MARITIME AID POLICIES OF SELECT COUNTRIES

Overview:

In efforts to preserve and expand their fleets by making them more competitive, many nations are developing aggressive maritime promotional policies. Prominent among them are several European and Asian nations that have enacted measures -- including major tax incentives, direct subsidies, and ship financing schemes -- aimed at benefiting shipowners operating under their national flags, thus enhancing the appeal of their ship registries against flags of convenience. These efforts have greatly intensified in recent years.

The information that follows is not presented as an exhaustive review of all the maritime aid programs being offered by foreign governments, or even of the entire array of maritime aid measures now in effect in European Union (EU) member states and other European countries. By describing many of the key maritime aid provisions that have been adopted by several European governments, this information is intended to draw attention to the fact that other maritime nations, recognizing the immense economic importance of their national-flag fleets, are intent on strengthening those fleets by adopting aggressive promotional measures.

In short, European and other foreign nations are taking bold and effective action to enhance the international appeal of their ship registries. Without countervailing action by U.S. policymakers, the aggressive policies being pursued by European nations to attract maritime business will work to the great disadvantage of U.S.-flag cargo and passenger ships attempting to operate in international trades. However, the negative competitive impact can extend to U.S. domestic operations as well.

U.S.-flag vessels operating in U.S. domestic trades will be adversely affected when American buyers purchase goods or leisure travel services from foreign sources, preferring to ship their goods or take their vacation cruises on vessels registered in countries whose maritime policies have reduced vessel operating costs to such a degree that prices for goods and services produced in the United States substantially exceed those for the same types of goods and services obtained via foreign-flag operators.

These policies, if not matched by the United States, will have an especially deleterious effect on any U.S.-flag cruise ships attempting to operate in both international and U.S. domestic trades. This is because operators in the intensely competitive cruise industry, in which overall supply (capacity) typically exceeds demand, are competing for a fixed amount of travel/vacation dollars, the supply of which changes only gradually over time. Value-conscious cruise customers can be expected to choose the cruise line that gives them the most value for their money. Between two cruise lines providing similar shipboard amenities, they are likely to choose the one offering the lower rate. Considering that nearly all foreign-flag cruise ships are built with large subsidies and pay no U.S. corporate or crew payroll taxes, the advantage can be overwhelming.

Belgium:

(updated July, 2004)

On March 19, 2003, the European Commission (EC) announced that it had decided to approve several tax measures including a tonnage tax scheme, enacted by Belgium to aid its maritime sector.

The new tax provisions are already sparking renewed interest in the Belgian flag, which Belgian ship owners abandoned en masse in 1991.

For example, Belgian ship owner CMB, which transferred its entire fleet to the Luxembourg register in 1991, announced in May that it planned to bring about 20 ships under the national flag.

SOME KEY PROVISIONS OF BELGIUM'S TONNAGE TAX SYSTEM

The tonnage tax regime applies to Belgian companies (and Belgian branches of foreign companies) that are:

	the owner, joint owner, or usufructuary of a ship that isn't subject to a bareboat charter; or
	the bareboat charterer of a non-Belgian-owned ship.

Belgian companies or branches that are engaged in the management of ships on behalf of third-party owners can also take advantage of the tonnage tax regime. To qualify, however, they must meet additional conditions: At least 75 percent of the ships must be registered in the Belgian ship register, and the company or branch must be exclusively engaged in ship management.

The tonnage tax regime is an optional one; a shipping company must explicitly request its application. When an application is granted, the tax regime enters into effect for the year following the year in which the application was submitted. For example, if the request was filed in 2002, the regime applies to income earned in fiscal 2003 (tax assessment year 2004).

The tonnage tax regime is granted for an initial period of 10 years, with an automatic renewal every 10 years. An operator can leave the regime, provided he or she gives notice at least three months before the end of the 10-year period.

Computing the Tonnage Tax

The tonnage tax is determined on a notional tax basis, which is then subject to the ordinary corporate income tax rate of 33.99 percent.

The notional tax basis is computed per ship, per day, and per 100 net tons, in accordance with the scale below.

For Belgian companies or branches that manage ships on behalf of third-party owners, the notional tax basis is computed per ship, per day, and per 1,000 net tons, in accordance with the following scale:

Up to 1,000 tons, euro 1.00
Between 1,001 tons and 10,000 tons, euro 0.60
Between 10,001 tons and 20,000 tons, euro 0.40
Between 20,001 tons and 40,000 tons, euro 0.20
Over 40,000 tons, euro 0.05

The capital gains (or losses) on the disposition of ships are not taxable (or deductible) and are deemed to be included in the notional tax basis of a company or branch that has elected to enter the tonnage tax regime.

