Against improved taxation of shipping

Introduction

At the end of June, the government appointed an inquiry to review key aspects of Swedish maritime taxation. The investigator has been tasked with looking more closely at two areas with the aim of creating a more attractive and competitive regulatory framework for the taxation of Swedish shipping. This involves, on the one hand, reviewing the rules on tonnage tax, which have existed in Sweden since 2017, and on the other hand, investigating whether there are reasons to abolish the stamp duty levied on mortgages of Swedish vessels.

Below is a brief description of expected changes to shipping taxation, and a number of issues are highlighted where it is important for the investigator to propose reforms. The presented investigation has already generated great interest among shipping stakeholders, and you are welcome to visit and meet MOORE's advisors in Donsö at the end of August to discuss the taxation of Swedish shipping.

Tonnage tax

Although tonnage taxation leads to favourable taxation for shipping companies that have chosen to apply this taxation model, there are conditions in the regulatory framework introduced in 2017 that make it difficult or impossible for some Swedish shipping companies to meet the conditions for tonnage taxation. It may also involve conditions that create significant uncertainty as to whether they can be met continuously, which is a requirement to remain in tonnage taxation and not risk losing their approval for tonnage taxation with drastic sanctions as a consequence.

International traffic

A fundamental requirement that has caused problems primarily for coastal and inland shipping is the condition that the shipping company's vessels must primarily operate in international traffic. Sweden, with its long coastlines and a couple of large lakes, means that several shipping companies have vessels that cannot meet the requirement, or are at least uncertain if they can meet the condition over time. An illustrative example of the unpredictability and uncertainty is a shipping company that has its vessels chartered on a time charter basis, and where the charterer wishes to operate on new routes that do not meet the requirement for the vessels to operate in international traffic. Such a request may be impossible to comply with while simultaneously meeting the requirements for international traffic to be able to apply tonnage tax.

There is therefore every reason for the investigator to critically examine whether the requirement that a vessel of at least 75 % must operate in international traffic truly serves any legitimate purpose, or if the condition can be abolished entirely or modified to better reflect the competitive conditions of Swedish shipping companies.

Untaxed reserves

Another deterrent for shipping companies to adopt tonnage tax rules has been the treatment of the surplus depreciation that companies have regularly built up within ordinary corporate taxation, which represents a latent tax liability. Upon entry into tonnage tax, there has been uncertainty regarding how quickly the surplus depreciation would practically need to be taxed again. It has also been perceived as problematic that the entire amount of remaining surplus depreciation must be taxed upon voluntary or forced exit from tonnage tax. This taxation can lead to tax demands amounting to millions, which for easily understandable reasons, a shipping company in many cases cannot bear, resulting in devastating consequences.

Here it is more uncertain which path the investigator will choose. Hopefully, the investigator will, if not grant a concession on excess depreciation upon entry, then at least a gradual reduction of excess depreciation during the period of tonnage taxation in a way that is comparable to some of our competitor countries. In addition, the condition of immediate reversal of excess depreciation upon exiting tonnage taxation needs to be reviewed.

There are several additional conditions in the existing tonnage tax regulations that create uncertainty, are excessively fiscal, and lead to competitive disadvantages for Swedish shipping companies. This applies, among other things, to the size requirement for vessels, the requirement for a joint group election, blocking periods, etc.

Stamp duty

When taking out loans secured by a ship, where the ship is registered in the Swedish Ship Register, a stamp duty of 0.4 %is charged. In several other countries where Swedish shipping companies have chosen to register their vessels, no equivalent stamp duty is levied. This applies, for example, in Denmark, Norway, Finland and the Netherlands.

The Swedish stamp duty means that owners of vessels in the Swedish register incur higher costs for financing vessel acquisitions, which puts them at an economic competitive disadvantage compared to owners of vessels registered in many other countries. As the costs of investments in the shipping industry can amount to very large sums, stamp duty can also represent significant costs for companies. It is therefore important that the investigator analyses whether there are no grounds to abolish stamp duty on the mortgage of vessels in the Swedish ship register.

Commentary

It is pleasing that the Government has heeded Parliament's previous request for a review of significant tax regulations for shipping. This is with the fundamental aim of increasing Swedish shipping's attractiveness and competitiveness. A more competitive regulatory framework is an important part of increasing the size of the Swedish merchant fleet. An increased Swedish merchant fleet is crucial, among other things, for strengthening the Swedish maritime cluster, retaining Swedish maritime expertise, and not least, strengthening Swedish emergency preparedness. Something that has gained significantly increased relevance, and where the number of Swedish-registered vessels is worryingly low.

A simple way to increase the competitiveness of the Swedish tonnage tax is to abolish the requirement that vessels must operate in international traffic, or at least to reform the current design which prevents some shipping companies from applying the tonnage tax and also creates uncertainty and difficult demarcation issues. Sweden should not be unique in disadvantaging its own shipping in favour of foreign companies. That can hardly be the purpose of the regulations. As stated, the rules surrounding the handling of surplus depreciation should also be reformed to become more competitive.

Let's hope the investigator dares to be bolder in his proposals this time so that Swedish shipping companies get tonnage tax rules that are competitive with the corresponding regulations in other maritime nations. The basic requirement for the investigator must be to create a more inclusive, predictable and competitive regulatory framework.

Abolishing stamp duty on ship mortgages is a simple and not very costly way of creating a more competitive maritime taxation system, and would only mean that Sweden would have rules similar to those in our immediate neighbours.

The investigator is due to submit their report to the government by the end of the year, so shipping companies have every reason to keep a close eye on potential regulatory changes, enabling them to act and prepare to benefit from more favourable regulations at an early stage.

Feel free to come by and speak with us at Moore on Donsö at the end of August and ask your questions about what a reformed regulatory framework for the taxation of shipping could mean for you and how you can act to prepare yourselves and benefit from, for example, an improved tonnage tax regulation. We have provided advisory services to more than 2/3 of the companies that have applied for approval for tonnage taxation.