Corporate Taxation in the Global Offshore Shipping Industry

Transportation & Logistics International Tax

Corporate taxation in the global offshore shipping industry

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Contents Introduction 4 Executive Summary 6 Vessel types related to the oil & gas offshore industry 8 Vessel types related to the offshore wind farm and offshore construction industry 10 Vessel types related to other services provided offshore 12 Other tax incentives for shipping entities 14 Final remark 15 Territory contacts 16

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Corporate taxation in the global offshore shipping industry 3 Introduction Shipping companies that are part of the offshore value chain need to understand how differences in tax treatments can affect their business in key territories. This paper, Corporate taxation in the global offshore industry, takes a detailed look at how relevant vessels are handled. It is a supplement to our longer report, “Choosing your course - Corporate taxation of the shipping industry around the globe” , which focuses more broadly on how the shipping industry is taxed. Both papers focus on the countries around the world that are most important for the shipping industry.1

In this paper, we focus specifically on The offshore industry is a good shipping companies that are part of example. Traditional fossil energy the value chain within the offshore extraction, green energy and offshore industry (wind farms, oil rigs etc.). construction have all made significant While offshore activities may be more advances to keep pace with growing commonly seen as part of the energy demand. That’s led to an increased businesses, the shipping industry demand for specialised offshore vessels actually performs a number of critical and for the development of offshore services using highly specialised vessels. support services around the globe. These include wind farm construction There has been a significant increase vessels, accommodation and support in both the number of market players vessels, FPSO’s (Floating Production and in the types and designs of the Storage and offloading vessels), anchor specialised vessels servicing the sector. handling and drill ships. And companies have also developed a wider range of shipping services that are The shipping industry has undergone offered to the offshore industries within significant developments over the last oil & gas, wind farms, and offshore 15 years, since shipping tax regimes construction projects. started to be introduced. In addition, the financial crisis put pressure on But legal frameworks have not always companies to get more efficient, but kept up with this rapid pace of change. that’s not the only way shipping has For example, recent surveys show that changed. The industry has also made more than 18 vessel types are now significant technological advances – being operated during an offshore wind and so have the industries shipping project life cycle — far more than what companies serve. was anticipated when applicable laws The offshore shipping and regulations were drafted for this industry has changed sector. dramatically in recent years, but legal frameworks have not always kept up.

1 We have excluded Russia and Brazil from this analysis because our research shows that these countries do not have special tonnage tax incentives aimed towards the offshore shipping industry. For more information on shipping tax incentives in Russia and Brazil, please see our related report Choosing your course - Corporate taxation of the shipping industry around the globe

4 Corporate taxation in the global offshore shipping industry To stay competitive in the offshore environment, And while a number of countries throughout the world, that act as key companies will centres for shipping services, offer special incentives targeted towards need to look for traditional shipping companies both a competitive operating container, tanker, dry bulk, and passenger vessels, far fewer regulatory provide the same beneficial regimes or incentives to offshore shipping players. framework and high For example, within the EU, the EU quality specialised Commission has sanctioned state aid measures such as tonnage tax and net resources that are salary/salary tax refund schemes, which Socrates Leptos-Bourgi member countries can implement in dedicated to the Global Shipping & Ports their national legislation. Similar tax Coordinator sector. incentives are available in numerous Transportation & Logistics countries in Asia, America etc. But these Leader Greece types of regulations haven’t yet kept up with the increasing specialisation of the offshore shipping industry.

Competition in the shipping industry is fierce, and where you locate operations matters. To stay competitive in the offshore environment, companies will need to look for both a competitive regulatory framework and high quality specialised resources that are dedicated to the sector.

This report reviews the tax regimes applicable to shipping companies Bo Schou-Jacobsen operating in the offshore sector in a Transportation & Logistics number of key jurisdictions around the Leader Denmark globe. Our comparative analysis can help companies evaluate their options when establishing new services and operations or considering relocation of existing operations.

We hope you find it useful reading.