Cyprus

(updated March, 2004)

Cyprus offers significant tax incentives to shipping companies, including the following:

	No income tax is payable on the profits from the operation of a Cyprus-registered vessel.
	No capital gains tax is payable on the sale or transfer of a ship.
	No income tax is payable on the salaries of officers and ratings employed on Cyprus-registered ships operated in international waters.
	Vessels registered in Cyprus are subject to a very low tonnage tax.

SOME KEY PROVISIONS OF THE CYPRIOT TONNAGE TAX SYSTEM

For vessels other than passenger ships, the tonnage tax is calculated as follows:

(BASIC CHARGE + GROSS TONNAGE INCREMENT) x AGE MULTIPLIER

The basic charge is CY£100, and the gross tonnage increment is calculated as follows:

	GROSS TONNAGE	CENTS
	For each unit up to 1,600	26
	For each unit between 1,601 and 10,000	16
	For each unit between 10,001 and 50,000	6
	For each unit over 50,000	4

The age multiplier is shown below:

	AGE*	SHIP RATE MULTIPLIER
	Up to 10 years	0.75
	11-20 years	1.00
	Over 20 years	1.30
* This is calculated by deducting the year in which the keel was laid from the year of assessment of the tonnage tax

For passenger ships the tonnage tax payable is double that payable for other ships. The tonnage tax is payable in biannual installments, on 1 January and 1 July.

If a vessel's crewing and technical management is carried out by companies operating in Cyprus, a 30 percent reduction of the tonnage tax is allowed, provided the relevant documentary evidence is submitted to the Department of Merchant Shipping.

The law further provides that if Cypriot citizens are employed as members of a vessel's crew, a percentage of the tonnage tax owed on the vessel may be refunded for each month they are employed on board.

In addition, if a ship is laid up for a period of more than three consecutive months, the tonnage tax payable is reduced by 75 percent for the period during which the ship is idle. However, the maximum reduction or refund cannot exceed 50 percent of the tonnage tax due.

Denmark:

(updated March, 2004)

In its draft budget for 2001, introduced at the end of August 2000, the Danish government stated its intention to introduce a tonnage tax system, but without setting a timetable.

At the time, Danish shipowners reacted negatively to the government's proposal to combine a tonnage tax with a requirement that owners also include a "shadow calculation" of tax liability based on the regular corporation tax system. They wanted a tonnage tax without side calculations.

They now have it. Denmark's current government, elected in November 2001, offered a tonnage tax as part of a wider package of measures intended to stimulate business.

In presenting the tax proposal as part of its 2002 finance bill, the government said Denmark should still be an attractive country in which to operate shipping. "That requires that tax rules do not diverge substantially from rules offered in other countries."

Denmark's tonnage tax regime, which received approval from the European Commission in March 2002, is similar to the United Kingdom's.

Danish maritime shipping companies may opt into the tonnage tax scheme for renewable 10-year periods, allowing them to calculate their tax liability by reference to a fixed daily rate on the capacity (tonnage) of ships employed (per 100 net tonnage).

In 1989, Denmark implemented fiscal reduction measures for seafarers on board Danish vessels registered in either the ordinary register (DAS) or the second register (DIS).

Under these measures, which went into effect January 1, 1989, seafarers working on DAS- or DIS-registered vessels benefit from income tax reductions, though the income tax regime for the DAS register is less favorable.

The European Commission (EC) belatedly announced its approval of them on November 13, 2002, following a complaint that the favorable fiscal regime should be limited to European Union nationals.

The EC noted that all seafarers on board both DAS- and DIS-registered vessels are subject - at least in principle - to income tax in Denmark even though their fiscal treatment significantly reduces, or even eliminates, their tax liability.

"The Commission is thus of the opinion that the fiscal measures related to the income tax of seafarers in maritime transport in Denmark are so far compatible with European State aid rules," according to a press release on the subject.

SOME KEY PROVISIONS OF DENMARK'S TONNAGE TAX SYSTEM

The Danish tonnage tax regime is open to limited shipping companies registered in Denmark, EU shipping companies with a permanent establishment in Denmark, and all companies whose management is located in Denmark, provided that the company has corporation tax liability in Denmark.

