fleet

Traditional shipping:

  • The remaining contract period of the bareboat charter is eight years or less, provided that the charter is regarded as an operational bareboat lease, and the chartering out on bareboat terms does not exceed 40% of the total fleet

To avoid any risk of abuse of the system, any changes to existing bareboat contracts made between 15 November 2017 and 31 December 2017 will not be taken into consideration.

A transition period will be implemented for companies subject to the updated rules. This implies that affected companies will have a possibility to adjust to the new regulations for chartering out on bareboat terms within 1 November 2018. Companies are entitled to be taxed under the tonnage tax regime through October 2018. Companies that fail to adjust to the new rules will be taxed under the ordinary corporate taxation rules for  November and December 2018.

Windmill farm entrepreneurial vessels

Vessels engaged in the construction, maintenance, repair and disassembly of windmills at sea are eligible under the scheme as of the income year 2017.

Barges

Non-self-propelled barges are eligible for the Tonnage Tax Scheme insofar as the barges:

  1. qualify as a transport ship under the Norwegian Taxation Act,
  2. are operated in sea-going transport and not mainly in inland waterways or coastal activities,
  3. are operated in connection with a self-propelled vessel,
  4. are at least 1 000 gross tonnes, and
  5. are registered in an EEA country

The effective date will be from 1 January 2018. Transitional rules as described for bareboat charters will apply to the amendment related to 1000 gross tonnes, providing an extension to 1. november 2018 for adoption to the new rule.

Chartering in of vessels on time charter terms

Chartering in of vessels on time charter terms is within the tonnage tax scheme limited to 90% of non EEA-flagged vessels. This implies that a minimum of 10% of the tonnage of the company/company group that is taxed under the tonnage tax scheme must be either owned, chartered in on bareboat terms, and/or registered in an EEA ship register.

The new rules are not applicable for existing time charter contracts. Options to extend existing contracts will be treated in line with existing contracts in this respect.

The effective date for the amendment is 1 January 2018.

Flag-link

The current regulations on flag-link are maintained.

Further legislation process

The approval by ESA implies that the framework for the Norwegian tonnage tax scheme is secured for the next ten year period. However, it remains to change the Taxation Act in accordance with the framework. The Ministry of Finance is currently working on a White Paper  for revision of the tonnage tax rules and the transitional provisions. The White Paper will hopefully be brought before the Norwegian Parliament early 2018.

Link to the final notification approved by ESA can be found [here].

Link to the publication from the Ministry  of Finance can be found [here].

This Blog post is written by Lina K. Smorr and Hilde Thorstad.

 

Areas of interest: Næringsbeskatning

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Hilde Thorstad

Hilde Thorstad

Jeg heter Hilde Thorstad, er partner i Advokatfirmaet PwC, og leder firmaets avdeling for shipping, offshore og oljeservice. Jeg har mer enn 15 års erfaring med skatterådgivning overfor norske og multinasjonale konsern. Mine spesialområder er norsk og internasjonal bedriftsbeskatning, herunder restrukturering over landegrensene, transfer pricing og EU/EØS-skatterett, samt rådgivning til aktører innenfor shipping, offshore og oljeservice.

My name is Hilde Thorstad and I am a partner in PwC Tax & Legal Services. I have more than 15 years of experience with advising Norwegian and multinational groups. I assist clients with general tax advice on Norwegian and international corporate tax law, including cross border restructurings, transfer pricing and EU/EEA tax law, and have a special focus on shipping, offshore and oil service industries.


hilde.thorstad@pwc.com

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