Best Regards

Lars Koch Vinther Tax Leader Shipping Denmark

Corporate taxation in the global offshore shipping industry 5 Executive summary

In this report, we provide a condensed overview of the special tax regimes available for shipping companies in certain key jurisdictions around the globe, with a particular view to those that may benefit shipping companies operating in the offshore sector. Shipping companies operating in the offshore niche market are likely to operate specialised offshore service vessels such as AHTS (Anchor Handling Tug Supply vessels), PSV’s (platform supply vessels), FPSO’s (floating production storage and offloading vessels), wind farm construction vessels, drill ships, seismic vessels, crew transfer vessels, tugs etc. There are significant variations in how tax systems treat each vessel and service type. Our analysis covers 17 carefully selected countries around the globe and focuses on the types of vessels most commonly used in the oil and gas offshore industry, the offshore wind farm industry and various other offshore industries.

Our research shows that there is a In contrast, countries such as Denmark, broad spectrum of taxation approaches. Ireland, Italy and France take a more Countries such as Singapore and restrictive approach to the applicability Cyprus take a very liberal approach; of their tax regimes to offshore in these countries, various offshore vessels. In these countries vessels are vessels can generally be covered by their required, either by law or by generally beneficial shipping taxation regime. For accepted common practice, to exercise instance, Singapore offers an outright some kind of transportation of goods tax exemption to income (application or passengers. That creates a more required for non-Singapore flagged restrictive environment and impacts vessels) derived from the operation the ability of offshore market players of various vessels outside the limits of situated in these countries to compete the port of Singapore regardless of the over the long term. characteristics of the vessel in question. In some cases the situation differs Countries such as Malta, UK, Germany, by type of vessel. AHTS, PSV’s and Netherlands and Norway take what we tugs can be included in the system in regard as a fairly liberal approach to the Denmark, whilst other vessels such as applicability of their special taxation of drill ships, seismic vessels, and wind shipping activities to offshore vessels. farm installation vessels are specifically These countries have more detailed excluded. That may change, though. requirements that need to be met in The Danish Ministry of Taxation order for offshore activities to benefit recently announced that it intends from their systems. A number of specific to broaden the scope of the Danish vessels/service types may be or probably tonnage tax scheme so that e.g. wind are covered by their advantageous farm construction vessels, support and taxation of shipping income regimes, construction vessels, ice breaking vessels assuming that requirements are met. etc. will be covered as well. No schedule However, a minority of types of vessels for changes has been announced yet, so might not be or are probably not this plan is still in the proposal stage. covered.

6 Corporate taxation in the global offshore shipping industry Key shipping countries’ approach to allowing offshore vessels/services to be covered by their shipping tax incentives.

Very liberal approach Fairly liberal approach Fairly restrictive approach Very restrictive approach

Singapore Germany Denmark1 Finland

Hong Kong UK France USA

Cyprus Greece India

UAE Norway Italy

Netherlands Ireland

1) Please note that the Danish Government has announced to widen the scope of tonnage tax to a number of offshore vessels/ activities, thus wind farm installation vessels, accomodation vessels, security and patrol vessels, Icebreaking and other offshore vessels might be included during 2015 or late 2014. This could potentially move Denmark from a fairly restrictive to a fairly liberal approach depending on how the changes will be implemented and whether or not the changes will also cover seafarer incentives.

More detailed information on tax In countries that use tonnage tax and other incentives offered by these regimes or shipping incentives tax countries to shipping companies can be regimes, these don’t necessarily apply found in our longer analysis, Choosing to every type of vessel. Our analysis your course - Corporate taxation of the suggests that various countries’ shipping industry around the globe. approaches can have a significant impact on both individual businesses The countries covered in this report fall and the countries’ competitive position. under three categories of shipping tax We take a separate look at vessels and regimes: activities in the following areas: oil & gas offshore industry, offshore wind 1) Tonnage tax regimes - Tax regimes farm and offshore construction industry, under which the tax payable is based on and activities related to other services the tonnage of the vessels. provided offshore. 2) Shipping incentives tax regimes - Tax regimes with beneficial tax provisions specifically aimed at the shipping industry. 3) Tax efficient regimes - Tax regimes characterised by low effective tax rate (no specific shipping incentives).

