AN ALTERNATIVE LOCATION FOR SHIPPING BUSINESS

Taxation of the Shipping Company

As explained, when the Shipping Company will be part of a financial structure in Luxembourg, you can profit of tax exemption over the profit in the structure.

Income tax Shipping Company

Shipping companies are not subject to municipal business tax. Taxable income is based on the annual financial statements prepared in accordance with generally accepted accounting principles, as adjusted for Luxembourg tax purposes. All expenses incurred by the company for the purposes of its business are deductible, unless the expenses relate to exempt income. Typical non-deductible items of expenditure include taxes, fees paid to directors or other persons for supervisory services, certain gifts and fines. Losses can be carried forward without limitation.

Depreciation of vessels booked in the Shipping Company

The useful life of a vessel cannot be less than 12 years; Luxembourg income tax law provides for two types of depreciation:

  • Linear depreciation: for a vessel whose useful life is 12 years, the depreciation will amount to 8.33% of the purchase price per year.
  • Accelerated depreciation: the depreciation could be accelerated to three times the linear depreciation rate without exceeding 30%. Therefore, for a ship with a useful life of 12 years, the initial depreciation could be increased to 25%.

    Roll over of capital gains on the sale of vessels booked in the Shipping Company

    Capital gains realized on the disposal of a vessel will be subject to tax at standard rate (i.e. 22.88%). However, Luxembourg tax law allows for a Luxembourg shipping company to neutralize a capital gain realized on ship operated in international traffic by transferring it to the assets acquired with the proceeds of the sale.
    The neutralization of the gain is subject to the condition that the company has held the vessel for at least five years before selling her. The gain will reduce the tax value of the newly acquired assets. As a result the capital gain will be increased by the present gain rolled over. In addition, tax depreciation of the annual asset will be reduced. For sale proceeds not reinvested immediately, the gain may be kept on the books and taxation deferred for two years at the level of the Luxembourg shipping company. Reinvestments do not necessarily need to be realized in similar assets than those sold. Indeed, the new investment could be realized in any kinds of fixed assets such as ships, shareholdings, real estate, etc.

    Large-repair and maintenance work on ships booked in the Shipping Company

    In principle, provisions for losses or debts recorded by a Luxembourg company are only deductible, if they are determined precisely and relate to the expenses occurred in the year in which they are constituted. In the case of a Luxembourg shipping company however, Luxembourg tax authorities usually accept that reasonable provisions concerning large scale repair and maintenance work on ships are deductible in the year they are booked.

    Net worth tax Shipping Company

    Luxembourg Net worth tax is levied annually at a rate of 0,5% on the adjusted net asset value of Luxembourg resident companies. This tax is not deductible from the corporate income tax. The tax base of the company (unitary value) could be defined as the difference between the assets of the company and its third party debt. The third-party debt includes the provisions recorded by the Luxembourg shipping company and in particular the provision for large-scale repairs and maintenance works on ships.

    Indirect tax (VAT)

    In principle, supplies of goods and services in relation to seagoing vessels effectively used for transport, industrial or commercial activities are exempt from VAT. Even in the event that the conditions for the application of an exemption are not met, Luxembourg remains a friendly place to do business as its offers the lowest VAT rates in the EU. (15%)

    Capital duty Shipping Company

    At incorporation and during each subsequent increase in capital, capital duty computed at the rate of 1% of the value of the assets contributed is due. The tax is due on the subscribed capital, share premium (if any) and on any subsequent capital increase, except in the case of capital increases realized by transferring free reserves to the capital account. Based on a EU Directive proposal, capital duty should be reduced at least to 0,5% by 2008 and completely abolished by 2010 at the latest. Certain intra-EU transactions already benefit from capital duty relief. In particular two types of operations asset mergers and share mergers are exempt from capital duty under certain conditions.


    Investment credit

    Luxembourg income tax law provides for two specific incentives for investments in tangible assets put to use in Luxembourg. They are referred as global investment tax credit (Bonification dimpt pour investissement global) and complementary investment tax credit (bonification dimpt pour investissement complmentaire). Both incentives take the form of a tax credit to be offset against Luxembourg corporate income tax. The investment tax credit not used during a given year can be carried forward for 10 years. Investment tax credit cannot be offset against Luxembourg municipal business tax. This however is irrelevant for Luxembourg shipping companies as they are not subject to the municipal business tax.

    Eligible persons

    In principle, the investment tax credit is granted to Luxembourg companies that invest in tangible assets. However for leasing transactions, Luxembourg tax authorities have issued guidance determining under which conditions a lessee or a lessor may be authorized to benefit of the investment tax credit in lieu of the legal owner.

    Eligible goods

    In order to be eligible for the incentives, the investment must meet the following conditions:

  • Investment should be in tangible assets which are depreciated over at least three years;
  • The asset must be new; however, this condition must not be fulfilled in the case of shipping vessels used in international traffic, as long as the taxpayer can demonstrate that the vessel has not benefited from the investment tax credit in the past.
  • The investment must be physically operated in Luxembourg. Here again, the condition does not apply in case of an investment in shipping vessels operated in international traffic.

    Computation of the grant

    The base for the computation of the complementary investment tax credit for a given year is the difference between the book value of eligible assets at the end of the year and the average of the book value of eligible assets over the five preceding years. This difference is increased by the amounts of the depreciation on eligible assets acquired during the same year. The tax credit amounts to 10% of this figure.
    The global investment tax credit is based on the acquisition price of the eligible assets acquired during the year for which the tax credit is applied for. The tax credit amounts to 6% of the first EUR 150.000 and to 2% on the exceeding balance. As a result, a Luxembourg company that acquires a ship will be entitled to benefit from a tax credit amounting to more or less 12% of the acquisition price of the ship.

    Example

    We assume that Luxco is a Luxembourg shipping company formed in 2007 that has acquired a vessel in early 2007 for an acquisition price of 120.000.000. The depreciation for the first year (December 31st, 2007) is EUR 9.600.000 (i.e. 8% per year of the acquisition price). The investment tax credit as at December 31st, 2007 will be determined as follows:
    Complementary tax credit
    Net book value of the vessel 110.400.000
    Average book value of the 5 preceding year (1.850) (min. EUR 1850)
    Depreciation on acquisition in 2007 9.600.000
    Tax credit 11.999.815
    Global tax credit
    Acquisition price of the vessel 120.000.000
    Tax credit (EUR 9.000 + EUR 2.397.000) 2.406.000
    Total Investment tax credit 14.405.815
    The amount of EUR 14.405.815 can be credited against the Luxembourg corporate income tax due by Luxco for 2007. If the corporate income tax of Luxco is less than EUR 14.405.815, the non-used tax credit may be carried forward for 10 years.