Legal Alert – Finnish Tonnage Tax Reform Enacted
The bill amending Finnish tonnage tax legislation has been passed by the Finnish parliament and the new regime has entered into force as of 1 March 2012. The amended legislation aims to promote the in-ternational competitiveness of the Finnish shipping industry and the employment of the branch in question. The new tonnage tax regime offers tax incentives for Finnish shipowners and encourages ship-owners to new investments and to bringing ships under the Finnish flag.
The enacted legislation includes significant amendments in relation to calculation of taxable tonnage income, dividend distribution provisions under the tonnage taxation, flag requirements, increased flexibility of shipowners activities and alleviated tax debt provisions.
The new tonnage tax regime is based on a calculation of imputed in-come subject to tonnage tax instead of the current system where the amount of tax payable is calculated on the basis of the total tonnage of the fleet. The tonnage tax is based on imputed income which is calculated gradually on the basis of net tonnage of the ship.
Example: For a ship, which net tonnage is 20.000 tons, a daily deemed taxable income is EUR 122. The yearly taxable imputed income will then be EUR 44.530 subject to the 24.5% corporate income tax rate. The total ton-nage tax payable for that ship would amount to EUR 10,909,85 per year irrespective of its actual profits.
Dividends distributed by a company under tonnage taxation are taxed according to same provisions than any other dividend received by shareholders. Taking into consideration the current Finnish dividend tax provisions this leads to situations where income covered by ton-nage taxation can be distributed to a parent company tax-exempt.
The new legislation includes a widening of the definition of activities covered by tonnage taxation. All those activities are free of general corporate income tax. According to the new act the definition will also cover services that are closely related to sea transport such as harbour, delivery and terminal services. However, tax-free shopping is not part of activities under tonnage taxation.
In order to increase the flexibility of shipowners activities, the flag requirements of the tonnage tax regime has been eased. Only 60% of gross tonnage of a shipowner is required to be registered under the flag of an EU member state. In addition, 25% of the gross ton-nage owned and chartered shall be registered under the Finnish flag. Also, under new provisions it is required that 20% of the gross ton-nage of a shipowner is owned by the shipowner.
The group treatment of tonnage taxation has also been relieved. Ac-cording to the new regime, the group companies that carry on pas-senger ship activities or freighter activities can choose to apply for tonnage taxation independently of other activities.
The deduction of confirmed tax losses on non-tonnage taxable in-come are permitted to the extent that the losses have arisen in ac-tivities subject to income taxation. On the other hand, the tax debts from income taxation will be reduced in process of time. As regards sale of ships, shipowners may enter a replacement reserve for fu-ture acquisitions and mitigate tax consequences in relation to tax debts accrued before the entry into tonnage taxation.
The amended tonnage tax regime entered into force as of 1 March 2012. The new regime has retroactive effect covering taxable years beginning on or after 1 January 2011. Shipowners have to apply for tonnage taxation latest by 31 December 2014 or within three months from the establishment of a new enterprise. In practice, the entry into the regime will require planning and long lasting restructurings. Therefore, the planning for the entry should be initiated early enough.