Corporate taxation in the global offshore shipping industry 7 Vessel types related to the oil & gas offshore industry

Many countries exclude vessels related to the oil & gas industry from their shipping taxation regime. The reasons vary, but drill ships/drilling rigs are mainly excluded due to the fact that transportation is not their main activity; in some cases, their design means they cannot transport goods or passengers at all. Still, many vessel types are in a grey area, where it is not clear whether or not they are covered by the shipping tax regime of the countries in question.

Most attractive: Hong Less attractive: Denmark, Kong, Singapore and the Finland, France, Ireland, UAE. Italy and USA. These countries all operate with a Next up: Cyprus, Germany, more restrictive approach regarding Greece, India, Malta, the eligibility of these types of Netherlands, Norway and vessels for their shipping tax regimes UK. either specifically by law or by the administrative practice carried out by These countries also have a fairly the local tax authorities. Only very liberal approach. A number of activities few vessel or activity types can be can still be eligible for their systems, covered. In our view, companies in as long as specific requirements are these countries run a real risk of losing met. These countries might still be business to competitors located in more attractive alternatives to the very liberal liberal jurisdictions. Eventually that jurisdictions. could have significant consequences for the local shipping industries.

8 Corporate taxation in the global offshore shipping industry ■ Very liberal regime ■ Fairly liberal regime ■ Fairly restrictive regime ■ Very restrictive regime

Vessel / Activity Cyprus Denmark1 Finland France Germany Greece Hong Kong India Ireland Type

Drill ships and/or X XX XX X √ √√ √ √ X drilling rigs

Anchor handling tug vessels and platform √√ √√ √ √ √ √ √ ? √ supply vessels

Seismic vessels √√ XX XX X √ ? √ ? √

Floating production storage and √ XX XX X X ? √ ? X offloading vessels (FPSO’s)

Vessel / Activity Italy Malta Netherlands Norway Singapore UAE UK USA Type

Drill ships and/or X X X XX √√2 ◊ XX XX drilling rigs

Anchor handling tug vessels and platform √ √ √ √√ √√2 ◊ √√ XX supply vessels

Seismic vessels X √ √ √√ √√2 ◊ √ XX

Floating production storage and X ? ? XX √√2 ◊ XX XX offloading vessels (FPSO’s)

1 The Danish Government has announced to widen the scope of tonnage tax to a number of offshore vessels/activities, thus wind farm installation vessels, accommodation vessels, security and patrol vessels, icebreaking and other offshore vessels might be included during 2015 or late 2014. However, at the time of writing these proposals did not include any of the oil industry vessels listed above. 2 if operations are carried out outside the limits of the port of Singapore.

√√: definitely qualifies √: likely to qualify ◊: not subject to taxation ?: might qualify X: likely not to qualify XX: does not qualify

Corporate taxation in the global offshore shipping industry 9 Vessel types related to the offshore wind farm and offshore construction industry

The offshore wind farm and construction industry is booming and double-digit growth rates are expected to continue over the next 5-10 years. This has led to the formation of highly specialised niche shipping companies fighting a fierce battle in the market place to win lucrative projects building wind farms and other offshore installations around the globe. How selected countries treat the operation of such vessels for tax purposes can have a profound impact on these companies’ competitiveness.

Most attractive: Cyprus, In these jurisdictions, the transportation Netherlands, Singapore element of the service provided by the and UAE. vessels is crucial for the eligibility of tonnage tax. In some cases, it can lead Most vessels/activities are included in to part of the activity being subject to their shipping tax schemes. normal taxation and part being subject to tonnage tax, which brings uncertainty Next up: Cyprus, Germany, and increased administrative burdens Greece, India, Hong Kong and costs. Wind farm construction and Norway. vessels, for instance, might be covered to the extent there is a transportation These countries have fairly liberal element included in the service. Purely policies, where a number of the vessel construction-related activities might types might qualify, if certain specific be taxed normally, while deliveries are criteria are met. eligible for tax incentives. To comply with these tax codes, companies need Borderline: Denmark, to manage contracts and costs closely, France, Germany, Ireland, which make it more burdensome for Italy, Malta and UK. enterprises located in these territories compared to their competitors in the These countries specifically exclude a very liberal or fairly liberal jurisdictions. number of these vessel types/activities. In the case of Denmark, the UK and Less attractive: Finland Germany, authorities take a more case by case approach on deciding whether and USA. the actual activities performed by a These countries offer no incentives. specific offshore vessels makes them eligible. That makes it difficult to place vessels in such locations as there is uncertainty to how the vessel will be taxed.

