Our shipping update summarises the most relevant Netherlands and international tax developments for the shipping & offshore sector.
This edition of the update provides you with a brief overview of relevant tonnage tax, value added tax and social security developments in the Netherlands. It also highlights some relevant EU developments for the shipping & offshore sector.
1. Prolongation of the Dutch tax tonnage tax scheme for ship managers, large vessels and service vessels
On 26 July 2019 the European Commission (“EC”) issued a press release with respect to the Dutch tonnage tax regime.
The EC authorised the prolongation of the approval to apply:
i. a reduced tonnage tax rate for large vessels exceeding 50,000 net tons;
ii. a reduced tonnage tax base for ship management companies; and
iii. the tonnage tax regime to cable-laying vessels, pipeline laying vessels, research vessels and crane vessels.
The EC assessed the prolongation under its Maritime State Aid Guidelines and the Communication from the EC providing guidance on State aid to shipmanagement companies and concluded that it is in line with EU State aid rules.
In order to obtain the approval of the EC, the Dutch government committed to implement three new criteria in the Dutch tonnage tax regime. Based on the press release the following three amendments are expected:
i. flagging requirements for ship management companies;
ii. the requirement to have at least one EU/EEA flagged vessel in the fleet when entering the tonnage tax regime; and
iii. a 50% cap on the revenues of activities considered ancillary to maritime transport.
The amendments should enter into force on 1 January 2020. A legislative proposal is expected to be published on Budget Day (17 September 2019). It is currently unclear whether transitional law will be published and if so, whether the transitional law will have non-retroactive effect with respect to existing situations. We will in any case keep you updated on developments on this matter.
2. 0% VAT rate no longer applicable to offshore jack-up drilling rigs
From a judgment of the European Court of Justice (“ECJ”) of 20 June 2019 (case C-291/18, Grup Servicii Petroliere SA) it follows that the 0% VAT rate does not apply to the supply, lease, maintenance or provision of offshore jack-up drilling rigs.
The Dutch 0% VAT rate, which is the VAT exemption with the right to deduct input VAT in the EU VAT Directive, is applicable to supplies to ‘vessels used for navigation on the high seas’, used for industrial activities. According to the ECJ the wording ‘used for navigation’ means that an installation should at least mainly or for the most part be put into action for navigation on the sea. Since jack-up drilling rigs are only predominantly in stationary position, the ECJ ruled that these jack-up drilling rigs cannot be regarded as vessels for the application of the 0% VAT rate. In the Dutch offshore practice the 0% VAT rate is currently applied in most cases. Often, the supplier holds a written statement of his recipient (usually the owner, operator or user of the rig) stating that it concerns a sea-going vessel used for industrial activities taking place mainly on high seas.
For the Dutch offshore market, the ECJ ruling can have VAT compliance consequences. Following the judgment, owners, operators and users of offshore jack-up drilling rigs will in future be confronted with (deductible) VAT on expenses relating to usage and maintenance of these rigs. For suppliers it is recommended to check whether and with respect to which supplies relating to such drilling rigs they will need to charge VAT.
3. Social security: The effect of EU Regulation 883/2004 on employees working aboard vessels which are flagged outside EU-territory
On 8 May 2019 the ECJ rendered a judgement (case C-631/17) in the case of a Latvian resident employee who worked aboard a vessel sailing under the flag of the Bahamas in non-EU waters for a Dutch employer.
In its judgement, the ECJ considered that situations where an employee carries on his activities outside the territory of the EU fall within the scope of the Regulation if a sufficiently close connection exists between the employee’s activities and the territory of EU. Such connection can be derived from, inter alia, the fact that an EU citizen, who is resident in a Member State, has been engaged by an undertaking established in another Member State on whose behalf he carries on his activities. Since the Latvian resident maintained his residence in Latvia and his employer was established in the Netherlands a sufficiently close relationship existed in this case.
The Dutch Supreme Court ruled, in accordance with the judgement of the ECJ, that under the EU Regulation the Latvian employee was only liable for social security contributions in Latvia, even if such contributions are non-payable in Latvia under national law. The judgements of the ECJ and Dutch Supreme Court may have far-reaching consequences, as they could mean that in some cases shipping companies are required to pay social security contributions in all the EU member states where their employees reside. In addition, the judgments create a few questions. For instance, the question of repayment of the Dutch social security contributions and the factual social security protection of the employees. Perhaps the possibility of a voluntary admission to a social security scheme could be useful in case the employee’s state of residence does not provide social security coverage.