The latest change in Dutch tonnage taxation offers more flexibility and more options – even to German investors and their ships.
1. Dutch tonnage taxation for special-purpose vessels
1.1. 2010 Tonnage tax regime
Before the EU’s approval of[ds_preview] the Dutch tonnage taxation also for cable layers, research and crane vessels in 2010, the tonnage tax regime in the Netherlands had already applied to various types of vessels. To start with, a vessel qualifies for the regime if it is used for the transportation of goods or people in the context of international oceangoing commerce, i. e. not only limited to a country’s coastal waters, or the oceangoing transportation of goods or people for the exploration or exploitation of the sea’s natural resources, for example the provisioning of oil rigs at sea. Therefore, not only transport vessels qualify under the regime, but also other types of vessels that are used for or intended to be used for offshore transportation. A benefit of the latter qualifying activity is that transportation does not have to take place in the context of international commerce. The only requirement is that it occurs at sea.
Oceangoing vessels also qualify for the regime if they are intended for dredging activities at sea, provided that at least 50 % of their annual business use consists of oceangoing transportation of dredged materials. Profits from activities other than the transportation of dredged materials are taxed according to the normal tax regime.
In addition to the two categories above, tugboats with the exception of harbor tugboats and vessels rendering aid to ships at sea also qualify for the tonnage tax regime.
All activities directly involved in the above-mentioned activities also qualify. A major advantage of applying the tonnage tax regime in the Netherlands is the Dutch Revenue’s willingness to conclude advance agreements with businesses regarding profit determination and profit split between the normal tax regime and the tonnage tax regime. KPMG Meijburg & Co has concluded numerous agreements with the Dutch Revenue regarding the application of the tonnage tax regime to the above-mentioned situations.
1.2. Tonnage tax regime as of 2010
As of January 1, 2010, the Dutch tonnage tax regime for various types of vessels has been enlarged to include cable and pipeline laying vessels, crane operating vessels, and research vessels, as far as the transportation part is concerned. It is important to note that in practice often advance agreements are made with the Dutch Revenue to ensure a good profit split agreement regarding the profit that will be partly taxed under the normal tax regime and partly under the tonnage tax regime. The Dutch Revenue adopts a positive position on this, provided that the agreements are in accordance with EU state aid rules.
1.2.1 Research vessels
Under the tonnage tax regime, research vessels are defined as those vessels intended for the exploration of the sea floor, but only insofar as they are used for the oceangoing transportation of goods or people in respect of the exploration of the sea floor. Research vessels predominantly transport goods and / or passengers from the harbor to the place where the research takes place, and back to the same or another harbor or installation once the research has ended. The principal activity, i. e. the research itself, is not part of the oceangoing transportation.
1.2.2 Cable and pipeline laying vessels
The European Commission is of the opinion that pipeline laying activities can be compared to cable laying activities. In general, pipeline laying vessels do not transport the pipes from one harbor to the other or to an offshore installation. They are, for the most part, actively employed in laying pipelines from one coastal point to a specific point on another coast. Therefore, these vessels’ principal activities do not appear to consist of oceangoing transportation in the sense of the oceangoing transportation of goods or passengers from one harbor to another harbor or offshore installation. The European Commission has, however, approved that vessels intended for the laying of pipes or cables qualify to the extent that they are used for the transportation of goods for, or people working on, the laying of cables or pipes.
1.2.3 Crane and jack-up vessels
The European Commission is of the opinion that while crane vessels do transport goods and / or passengers from a harbor to a work location and back to the same or another harbor or installation, the performance of hoisting and rigging activities at sea for ships or installations cannot be regarded as ocean shipping within the meaning of Regulation (EC) no. 4055/86. The European Commission has, however, approved that the oceangoing transportation of goods or people by crane and jack-up vessels to ships or installations involved in exploration or exploitation activities does qualify.
2. Comparison with the German tonnage tax regime
Compared with the Dutch rules German tonnage tax regulation provides for only a few special-purpose vessels to be covered by the regime.
2.1 Research vessels
Research vessels are only partially covered by the German tonnage taxation. Such research vessels have to search for mineral resources on the seabed or on the subsurface of the sea in order to qualify. Ships that are engaged in the mining of resources at sea are not covered by the tonnage taxation even if operated in international traffic or at the high sea. Vessels which are capable of measuring subsoil gas or oil reservoirs have explicitly been excluded from the German tonnage tax rules in 2007. The change in the law was brought about by a request from the European Commission. The Commission stated that such vessels are not engaged in international traffic at sea and therefore have to be excluded. It remains unclear which research vessels are still covered by the German rules. Searching for mineral resources is defined by the law as detecting and measuring of such resources. Since in 2007 the measuring of energy resources has been excluded, one has to conclude that only the search for other mineral resources which are not used as an energy supply may be part of the tonnage tax regime.