10 Corporate taxation in the global offshore shipping industry ■ Very liberal regime ■ Fairly liberal regime ■ Fairly restrictive regime ■ Very restrictive regime

Vessel Type Cyprus Denmark1 Finland France Germany Greece Hong Kong India Ireland

Wind farm √ X XX X ? ? √ ? X construction vessels

Crew trans- Crew trans- Crew trans- Crew transfer vessels: fer vessels: fer vessels: fer vessels: Accommodation √ √ ? ? Crew trans- and support vessels XX fer vessels: ? ? ? (e.g. flotels and crew Flotels and Flotels and Flotels and Flotels and ? transfer vessels) accom- accom- accom- accom- modation modation modation modation vessels: ? vessels: XX vessels: X vessels: X

Support and construction vessels Dredgers: ? (floating cranes, dive √ X XX X ? ? X X vessels, construction Other types jack-up rigs, dredging of vessels: X etc.)

Offshore installation vessels of other kind √ ? XX ? ? ? √ ? X (e.g. MCV’s)

Vessel Type Italy Malta Netherlands Norway Singapore UAE UK USA

Wind farm ? √ √ √ √√2 ◊ ? XX construction vessels

Accom- Crew trans- modation fer vessels: vessels: ? √ Crew trans- Accommodation Flotels:. XX fer vessels:? and support vessels Crew trans- Flotels and ? √√2 ◊ XX (e.g. flotels and crew Other ves- fer vessels: accom- Other types transfer vessels) sels ? √ modation of vessels: X vessels: XX Support vessels √ Yes, √√:

if support Support and and con- construction vessels struction (floating cranes, dive vessels X X √ √√2 ◊ ? XX vessels, construction within oil & jack-up rigs, dredging gas sector. etc.) √√:

Other types might qualify Likely to Offshore installation qualify if vessels of other kind ? ? √ within the oil √√2 ◊ XX XX (e.g. MCV’s) & gas sector ?

√√: definitely qualifies √: likely to qualify ◊: not subject to taxation ?: might qualify X: likely not to qualify XX: definitely does not qualify

Corporate taxation in the global offshore shipping industry 11 Vessel types related to other services provided offshore

The remaining vessels do not share any defining characteristics. These are vessels used in specific niche segments, providing very specific and specialised shipping services.

Most attractive: Cyprus, Less attractive: Denmark, Hong Kong, Ireland, Finland and USA. Norway, Singapore, UK and These countries are generally very UAE. reluctant to grant these types of vessels/ These countries operate with a more activities access to the benefits of their liberal approach to these vessels, and shipping tax regimes. will be able to attract more investments in these areas.

Next up: Germany, Greece, Italy, India and Malta. In these countries, a majority of these services are eligible for tax benefits, if certain requirements are met. Often the eligibility of vessels such as standby vessels and offshore patrol vessels depends on a very case by case assessment, including whether or not there is a transportation element in the services provided.

12 Corporate taxation in the global offshore shipping industry ■ Very liberal regime ■ Fairly liberal regime ■ Fairly restrictive regime ■ Very restrictive regime

Vessel Type Cyprus Denmark1 Finland France Germany Greece Hong Kong India Ireland

Lightering/ship-to- ship transfers (e.g. tanker vessels used for transfers at sea √√ ?3 √ √ √ ? √ ? ? and subsequent transportation of oil products to and from harbor

Ice breaking / ice √ XX XX X XX ? ? ? √ management vessels

Standby vessels √ X XX ? ? ? ? ? √

Offshore patrol √ X XX X ? ? √ ? √ vessels (OPV’s)

