Maltese tonnage tax regime receives formal approval

March 21, 2018

Malta's maritime industry is undeniably one of the island's economic pillars, with the shipping register being the sixth largest in the world and the largest in Europe.

While the success of the Maltese flag can be attributed to a number of non-fiscal factors (Malta's membership of the Paris Memorandum of Understanding; the possibility of registering oil-rigs, floating docks, pontoons and barges under the Maltese flag; and an efficient regulator, to name but a few), Malta's tonnage tax regime, whereby shipping companies can elect to pay a fixed registration tax based on the tonnage they operate as opposed to being taxed on the profits actually derived, undoubtedly plays a crucial role in making Malta's flag one of the world's most recognisable.

The European Commission's recent conditional approval of Malta's tonnage regime for a period of 10 years was therefore greatly welcomed by the industry and formally brings to an end an investigation that commenced in 2012, when the European Commission opened an in-depth analysis of the Maltese tonnage tax scheme to examine its compatibility with EU state aid rules. This decision has given operators and practitioners alike much needed legal certainty and should have a bearing on attracting investment in this area.

The Commission has confirmed that the operation of the Maltese tonnage tax regime is aligned with the functioning of the internal market, the EU maritime guidelines as well as EU state aid rules, as the tax relief granted is an appropriate instrument to address global competition and will provide the right incentives to maintain maritime jobs within the EU, while preserving competition within the EU single market.

In response, the Maltese authorities have pledged continued support to restricting the application of the Maltese tonnage tax regime to shipping operators that are carrying out shipping activities and have agreed to introduce certain legislative changes so as to ensure the continued compatibility of the Maltese tonnage tax regime with the operations of the internal market and the EU maritime guidelines. Such changes are expected to be implemented in 2018.

Although as a result of the proposed changes, certain shipping organisations may face challenges when electing to fall within the scope of the tonnage tax regime, such vessels may still be eligible to the fiscal benefits offered by alternative legislative frameworks, such as securitisation and the recently introduced notional interest deduction rules.