registry system, the registry is a virtual extension of the primary ship registry but is
afforded, among other things, the tonnage tax regime which is different from the
normal corporate taxation regime of the primary registry. The secondary registry
may be physically located in the same place as the primary registry which is the case
with Norway, Denmark and Germany
12 ; or it may be located in an offshore territory
of the state of primary registry such as in the UK, France and Spain.
13
The tonnage tax phenomenon is the common denominator for the abovementioned non-traditional registries. It is an alternative fiscal regime for shipping.
Under this system no income tax, is charged; instead, a flat rate tax is charged based
on the tonnage of each ship. In other words, the tax imposed is not income-based but
rather tonnage-based; hence the term “tonnage tax”. In Northern Europe, the term
“tonnage tax” is shorthand for a tonnage-based corporate tax. This contrasts with a
traditional corporation tax regime under which a company’s tax liability is based on
the commercial profits that it has made in a year. The tonnage tax system ignores
actual profits and instead computes a notional profit on the basis of number and size
of ships operated by a company, and taxes this profit at the normal corporation tax
rate. The tonnage tax is set on that notional profit, and hence, tax liability is minimal,
while being compatible with international tax treaty obligations. While the general
principles involved are fairly uniform, the practices of individual states are different
mainly because of a lack of harmonization of fiscal policies. Countries in Europe
operate tonnage tax schemes according to their national policies and what is perceived to be in their best interests.
14
2.2 Important Elements of Tonnage Tax
The tonnage tax concept was launched in Europe with the object of rejuvenating the
industry which was in a state of decline mainly due to the fiscal facilities being
offered by certain jurisdictions aspiring to establish themselves as flag states. It is, of
course, undeniable that international trade and shipping are inextricably linked. The
European countries have, for many centuries dominated global trade, and have been
major ship-owning countries largely by virtue of their colonial history. Europe is still
a major player in the world scene as a trading bloc. There are numerous land-based
industries that rely heavily on shipping. Furthermore, seafaring has traditionally
been an occupation ingrained into the European socio-economic culture and has
been a significant source of employment for European citizens. However, seafaring
as a profession was beginning to show signs of decline as European ships moved
12 See the Norwegian International Ship Registry (NIS), the Danish International Register of Ship
(DIS), the German International shipping Register (ISR).
13 Such as Bermuda and Cayman Islands in respect of the UK, Kerguelen Islands in respect of
France and Canary Islands in respect of Spain.
14 Smith and Middledich (2003/2004).
The United Kingdom Tonnage Tax Regime: Compatibility with Relevant. . .
717
afforded, among other things, the tonnage tax regime which is different from the
normal corporate taxation regime of the primary registry. The secondary registry
may be physically located in the same place as the primary registry which is the case
with Norway, Denmark and Germany
12 ; or it may be located in an offshore territory
of the state of primary registry such as in the UK, France and Spain.
13
The tonnage tax phenomenon is the common denominator for the abovementioned non-traditional registries. It is an alternative fiscal regime for shipping.
Under this system no income tax, is charged; instead, a flat rate tax is charged based
on the tonnage of each ship. In other words, the tax imposed is not income-based but
rather tonnage-based; hence the term “tonnage tax”. In Northern Europe, the term
“tonnage tax” is shorthand for a tonnage-based corporate tax. This contrasts with a
traditional corporation tax regime under which a company’s tax liability is based on
the commercial profits that it has made in a year. The tonnage tax system ignores
actual profits and instead computes a notional profit on the basis of number and size
of ships operated by a company, and taxes this profit at the normal corporation tax
rate. The tonnage tax is set on that notional profit, and hence, tax liability is minimal,
while being compatible with international tax treaty obligations. While the general
principles involved are fairly uniform, the practices of individual states are different
mainly because of a lack of harmonization of fiscal policies. Countries in Europe
operate tonnage tax schemes according to their national policies and what is perceived to be in their best interests.
14
2.2 Important Elements of Tonnage Tax
The tonnage tax concept was launched in Europe with the object of rejuvenating the
industry which was in a state of decline mainly due to the fiscal facilities being
offered by certain jurisdictions aspiring to establish themselves as flag states. It is, of
course, undeniable that international trade and shipping are inextricably linked. The
European countries have, for many centuries dominated global trade, and have been
major ship-owning countries largely by virtue of their colonial history. Europe is still
a major player in the world scene as a trading bloc. There are numerous land-based
industries that rely heavily on shipping. Furthermore, seafaring has traditionally
been an occupation ingrained into the European socio-economic culture and has
been a significant source of employment for European citizens. However, seafaring
as a profession was beginning to show signs of decline as European ships moved
12 See the Norwegian International Ship Registry (NIS), the Danish International Register of Ship
(DIS), the German International shipping Register (ISR).
13 Such as Bermuda and Cayman Islands in respect of the UK, Kerguelen Islands in respect of
France and Canary Islands in respect of Spain.
14 Smith and Middledich (2003/2004).
The United Kingdom Tonnage Tax Regime: Compatibility with Relevant. . .
717