Tax updates for the shipping sector amid greener supply chain regulations Tax updates for the shipping sector amid greener supply chain regulations Tax updates for the shipping sector amid greener supply chain regulations

Following our most recent newsletter which put a spotlight on the shipping sector, here’s a round-up of the latest national and international developments.

Account 115

In a final judgment released on 31 March 2022, the Luxembourg Supreme Court (Cour administrative) denied the qualification of contribution in account 115 for the purposes of the application of the Luxembourg parent-subsidiary regime (i.e. not considering account 115 contribution as a component of the purchase price of the participation).

This may impact Luxembourg shipping companies with more than one shareholder, in particular minority shareholders with less than 10% in the share capital which rely on  account 115 for acquisition price purposes.

Read this tax alert for more information on recent Court decisions in Luxembourg.

New double tax treaty with the UK

On 7 June 2022, a new double tax treaty (DTT) was signed between Luxembourg and the United Kingdom, but has not entered into force yet.

This new DTT notably contains a revised definition of Permanent Establishment (in line with OECD model conventions) which may impact shipping companies.

ATAD 3

The proposed ATAD 3 (Anti-Tax Avoidance Directive 3) or “Unshell Directive” aimed at combatting the misuse of shell entities for tax purposes is expected by 30 June 2023. Based on recent discussions at EU level, it might be postponed as it is still not clear if the current anticipated implementation date of 1 January 2024 will be met.

Companies failing to meet all substance indicators would be deemed shell entities. The tax consequences for shell entities would be the denial of benefits from double tax treaties, or the parent-subsidiary Directive and the interest/royalties Directive.

Pillar 2

Following the recent developments surrounding Pillar 2 and the maritime sector, the OECD has now published its technical commentary. Although an exemption has been included for international seagoing vessels, it is far from certain that the maritime sector will not be affected once the rules take effect. The rules will, without a doubt, result in a heavier administrative burden, not to mention the fact that the substance requirements are out of step with what is customary under, for example, tonnage regimes, while offshore vessels and dredgers do not actually fall under the exemption, etc.

Fit for 55

The EU ambition for the emission trading system (ETS) is to include 100% of emissions from ocean transport routes within Europe from 2024; extra-EU routes would be covered 100% from 2027 onwards under the proposals. Overall, free allowances would be phased out from 2026 and gone by 2030, five years earlier than proposed previously.

On 14 July 2021, the European Commission published its plans for the “Fit for 55” package to reduce greenhouse gas emissions in all sectors, including shipping, by 55% by 2030 compared to 1990. The ambitions of the Fit for 55 package for the maritime sector require rapid greening and enable shipowners to invest in clean ships. Part of the proposed legislation is to amend the EU’s ETS to include shipping emissions.

Various adjustments have been proposed and resulted in a draft report. The draft report (PDF, 0.5MB) includes several ambitious amendments to emissions trading for the maritime sector.

During the 6 – 9 June 2022 EU Parliamentary plenary session, a heated disagreement on the proposed revised ETS report resulted in a 53% majority vote rejection of the report.

Next steps

Although the EU Parliament has adopted the amended proposed reports on 22 June 2022, the texts are not final EU legislation, and may be subject to further amendments based on the outcome of the trialogue between Parliament, the Council and the Commission.

The Greek tax administration released Circular E.2018/2022 which provides detailed guidance regarding controlled foreign corporations (CFCs). The guidance specifically addressing the CFC provisions do not apply for companies with substantial economic activity and shipping companies. Read this March 2022 report (PDF, 1MB) by the KPMG member firm in Greece.

On 4 May 2022, the dispatch on the act governing the tonnage tax was adopted by the Swiss Federal Council. These rules provide for the taxation of profits from the operation of qualifying vessels at a flat rate based on the net tonnage. Here’s a bit of background from our Swiss colleagues.

Following the targets set by the International Maritime Organization, the Maritime & Port Authority of Singapore has set out three tiers of discount on tonnage tax and registration fees dependent on the level of emission reduction of the ship at hand. The reductions differ from 100% (for zero-carbon fuel vessels) to 20%.

Juanita Brockdorff and Stephan Piazza at KPMG in Malta delivered a webinar (organized by Mondaq) on Maltese and Global Shipping Perspectives.

The Belgium government has submitted a bill to the parliament on various tax measures. Among others, payments to tax havens by companies benefitting from the Belgium tonnage tax regime will be included in the taxable base if they are not based on real and genuine economic activities!

The bill and the accompanying explanatory memorandum (PDF, 0.7MB), published on 2 June 2022, are available on the parliament’s website (in Dutch and French).

The Italian tax authorities provided a clarification on the application of the VAT zero rate, available here (in Italian only), on transactions made to intermediaries instead of, for example, a shipowner (in relation to bunkering of the vessel for instance).

Details of the Italy – Jamaica Income Tax Treaty, which generally applies from 1 January 2022, have become available. Interesting for the shipping and offshore industry is that the term “permanent establishment” in art. 5 of the treaty explicitly includes a drilling rig or ship, but only if such activity continues within that state for a period or periods aggregating more than six months, in any  12-month period.

The Supreme Court confirmed the decision of the Gujarat High Court which held that no tax is payable under IGST Act, 2017 by the Indian importer on reverse charge on ocean freight paid by foreign seller to a foreign shipping line.

The case is: Union of India v. Mohit Minerals Pvt. Ltd. Read a May 2022 report  (PDF, 0.5MB) by the KPMG member firm in India.

Recently, amendments have been proposed to the so-called “offshore law”. The proposed rules regulate the framework for offshore and deep onshore investments.

See here for more info in Romanian language.

Intended to bring the Danish VAT rules in line with the CJEU case law. The new rules mean that the VAT exemption will only be available to a company (shipping, carriers, and other companies) that directly invoices the sender or recipient of goods for export outside the EU. Here you can find more detailed information

US Senate Finance Committee members introduced legislation (PDF, 0.5MB) disallowing foreign tax credits and other tax benefits for companies operating in Russia. Among others, it is proposed that, for identified persons, the exemption from tax for shipping income (section 883) is not available.

On 12 May 2022 the new policy statement on insurance premium tax was published. This policy statement contains several amendments, of which the following two points regarding the transport exemption are worth noting: owner-operated transport and temporary storage.

The new policy statement on insurance premium tax applies as of 13 May 2022, but the amendments regarding the transport exemption will not take effect until 1 May 2023.

The tonnage regime contains several exceptions to the flag requirement. One of these exceptions is the national exception to the flag requirement. The national exception is reviewed each year by ministerial regulation to see whether it should apply. By ministerial regulation it has been decided that the national exception will not apply in 2022 (in contrast to 2021 when it did apply).

At the end of 2019 and early 2020, the Ministry of Finance as well as the Dutch Ministry of Infrastructure and Water Management jointly evaluated the Dutch tonnage tax regime. It has recently been announced that the evaluation report, which is typically the “end-product” of such an evaluation, will be shared with the parliament.

This blog post is adapted from a newsletter by Dutch colleague and tax lawyer Ernst-Jan Bioch.

Henri Prijot, Tax Partner, Commerce & Industry at KPMG Luxembourg also serves as a Board Member of the Luxembourg Maritime Cluster.