Improving and simplifying tonnage taxation

Special shipping is included

A clear improvement would be to include specialized shipping in the possibility of tonnage tax. Under the current regulatory framework, tonnage tax is only possible for maritime transport of passengers or goods. This arrangement practically excludes large parts of specialized shipping. 

Under the government's proposal, a large part of specialised shipping will be eligible for tonnage tax. The stated reasons are that there is a need to improve the tonnage tax system and to enable more companies and vessels to be subject to tonnage tax. The bill exhaustively lists the types of maritime activities within the specialised shipping segment that may be subject to tonnage tax. These include, among others, surveillance, towing, salvage, fuel bunkering, icebreaking, cable or pipeline laying, construction, repair, service or dismantling of wind turbines, oil rigs and similar offshore facilities, transport of dredged material, maritime rescue, exploration of the marine environment and seabed, provision of personnel accommodation, workshop capacity and similar support and services to specialised shipping that may be subject to tonnage tax.  

It is gratifying that the government is proceeding with the investigation's proposals and making the tonnage tax regulations more inclusive by enabling large parts of specialised shipping to apply tonnage tax. An improvement that also corresponds to the tonnage tax system in several other EU countries. In order to create good conditions for specialised shipping, the size requirement for a qualifying vessel is also lowered to 20 gross tonnage for these types of operations.

The danger area is avoided 

The current regulatory framework creates difficulties for coastal shipping and other more domestic shipping because the requirement for a qualified vessel means that the vessel must primarily (i.e. to at least 75 %) operate in international traffic or in domestic traffic in another country. This has, among other things, made it impossible for some Swedish shipping companies to be approved for tonnage tax or has been associated with such great uncertainty about whether the shipping company can meet the requirements over time to continue to apply tonnage tax. This applies, for example, to shipping companies that have their vessels chartered out on time charter and where the charterer decides which routes are to be operated.

It is positive that the government, in its bill, is expanding the approved speed range to create a more inclusive regulatory framework. In the new regulatory framework, the requirement for the vessel to be engaged in international traffic is being replaced by a requirement that the vessel be used in traffic exposed to international competition in the maritime market. This requirement is also similar to the one for a shipping company to be eligible for maritime support and can be expected to significantly expand the traffic that can be accepted for a vessel to be eligible for tonnage tax. However, the limitation against domestic traffic that will apply is that a qualified vessel must not be exclusively used in traffic on rivers, canals, or lakes.

It is of course pleasing that the government is proposing that the qualified area of operation be clearly expanded to make tonnage taxation more inclusive and its application more predictable. However, the measure to replace a narrower definition with, admittedly, a broader limitation – where the meaning of the new limitation – traffic subject to international competition – in itself gives rise to new interpretation questions. In times when there is constant discussion about simplifying things for entrepreneurs, a simple measure would be to completely abolish the requirement for which areas of operation are to be considered qualifying for tonnage taxation.

Extended bareboat charter

The current regulations for tonnage tax only offer limited opportunities for a shipping company to bareboat charter out vessels at its disposal, for instance, in cases of temporary overcapacity. The current rules restrict acceptable bareboat chartering to a maximum of three years within a ten-year period and to at most 20 percent of the shipping company's gross tonnage. The government's proposal only involves extending the possible bareboat chartering to 50 percent of the gross tonnage, but still with the same time limit.

Naturally, it is positive that the government is creating improved conditions for bareboat charter, which naturally occurs in the shipping industry. However, the proposed improvement is quite limited in practice, especially considering that operations connected to a vessel are often conducted within a separate subsidiary.

Improved conditions for untaxed reserves

The current system means that there is no immediate tax depreciation of excess depreciations on the shipping company's vessels upon entering tonnage taxation. However, there is also no definitive release of the untaxed reserves. Instead, as a general rule, 25 percent of the excess depreciations are returned to taxation every five years within the framework of tonnage taxation. This is unless the shipping company, at the five-year review, has increased its vessel tonnage, resulting in the repayment obligation being postponed by 5 years.

The system for the reallocation of excess depreciation is now proposed to be reformed in two respects. Firstly, in the new regulatory framework for deferred reallocation of untaxed reserves, it is not required for the shipping company to have increased its vessel tonnage at the five-year review. Instead, it will be sufficient for the shipping company to have unchanged vessel tonnage at this point in time to defer the reallocation for five years.  

The second change is that the government proposes that binding agreements for the supply of newly built vessels within three years, under certain conditions, will be equivalent to the acquisition of a vessel. In the current regulatory framework, a new vessel must be delivered to be taken into account when assessing whether a shipping company has increased its vessel tonnage at the five-year review. Today's system therefore means that whether a shipping company will be forced to reclaim previous depreciation amounting to millions for taxation at a five-year review can depend on almost random reasons. This could happen, for example, if a shipping company has ordered a larger vessel that would have meant increased vessel tonnage at the review, but where the vessel delivery has been delayed for some reason.

It is welcome that the government's bill proposes improvements that facilitate the application and increase the predictability of the important rules regarding the management of untaxed reserves. This creates more favourable conditions, particularly for smaller shipping companies that do not have the same resources or the same flexibility when it comes to vessel acquisitions.

At the same time, it can also be noted that the government, in its memorandum, has not proposed any form of phasing out of untaxed reserves within the tonnage tax system. Something that exists within both the Danish and Finnish tonnage tax systems. 

Other

Otherwise, a number of further adjustments of a primarily technical nature to the regulations are noted. Among other things, it can be mentioned that such related activities that have a close connection with maritime transport and are considered qualified shipping activities are clarified in an exhaustive list. Examples of such related activities include payroll and personnel administration related to maritime transport, operation of cargo and passenger terminals, loading and unloading of cargo, among other activities. All under the condition that the activity is included in the compensation for maritime transport.

A further change to the regulations is the introduction of restrictions for companies in financial difficulty to conduct tonnage-taxed activities.

Entry into force

The government proposes that the reformed tonnage tax rules will enter into force on 20 July 2026 and will be applied for the first time for assessment years commencing after 31 December 2026. The reason for the delay before the government's proposals for changes to the tonnage tax rules can be applied is partly because the tonnage tax rules constitute so-called state aid which must be approved by the European Commission. 

It is, of course, positive that the tonnage tax regulations are being made more inclusive, particularly by giving specialised shipping the opportunity for tonnage tax and by extending the acceptable voyage area. Positive changes also include the conditions for handling surplus depreciation becoming somewhat more generous and predictable, which is particularly important for smaller shipping companies.

It can also be noted that during the consultation process for the investigator's original memorandum, the government received a large number of additional proposals to improve the tonnage tax regulations to make them more competitive, increase predictability, and facilitate application. Among other things, mention can be made of the possibility of phasing out untaxed reserves in the tonnage tax system in a similar way to our neighbouring countries, rule changes to increase predictability for more internationally active shipping companies, and the abolition of various stop-gap rules that considerably complicate application. For some reason, after 1.5 years of further investigation, the government has actually chosen to proceed only with the proposals that the investigator already presented in the original investigation.

This is while representatives of the government's support base have repeatedly expressed their desire to create tonnage tax regulations that are competitive with the tonnage tax regulations of other EU maritime nations. It can easily be ascertained that we are not there yet.

The reformed tonnage tax regulations are proposed to come into effect from 1 January 2027. There is therefore ample time to prepare for the application of the reformed tonnage tax rules and to analyse what the new framework means for one's own shipping operations.