Shipping companies can choose between the tonnage tax and the ordinary corporate tax. The decision, once made, is binding for a period of 10 years. Qualified companies are obliged to choose between the two options before they file their income tax for the year in which they qualify for tonnage taxation.

All qualifying shipping companies within a group are required to choose the same taxation system. However, individual companies with separate and independent management, and clearly different business activities, can apply for separate taxation.

Only income deriving from the shipping business (the transport of goods or passengers) and associated activities is covered by the tonnage tax system. Associated business includes such activities as the operation and maintenance of dockyards, passenger terminals, containers, ticket offices, and other related office facilities.

Activities not qualifying under the tonnage tax system include fishing, dredging and the extraction of hydrocarbons. Qualifying vessels include cable-laying ships, shuttle tankers and stand-by vessels, but not engineering ships.

Qualifying income is derived from vessels that a company owns or charters, including time-chartered vessels of 20 gross tons or more. The leasing of ships is not considered shipping business for tonnage tax purposes.

Computing the Tonnage Tax

Each ship's tonnage income is calculated as follows, on the basis of a fixed amount per 100 net tons:

	For each 100 tons up to 1,000 tons, DKK 7
	For each 100 tons between 1,000 tons and 10,000 tons, DKK 5
	For each 100 tons between 10,000 tons and 25,000 tons, DKK 3
	For each 100 tons above 25,000 tons, DKK 2

Tonnage income is calculated on a daily basis, regardless of the ship's operating status, and taxed at a rate of 30 percent annually, Denmark's ordinary corporate tax rate.

Capital gains related to the sale of ships are taxed at the same rate.

Finland:

(updated January, 2004)

While the Finnish-flag fleet has been stable in recent years, the industry is currently threatened with an exodus of vessels to foreign registers as owners face growing pressure to respond to the new competitive climate. For example, Finnlines and Viking Line have both announced plans to re-flag ships.

Under s subsidity system introduced in 1992 to compensate shipowners for the higher cost of employing local seafarers, Finnish-flag cargo vessels with a domestic crew and trading to and from Finland, in the international trade, became eligible for the repayment of seafarers' income taxes and three to five percent of social security payments. This subsidy system did not extend to ferries and passenger ships. (Under the Finnish Foreign Merchant Shipping Registry Act, only cargo vessels used primarily in international trade and passenger vessels not regularly calling at Finnish ports were eligible for state aid.)

In 2002, the government of Finland granted full restitution of all social security costs for seafarers, but again only for those employed on Finnish-flag cargo ships for seafarers. Another provision, which also applies only to cargo ships, allows up to 50 percent of a ships's crew to be hired from non-European Union countries.

On March 2002, the European Commission approved a Finnish scheme providing a subsidy to passenger vessels. The subsidy scheme gives EU seafarers working on board Finnish passenger ships a 97-percent reduction of withholding tax on their marine work income.

The tax relief benefits Finnish passenger vessels engaged in international transport and calling regularly at Finnish ports.

Also in 2002, after much debate, Finland's parliment ratified legislation implementing a tonnage tax system. The measure follows Norway's tonnage tax rules, whereby only revenues retained in a company for future investment in its shipping operations qualify for the tonnage tax; while those paid to shareholders in the form of dividends would be taxed at the normal corporate income tax rate of 29 percent. (Norway's tonnage tax system allows taxes to be deferred until such time as profits are distributed.)

The reaction among Finnish shipowners to the tonnage tax system has been generally negative, especially among large owners. Some industry representatives have been harshly critical.

"The system is a total disaster from start to finish," said Henrik Longqvist, acting managing director of the Finnish Shipowners' Association, who predicted that not a single ship would choose the tonnage tax over the traditional tax regime.

The big owners say the system does not provide satisfactory treatment of so-called "hidden tax debt" represented by depreciation.

Ferry operators complain that it does not cover revenue from duty-free sales on passenger ships.

Shipowners in Finland are also unhappy with the fact that the provision granting full refunds of crew taxes and social costs, and the one allowing up to 50 percent of a ship's crew to be hired from non-European Union countries, are restricted only to cargo vessels.

Despite the negative feedback from shipowners, the government of Finland said it had no plans to modify the tonnage tax system.