Vessel Type Italy Malta Netherlands Norway Singapore UAE UK USA

Lightering/ship-to- ship transfers (e.g. tanker vessels used for transfers at sea ? √ √ √ √√2 ◊ √ XX and subsequent transportation of oil products to and from harbor

Ice breaking / ice ? ? X ? √√2 ◊ √√ XX management vessels

Standby vessels ? √ X √√ √√2 ◊ √√ XX

Offshore patrol ? ? X ? √√2 ◊ ? XX vessels (OPV’s)

1 The Danish Government has announced to widen the scope of tonnage tax to a number of offshore vessels/activities, thus wind farm installation vessels, accomodation vessels, security and patrol vessels, icebreaking and other offshore vessels might be included during 2015 or late 2014. 2 If and not if operations are carried out outside the limits of the port of Singapore. 3 There is a pending tax case in Denmark on the use of tonnage tax on vessels operated in STS and lightering services, based on the wording of the Danish tonnage tax law it should be covered but it is currently subject to a tax case before the national tax court.

√√: definitely qualifies √: likely to qualify ◊: not subject to taxation ?: might qualify X: likely not to qualify XX: definitely does not qualify

Corporate taxation in the global offshore shipping industry 13 Other tax incentives for shipping entities

Below we provide a brief overview on whether or not the selected countries offer other tax incentives, e.g. net salary schemes for the seafarers performing work on the vessels in question.

Does the country have other beneficial tax incentives for shipping entities?

Cyprus • No tax on salaries and benefits of crew on board of Cypriot flagged vessel

Denmark • Net salary scheme for seafarers working on vessels that qualify for tonnage tax

Finland • Net salary scheme for seafarers primarily in international traffic

• Employer contributions and employee dues from seamen are based on the flat-rate France salaries

Germany • Wage tax subsidy system for seafarers working on a German flagged vessels

• Reduced income tax rates for seafarers of the commercial marine Greece • Various tax exemption and benefits apply for ship-owning companies, ship-owners and shareholders in shipping companies • Seafarers salaries are exempt from tax if absent from Hong Kong for a substantial por- Hong Kong tion of the year • In certain circumstances salary paid to a non-resident seafarer as remuneration for ser- India vice rendered on a foreign ship will be exempt from taxation in India. • Seafarers allowance available to Irish resident individuals who spend at least 161 days on voyages that either begin or end in a foreign port. Allowance is EUR 6,350 at the Ireland marginal rate of tax and a number of conditions need to be satisfied. It also applies to seafarers on vessels which service drilling rigs. • Tax credit equal to individual income tax due to employment income paid by company to Italy the crew on the vessel. Must be deducted from the payment of WHT on such income • Nothing specific within shipping. • In certain circumstances, the salary received by non-Maltese resident seafarers is likely Malta to be not chargeable to income tax in Malta, where the employment activities are carried on outside of Malta. • Zero VAT-rate for delivery and provisioning of seagoing vessels • Wage cost deduction for seafarers Netherlands • Accelerated depreciation of seagoing vessels • Zero VAT-rate for delivery and provisioning of seagoing vessels

Norway • Net salary scheme for seafarers

• Tax exemption on qualifying leasing income and concessionary tax rate on qualifying management income or income from provision of qualifying approved shipping related Singapore support services • Tax exemption of income derived from employment exercised on board a Singapore flagged ship if employment exercised substantially outside Singapore. • No specific benefits. UAE • Currently there is no individual income tax.

UK • “Seafarers Earning deduction”

USA • No

14 Corporate taxation in the global offshore shipping industry Final remark

Your decision on which tax regime is most suitable for your company, how to structure your business and where to locate your offshore shipping activities will depend on the circumstances and your activities. You’ll need to take into account a broad range of factors. How well you can manage and control your business is critical. But other factors including the effectiveness of the tax system for the specific offshore shipping activities your enterprise is engaged in, ship financing, freight taxes, wage cost deduction for seafarers, and taxes at source can also make a big difference to your business. Our PwC network of highly experienced and dedicated offshore shipping experts can assist you in deciding how to structure your offshore shipping business. Contact us for an informal discussion about your individual situation and considerations. You can find the contact details of our global offshore shipping experts and our global Transportation & Logistics network below.

