The recent long-awaited European Commission decision on the Maltese Tonnage Tax System has been welcomed by the shipping community, both locally as well as from other member states.

The European Commission rightly concluded that Malta was not abusing the European State Aid guidelines for shipping in an attempt to grow its registered fleet and hence was satisfied that Malta was not taking an unjust competitive advantage with respect to the other member states.

Furthermore, the Maltese Tonnage Tax System was endorsed by the Commission for a period of 10 years – this will create certainty and stability for owners intending to use the flag, giving them the confidence to properly plan ahead.

This article is not intended to be an analysis of Tonnage Tax Rules or how Malta has transposed them into its system. Rather, it addresses a question that has been posed to me a number of times by both colleagues and friends who are not versed in maritime law: Why should the shipping industry be afforded special tax treatment on the income it generates? And why is shipping treated differently than most other industries?

In a nutshell, State aid is granted to the shipping industry in the form of fiscal incentives that are offered to eligible owners and operators of vessels flying the flag of a European member state or operating from an EU jurisdiction. The scope behind this benefit is to attract owners to register, operate and manage their vessels within the European Union and also has the objective of increasing the tonnage registered in the EU.

In 1989, the European Commission published its first set of guidelines on the use of State aid for shipping. The primary objective of this was to create guidance and standard adherence by member states to the rules. The guidelines were also introduced on account of the fact that many owners were flagging out of the EU to jurisdictions which at the time were offering more attractive fiscal incentives and friendly environments to operate from. This legal development did not prove to be successful and there was an ever-growing trend of ship owners who opted for non-EU flags to register their vessels in, as well as non-EU jurisdictions to operate from. This led to the 1997 Communication defining new guidelines on state aid to maritime transport, followed by the 2004 commission communication which was issued, in part, to cater for further ship registries, including the Malta ship registry, which through the accession of such States in the union, were going to increase European tonnage considerably.

These two communications proved to be helpful for those member states wishing to attract shipping to their jurisdiction and were successful in enabling European member states to attract tonnage back to Europe. Historically, Greece was the first to adopt its tonnage tax rules, and others such as the Netherlands, Denmark, France and Spain followed suit.

Managing to attract and keep ship owners within the EU is important for a number of reasons, including that EU standards can be imposed on ships registered in European member states – this ensures, among other things, safer and cleaner seas and better conditions applicable to the seafarers’ rights, giving added value to the owners or operators of vessels, which are seen to confirm and adhere to the best maritime standards. Moreover, more leverage is acquired by member states with substantial tonnage to influence non-EU international players, encouraging them to adopt international conventions putting higher standards into practice. Also, as a consequence, ship management activities could employ a number of skilled and well-paid workers, ensuring the industry generates a substantial amount of income.

Shipping is not like any other industry. Ships and their owners have, to a large degree, no real necessity to operate or flag their vessels in a particular jurisdiction. There are a number of non-EU registries having white list status, meaning that they are flags that enjoy a good reputation. Historically, these non-EU jurisdictions have proved to be quite successful in attracting tonnage to their shores and thus negatively impacting European fleet numbers.

The European Union has recognised this phenomenon and has, through the adaptation of the guidelines and its recent fine-tuning as to how such guidelines should be implemented by EU states, created much needed clarity within the industry. Issues of transparency and checks and balances have also strengthened the system and are intended to reduce any potential abuse.

In principle, aid should be given for income that is generated from pure shipping activities as defined in the guidelines and should not be afforded without some level of scrutiny. In order for the scheme to be effective, each member state adopting it must ensure that abuses are minimised and that the objectives of growth are being achieved.

The European Commission needs to monitor the behaviour of each member state offering this assistance to their shipping industry in order to ensure that there is a level playing field between EU countries and that no member state is gaining unjust competitive advantage on others. It does, however, also need to sensitise itself to the competition that its own member states are facing from third countries. In this respect, one cannot but criticise the undue delay by the Commission in providing its decision on the Maltese tonnage tax rules – a staggering five years.

The European Union and the so-called European Fleet need to be able to compete and attract more owners to their shores. This is critical not only from an economic perspective, but also because a larger fleet can exert more leverage and influence on the manner in which this industry is regulated. This, in turn, will benefit the maritime environment generally. Higher environmental standards, better working conditions and safer vessels are the bi-product of attracting more tonnage towards European shores. Ship owners who have not experienced the EU flag for a while, need to be re-introduced accordingly and understand the many benefits of operating within a European member state or flying the flag of such member state.

The ability of member states to offer State aid to the shipping industry needs to be regarded as an essential tool afforded to it by the European Union which should be exploited and utilised in order to achieve the goals and aspirations set out by the Commission. It is imperative that member states, including Malta, which boasts of being the largest register in Europe, work towards a common objective – the continued growth and influence of the European fleet and the European shipping industry.

This article was first published in The Times of Malta, 4 September 2018.