RECENT DEVELOPMENT: Helsinki announced in November 2003 that, effective from January 2004, it would revise its maritime policy to allow owners of both cargo and passenger vessels to receive a full refund for tax and social security payments made on behalf of seafarers. The "net wage" system, based on the Swedish model, also permits funds received from ship sales to be set aside untaxed if they are used to acquire replacement tonnage.

France:

(updated May, 2004)

Quirats System

In the summer of 1996, the French parliament approved a "quirats" system (which came into force in October 1996) whereby private investors could buy shares in French-flag ships in return for tax breaks. The now-defunct instrument, which was to have been available for investments subscribed up to the end of the year 2000, allowed individual investors to deduct up to FFr500,000 ($65,200)* and firms applying together up to FFr1 million ($130,400) annually from their taxable income provided the sum was invested in ships under the French flag. Ships financed under the quirats system must remain under the French or Kerguelan flag until the year 2001.

The quirats system covered both merchant tonnage and passenger ships. The ships concerned could be new or secondhand but had to be certified as having a useful life of eight years and delivered within 30 months of the investment being subscribed. In addition, owners themselves were required to provide 20 percent of the purchase cost. Each application had to be individually approved by the government. The system was the centerpiece of an attempt by the French government to strengthen the French-flag merchant fleet.

As of May 1997, some FFr3,500 million to FFr4,000 million ($456.4 million to $521.6 million) worth of ships had been financed under the quirats system. "Not too long ago there was talk of the French fleet withering to nothing," said Philippe Poirier D'Ange D'Orsay, president of the French Shipowners' Association. "All that has changed. Quirats has stirred fresh dynamism and optimism."

In December 1997, after many debates on the issue, the French parliament's lower house -- National Assembly -- abolished the short-lived quirats system over the heated protests of French shipowners. The decision came during deliberations on France's budget for 1998, and overturned a Senate vote in favor of the system. All contracts signed under quirats before September 15, 1997 were deemed legal and allowed to proceed.

Pons System

France also has in place what is known as the "Pons" system, under which a ship operating company may raise 100% of the money needed to finance ship construction from private investors, and after five years of operation acquire the ship at 50 percent of its construction cost. Investors in ships financed under the Pons system are entitled to deduct a certain amount of their investment from their taxable income. Ships financed under the Pons system must fly the French flag and operate within French territories. (Vessels ordered under the alternative Quirats system are not limited to French territories, provided they fly the French flag for a minimum of five years.) Further, the master and other senior officers of ships financed under the Pons system must be French nationals.

France also provides direct subsidies to the French shipping industry. The subsidies amounted to FFr201 million ($26.2 million) in 1997. The money is used to compensate for the high cost to French shipowners of sailing under the French flag, both in salaries and in the social charges levied by the government.

In November 1999, French shipowners' association CCAF proposed a set of reforms aimed at enhancing the flag's competitiveness internationally and to safeguard the domestic fleet. The proposed measures included the introduction of a lump-sum tonnage tax, tax-exempt status for seamen's salaries, and the abolition of social charges for seafarers. Another proposal called for the government to expand on France's strategy of having three separate flags for different shipping sectors.

The French transport minister had announced months earlier that his ministry was considering a reform of existing regulations governing the French flag, without providing any details. Then, in early 2000, the French government let it be known that it would propose measures shortly to make the French flag more attractive to ship operators.

It was reported that the government planned to reform France's international registry, commonly known as the Kerguelen registry, to enhance its appeal. Under the proposed changes, shipowners would be given greater freedom in the use of non-French seafarers. Currently, crews on Kerguelen-flag vessels must be 35 percent French, but the government indicated that shipowners would be allowed more flexibility in meeting this requirement, probably by letting them apply the percentage as a fleet-wide average rather than as a minimum requirement for each vessel.

The government also announced its intention to extend existing employer social charge reimbursements to family allowance and employment pay contributions, and to review policies pertaining to taxation of capital gains from the sale of French-flag ships. Consideration was given to the possibility of exempting proceeds from the sale of French-flag vessels from the capital gains tax in the event that the proceeds were reinvested in another French-flag ship within five years of the sale. News reports indicated that the French government seemed to prefer this form of tax relief to the tonnage tax proposed by shipowners.

The French government also proposed opening the Kerguelen registry to cruise ships.

The government then decided to commission a fresh study by outside experts who, in the report they produced a few months later, agreed with the owners that the French flag merchant fleet is at a serious cost disadvantage in relation to its European neighbors and, without supportive action, faces extinction.