Corporate taxation in the global offshore shipping industry 15 Territory contacts

PwC has established a Global Offshore and Shipping Network of industry specialists. Within this network, a dedicated team of assurance, tax and advisory professionals provide advice and support to businesses like yours. Through our network of local specialists PwC can offer the solutions needed to manage your business on a local and global basis. The Offshore and Shipping Network has strengthened its commitment to exchange experience through our global databases and regular meetings, allowing all members to share knowledge and find solutions that fit your needs. No matter where you are navigating, PwC has a Offshore and Shipping Team ready.

Key contacts

Socrates Leptos-Bourgi Bo Schou-Jacobsen Lars Koch Vinther Partner - Global Shipping & Ports Partner - T&L Leader Denmark Partner – Tax Leader Shipping Denmark coordinator and T&L Leader Greece +45 39 45 36 39 +45 39 45 94 57 +30 210 428 4000 [email protected] [email protected] [email protected]

Global T&L Central Team

Global Transportation & Logistics Global Transportation & Logistics Global Transportation & Logistics Leader Business Development Knowledge Management Julian Smith Peter Kauschke Usha Bahl-Schneider +62 21 52890966 +49 211 981 2167 +27 11 797 4787 [email protected] [email protected] [email protected]

16 Corporate taxation in the global offshore shipping industry Country Shipping offshore expert Transportation & Logistics leader

Cyprus Cleo Papadopoulou Yiangos Kaponides +357 25 555 200 +357 25 555 230 [email protected] [email protected]

Denmark Lars Koch Vinther Bo Schou-Jacobsen +45 39 4594 57 +45 39 45 36 39 [email protected] [email protected]

Bo Schou-Jacobsen +45 39 45 36 39 [email protected]

Finland Camilla Valtti Mikko Nieminen +358 20 787 7455 +358 (0) 9 2280 1257 [email protected] [email protected]

France Anne-Laure Bertho Vincent Gaide +33 (0) 4 91 99 29 85 +33 1 56 57 8391 [email protected] [email protected]

Germany Marcus Blömer Dietmar Prümm + 49 40 63 78 8435 +49 211 981 2902 [email protected] dietmar.prü[email protected]

Greece Vassilios Vizas Socrates Leptos-Bourgi +30 210 687 4019 +30 210 4284000 [email protected] [email protected]

Hong Kong Reynold Hung Alan Ng +852 2289 3604 +852 2289 2828 [email protected] [email protected]

India Taral R Shah Manish Sharma +91 (0) 22 6689 1498 +91 124 330 6007 [email protected] [email protected]

Italy Egidio Filetto Guido Sirolli +39 081 7161411 +39 657 083 2125 [email protected] [email protected]

Corporate taxation in the global offshore shipping industry 17 Country Shipping offshore expert Transportation & Logistics leader

Malta Neville Gatt Neville Gatt +356 25 64 67 11 +356 25 64 67 11 [email protected] [email protected]

Netherlands Jeroen Boonacker Isis Bindels +31 6 51 04 56 53 +31 88 792 3606 [email protected] [email protected]

Erwin van den Bree +31 88 792 3404 [email protected]

Norway Svein T. Sønning Rita Granlund +47 95 26 10 71 +47 95 26 02 37 [email protected] [email protected]

Singapore Elaine Ng Kok Leong Soh +65 6236 3627 +65 6236 3788 [email protected] [email protected]

Siew Nam Tia +65 6236 3673 [email protected]

United Arab Jochem Rossel Anil Khurana Emirates +971 (0) 4 304 3445 +1 (214) 754 5083 [email protected] [email protected]

United Andrew Norris Coolin Desai Kingdom +44 (0) 207 212 6545 +44 207 212 4113 [email protected] [email protected]

John Ritchie +44 (0) 1224 25 3220 [email protected]

United States Gary M. Pogharian Jonathan Kletzel of America +1 973 236 5696/+1 201 463 7977 +312 298 6869 [email protected] [email protected]

18 Corporate taxation in the global offshore shipping industry

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