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Circular 2016/12 – Tax Department: Exemption from the Special Contribution for the Defense Tax on bank accounts

On the 16th of September 2016, the Tax Department issued a circular with regards to the exception from Special Contribution for Defense tax, that is available to owners, charterers or managers of ships who are taxed by virtue of the Merchant Shipping (Fees and Taxing Provisions) Law of 2010 (the “Law).

Article 8(d) of the Law, which regulates the shipowner’s taxation, provides that “No tax shall be imposed or collected ….. (d) other than interest on moneys kept for investment, upon any interest earned on working capital and/or revenue earned by a qualifying owner from a relevant qualifying shipping activity on bank accounts , if such working capital or revenue is used to pay expenses for the financing and/ or the operation and/ or the maintenance of the ship.”

Identical exception is provided for charterers and managers under articles 20(d) and 30 (d).

As per the relevant Circular, the exemption deriving from the above-mentioned articles concerns all taxes, including income tax and special contribution for defense on interest received by or credited to eligible owners, charterers and ship managers in:

  1. Bank accounts that are being used as working capital; or
  2. Bank accounts whose deposited capital constitutes income which derives exclusively from eligible shipping activities,

provided that the relevant bank accounts are being used exclusively for the funding of the eligible shipping activity of the beneficiaries.

It is highlighted that no tax exemption is granted on interest of capital which is being used for investment or for any purpose other than the funding of the eligible shipping activity, even though the capital derives from income of the eligible shipping activity.

Furthermore, no tax exemption is applied on interest of bank accounts of which the beneficiary is not an eligible shipowner, charterer or ship manager.

The provisions of the Taxation of Income Law N.44(I)/2010, as amended, and of the Special Contribution for the Defense of the Republic Law N.117(I)/2002, as amended, is applicable to all other interest which does not fall within the scope of articles 8(d), 20(d) or 30(d).

The interest which is tax exempted under the abovementioned articles concerns interest of the following bank accounts:

  1. Existing accounts of the eligible shipowners, charterers or ship managers;
  2. Any bank account, including the accounts of the eligible shipowners, charterers or ship managers, in which the deposited capital constitutes income exclusively deriving from eligible shipping activity;
  3. Existing bank accounts in the name of Companies of Specific Purpose which are incorporated in order to facilitate the management of the eligible shipping income with the eligible shipowners, charterers or ship managers being the beneficiaries of them;
  4. Any bank account, including the accounts in the name of Companies of Specific Purpose which are incorporated in order to facilitate the management of the eligible shipping income, in which the deposited capital constitutes income exclusively deriving from eligible shipping activity, with the eligible shipowners, charterers or ship managers being the beneficiaries of the accounts.

The eligible shipowner, charterer or ship manager would have to submit a declaration to the bank in which he holds a bank account in order to benefit from the exemption from the special contribution for the defense tax. The relevant declaration shall make reference only to the bank accounts that are eligible to benefit from the tax exemption as provided above. In case that only a part of the funds of the account is eligible for tax exception, the shipowner, charterer or ship-manager may request return of the Special Contribution for the defense tax which corresponds to that amount.