"Without flexibility on all sides, the future of the French merchant fleet will be inscribed under one or several foreign flags," according to the report.

While arguing that the French government has done less to help the shipping sector than its counterparts in other European countries, the report came up with surprisingly few hard-and-fast recommendations for remedying the situation.

It supported the owners' claim for exemption from social charges for crew members but suggested that the tonnage tax might not bring the benefits they expect.

Above all, it called for a revision of the Kerguelen register, making it available for all categories of ships operating in international markets.

The report accepted the need to give owners some flexibility in meeting the 35 percent requirement, but the Central Committee of French Shipowners expressed strong reservations about the further recommendation that shipping companies be obliged to give long-term guarantees regarding the maintenance of seafarers' jobs.

Overall, the report won a mixed response from the shipowners' committee.

In April 2001, after months of negotiations, the French shipowners' committee announced that it had reached conditional agreement with all the leading seafarers' unions except one in regard to manning requirements for the Kerguelen registry.

The agreement would allow shipowners to make virtually unlimited use of non-French seafarers on ships new to the Kerguelen fleet, requiring only the master and second officer to be French.

In return for this concession from the unions, French shipowners agreed to abide by the 35 percent minimum French crewing requirement on vessels in the existing Kerguelen fleet. Instead of being applied on a vessel-by-vessel basis, however, the percentage requirement would be applied on a company-wide basis, allowing variations in French crewing levels from one vessel to another.

The unions remained unwilling to conclude agreement on the 35-percent rule, however, without further progress on other aspects of the reform, which covers such areas as union representation for Kerguelen crews and social security cover for foreign seafarers employed on Kerguelen vessels.

And until shipowners and unions reached full agreement on all aspects of the reform, the French government was unwilling to put any of it into effect.

For example, an item in the 2002 Finance Bill, published in September 2001, provided for the reimbursement of seafarers' social charges not already covered by their social security system. However, the transport ministry indicated in its note of presentation of its proposed 2002 budget that this measure would not apply to seafarers aboard vessels on the Kerguelen register until talks between owners and unions had been completed - a decision which drew protests from shipowners.

But the government took what was reported to be a significant step forward in March 2002 by adopting an ordonnance giving its agreement in principle to owners' pleas for greater freedom to use foreign seafarers in vessels using the Kerguelen register. The ordonnance needs to be completed by a decree requiring approval from the Council of State.

Though French shipowners failed to persuade the government to include a tonnage tax in the 2002 Finance Bill, one was included in a package of transport measures proposed by Union en Mouvement, the grouping behind President Chirac's successful bid for re-election in May 2002.

Following the election, French shipowners' leader Philippe Louis-Dreyfus, said he was "relatively optimistic" about the prospects for French shipping under the new government.

He indicated that French owners were hopeful that the government would move to end the blockage on flag reform, allowing them greater freedom in the use of non-French seafarers on France's second register.

They attach particular importance to the total reimbursement of employer social security contributions, promised but never carried out by the previous government.

French shipowners also continue to push for tax-exempt status for seafarers' salaries.

In December 2002, the French parliament approved legislation providing for the creation of a tonnage tax, two months after the French government gave the go-ahead for adoption of a tonnage-tax system in 2003.

France's tonnage tax regime, which received European Commission approval in May 2003, is available to companies drawing over 75 percent of their revenues from commercial shipping and can be applied to vessels of 50 Universal Measurement System (UMS) units or more.

Tugs, dredgers, fishing boats and fixed vessels are not included.

Another significant development came in April 2003 with the announcement that France had agreed to set up a new international register to replace the French Southern Antarctic Territories register, more commonly referred to as the Kerguelen flag.

The proposal to create the French International Register (FIR), which would virtually eliminate the French nationality requirement aboard French-flag vessels, was made in a government-commissioned report produced by Henri de Richemont, a senator and maritime lawyer.

Under the FIR, only the captain and his second officer must be French, whereas crews on ships under the existing Kerguelen flag are required to be 35 percent French.

Other proposals offered by Mr. De Richemont include significant tax relief for seafarers' salaries, outright elimination of employer social security charges for vessel owners rather than the present policy of reimbursing them for such charges, and tax relief for road haulers willing to use maritime cabotage.

The FIR is expected to provide substantial operating savings compared to the French second register of the Kerguelen Islands.

In November, Dominique Bussereau, France's secretary of state for transport and the sea, confirmed that the FIR was on schedule to be adopted by January 1, 2004, adding that the text was almost finalized and was being reviewed by the Merchant Marine Council.