2.2 Cable and pipe laying vessels
Cable and pipe laying vessels are not covered by the German rules. Only if such vessels are to the greater extent used as transport vessels for goods and / or people these activities are covered by the tonnage tax rules. This means that a German cable laying vessel would need to operate in international traffic and has an excess of over 50 % of her activity in the transport of goods or people. This does in most cases not apply to cable laying or pipe laying vessels. The 50 % threshold also applies to all other types of vessels. Any vessel opting for tonnage taxation has to operate in international traffic at more than 50 % of her total operating days of a certain year.
2.3 Crane and jack-up vessels
Crane vessels are usually engaged with construction sites. Their main purpose is to lift construction parts and materials at the site while they may also be used to transport such parts over a short distance. The tonnage tax rules do only apply to such vessels if their main purpose is the transport of goods. No special exemption from the 50 % rule described above is being made here. The same rule applies to jack-up vessels used to build or repair off-shore installations. Those vessels transport goods and personnel from a port to an off-shore installation. However, the main purpose of the transport is the building or the repair aspect of the work done. This differentiates such vessels from simple supply vessels which for example deliver goods and transport personnel from ashore to an oil rig. As long as crane vessels or jack-up barges spend more of their operating time at the construction site rather than transporting goods, they are not operated in international traffic as defined by the law.
3. Tax structure
German investors who wish to make use of the broader scope of the Dutch tonnage tax rules will usually seek a transparent tax structure. Such structure is well established in cross border investments between Germany and the Netherlands. The Dutch CV and the German KG are legally similar and are both regarded transparent entities when it comes to taxation. This means that German investors may invest directly in a Dutch CV operating a special-purpose vessel. The Dutch CV, in fact all its participants, will opt for the tonnage tax rules and therefore the participants will calculate the income at a flat rate based on the net tonnage of the vessels. The taxable income allocated to the German investors will be subject to the regular Dutch income tax rate, but the income is determined according to the tonnage tax regime. The investors will therefore be subject to Dutch income taxation with their income (shipping income) from the CV and will have to file an annual tax return in the Netherlands.
This income is excluded from the investor’s German tax liability. However, when calculating the German tax rate the income is taken into account. In this way a higher income tax rate may be applicable to the German income of the investor. But this effect only results in a higher tax burden of the German investor if he is not already in the highest tax bracket of currently 42.5 % plus solidarity surcharge. The Dutch tonnage taxation also covers the capital gain taxation and the income from the sale of the vessel. Germany in turn exempts both the ongoing income from the ship’s operation and any capital gain from German taxation. However, one has to note that these rules apply only under the current double tax treaty concluded between Germany and the Netherlands. Currently, both states are negotiating a new tax treaty and it remains to be seen if such a new treaty will bring about any change in the taxation structure described here.
In case a large number of German investors are needed for the investment in a special-purpose vessel, those investors may in addition found a German Holding KG to hold the participation in the Dutch vessel operating CV. Such KG will then have the function to organise shareholders’ meetings and report ongoing issues to the shareholders. The ship’s operation will of course remain in the Netherlands as required by the Dutch tonnage tax rules. In such a structure using a Holding KG one of the limited partners should be established as a manager of the KG along with the unlimited partner. The management of the KG by a limited partner is needed since in recent decisions German tax authorities have doubted that such a Holding KG is not subject to German trade tax. If the management of the KG is carried out by a limited partner the KG is not subject to trade tax. It has also to be noted that special provisions need to be taken to make the Holding KG eligible for the deduction of VAT paid on incoming invoices. Otherwise VAT paid needs to be calculated in the costs of the Holding KG.
4. Résumé
The comparison shows an overall higher flexibility in the Dutch tonnage taxation regime. Dutch Revenue has accepted the tonnage tax privilege for the transportation part of the vessel’s business even if this is not the main purpose of the vessel’s trade. Especially cable and pipe laying vessels may opt for tonnage taxation in the Netherlands and will partially enjoy the benefits of tonnage taxation while in Germany the 50 % threshold keeps these vessels in practice out. The tax structure described offers German investors an easy-to-handle path into the Dutch tonnage tax regime. In the Netherlands it is furthermore possible to request an advanced ruling on this with the tax authorities.
Ernst-jan Bioch, Detlef Laub
