Tax Update Shipping & Offshore - June 2024

Dear reader,

A new update from the Shipping & Offshore team covering various worldwide updates from a tax perspective within this industry.

Unfortunately, no news yet on the Substance base Income Exclusion for Pillar 2 in relation to mobile assets. We look forward to seeing movement in that respect, especially as companies need time to prepare for the consequences.  

Further the South Korean government is likely, so we understand, to maintain the “tonnage tax”. Although there are concerns that it is not appropriate in terms of tax equity, the government seems to adhere to the existing system, judging that they must focus on revitalizing the country’s shipping industry. We have no final confirmation on this, but we will update you once this is clear.

Please reach out if you have any questions/remarks.

Ernst-Jan Bioch

Content

1. Kenya
2. South Africa
3. Netherlands
4. Switzerland
5. Norway
6. Denmark

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1. Kenya

Tax proposals in Finance Bill, 2024

The Finance Bill, 2024 proposes significant changes to the tax framework. The Bill proposes, among others, to increase the tax rate from 2.5% to 3% on non-resident air transport operators and ship owners where Kenya has no reciprocal arrangement or treaty with the other country. Please see here for more information on the whole proposal.

2. South Africa

Issues Guidance on Exemption of International Shipping Income

The South African Revenue Service (SARS) has published guidance on the tax exemption of income relating to South African ships used in international shipping. The examples are interesting to read.

3. Netherlands

3.1 Dutch knowledge group on the offshore clause in the Dutch – Belgium tax treaty

According to the Knowledge Group(s) within the Dutch tax authorities, the removal and disposal of decommissioned mining installations falls within the scope of Article 24 of the tax treaty with Belgium (offshore activities). These activities relate to the exploration and exploitation of natural resources.

Background of this is a company established in Belgium that carries out various activities on the Dutch part of the continental shelf on behalf of the operator of a decommissioned mining installation. The work consists of removing decommissioned mining installations from the seabed and transporting them to the mainland that have been used in the past for the extraction of oil and gas from the seabed. The work will be carried out with a ship designed to carry out construction and demolition work. It is irrelevant that the work is carried out by a company other than the company which operated the mining installation.

3.2  Appeal of Fugro

Appeal brought on 23 February 2024 by Fugro NV against the order of the General Court (Seventh Chamber) delivered on 15 December 2023 in Case T-143/23, Fugro v Council. In the end Fugro wants a change to plead to annul the Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union, in so far as:

• Article 17 excludes from its scope income from a shipping activity covered by Member States’ tonnage tax regime authorized under State aid rules, other than “international shipping income” and “qualified ancillary international shipping income”;
• Article 17 applies only if “the constituent entity demonstrates that the strategic or commercial management of all ships concerned is effectively carried on from within the jurisdiction where the constituent entity is located”;
• the Directive does not lay down transitional measures for taxpayers that made substantial investments relying on a national tonnage tax regime.

Reason is simple, within the EU State Aid is accepted based on the EU Maritime Guidelines but is basically undone due to the new minimum level of taxation which has a serious impact on the level playing field for EU / EEA based companies active in the maritime / offshore global industry.

4. Switzerland

The introduction of the so-called tonnage tax is off the table.

In the winter of 2022, the parliament had still supported the bill to introduce the so-called tonnage tax on ocean-going ships but makes a U-turn now. With 108 votes to 75 with two abstentions, the National Council followed the motion of the majority of its Committee on Economic Affairs and Taxation. For more background send an email to: bioch.ernstjan@kpmg.com

5. Norway

Aquaculture on the Norwegian continental shelf

Norway's Ministry of Finance announced its intention to tax both foreign companies and foreign workers with income from aquaculture on the Norwegian continental shelf. This follows the taxation of foreign companies’ business income from activities related to mining, renewable energy, and carbon management also on the shelf, which was already introduced in the 2024 state budget.

Now, in addition to activities and workers related to fish farming, the Norwegian Government also intends to extend taxation to foreign workers who have income related to these other activities on its continental shelf. The proposal was submitted for consultation and will be open for comments until June 17, 2024.

In case of any questions, feel free to contact jan.greni@kpmg.no or pedro.leite@kpmg.no

6. Denmark

Challenging allocation of profits to ship owning companies lacking sufficient substance and functions.

In a recent decision published May 28, the Danish National Tax Tribunal rejected an upward transfer pricing adjustment of around DKK 16.8 million (around $2.5 million in today’s value) at the level of the Danish parent entity engaged in the shipping business. The tax authority had argued that the Danish company should have earned this fee for controlling the risk of renting a ship from one foreign subsidiary in a low-tax jurisdiction to another.

The foreign sub owned a highly specialized ship, which could be used as a hotel ship or a floating office for projects in remote locations for projects with third parties. Another foreign sub added sailors and staff to the ship and supplied the ship, including crew, providing time charters to the group. The ship owning company had one employee and a board of directors residing in several countries.

As a result, the Danish tax authority claimed that not the foreign ship owning sub bore and controlled the risk but the Danish parent. Following this the authority took the position that the ship owning company was only entitled to a risk-free return. Interesting element, among others, to read in this decision is that subsequently the tribunal noted that the years discussed are before the 2017 OECD guidelines which give more possibilities to reallocate risks / income (hence not the full income is reallocated). We will monitor whether the authorities will appeal.

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