Paris rethinks plan for second register: French President Jacques Chirac, reacting to opposition party gains in regional council elections in March 2004, appointed a new government under Prime Minister Jean-Pierre Raffarin. The new government announced in April that the bill to create a new French international register had been taken off the government's legislative timetable.

While strongly favored by French shipowners, the measure drew fierce opposition from French seafarers' unions, which had waged a concerted campaign of industrial action against the proposal.

Francois Goulard, who replaced Mr. Bussereau as secretary of state for transport and the sea, asked Bernard Scemama, chairman of the Higher Council for the Merchant Marine, to act as a mediator between the unions and shipowers.

Mr. Goulard said the government's future approach to the issue would be decided on the basis of conclusions reached by Mr. Scemama following the discussions. A new bill is expected soon.

SOME KEY PROVISIONS OF FRANCE'S TONNAGE TAX SYSTEM

France's tonnage tax regime is open to companies that are liable to the French corporation tax, and which generate more than 75 percent of their revenues from the operation of commercial ships.

Owners or joint owners of qualifying ships (commercial ships of 50 or more gross tons, operated for the carriage of passengers or goods, towage in high seas, salvage activities, or maritime assistance or transport in connection with activities necessarily provided at sea) may elect to enter the tonnage tax system for a renewable and binding 10-year period if:

	They operate the ships directly.
	Ships are time-chartered or voyage-chartered.
	Ships are bareboat-chartered, provided that the bareboat charterer is a related company (as defined in article 39-12 of the French Tax Code) that also has opted for the tonnage tax.

Bareboat charterers and time charterers also may elect to adopt the tonnage tax regime with respect to the same qualifying ships, while voyage charterers are excluded from the regime.

Fishing vessels, dredgers and ships operated for port activities are excluded as well.

For existing companies that qualified for the tonnage tax system at the time of its inception, the deadline for electing to enter it is December 31, 2004. Companies that become eligible to enter the system after that date are afforded only a limited window of opportunity: If they are to enter, they must do so during the financial year in which they become eligible or the following one.

Vessels need not be registered under the French flag in order to qualify for the tonnage tax, but they must be strategically and commercially managed from France.

Computing the Tonnage Tax

The corporation tax rate (33.33%) is applied to profits, calculated on a ship-by-ship basis as follows:

STEP 1 - calculate the daily profit per ship

This calculation is made by reference to an amount of profits for each 100 net tons.

For each 100 tons up to 1,000 tons, euro 0.93
For each 100 tons between 1000 tons and 10,000 tons, euro 0.71
For each 100 tons between 10,000 tons and 25,000 tons, euro 0.47
For each 100 tons above 25,000 tons, euro 0.24

STEP 2 - calculate the profit per ship for the accounting period

Multiply the daily profit for each ship by the number of days that the ship is actually operated by the company during the accounting period.

STEP 3 - calculate the tax owed

Multiply the profit for each ship by 33.33 percent, the corporate tax rate.

EXAMPLE

For a ship of 50,000 tons, tonnage taxes for a 365-day accounting period would amount to 24,781.02 euros.

Capital gains resulting from the sale of ships that are purchased and sold while under the tonnage tax regime are exempt from taxes.

The following items of income are added back to the tonnage tax profits:

	Cancellation of debt, grants and acts of liberality made in favor of the company within the tonnage tax regime by a related company that has not opted to enter the regime.
	Income generated by pass-through entities, except in the case of joint-ownership of vessels that are eligible for the tonnage tax regime.
	Profits arising from the disposal of assets used in the operation of eligible ships.
	Gains generated by the voluntary revaluation of ships and fixed assets used in the operation of ships.
	Gains on capital contributions related to depreciable assets with respect to merger, spin off or partial business transfer - gains that benefit from the favorable tax regime of article 210 A of the French Tax Code.
	Interest calculated on the basis of the portion of shareholders' equity that exceeds twice the amount of the debts of the company plus the lease payments remaining due at the end of the financial year and the residual price of the assets leased

* Equivalent U.S. dollar amounts given herein are based on the rates of exchange for the U.S. dollar against the particular foreign currency as of June 21, 2001, as listed in The Wall Street Journal on June 22, 2001.

Germany:

(updated April, 2004)

Effective January 1, 1999, the German government adopted measures intended to bring substantial tax relief -- an estimated Dm160 million ($70 million) annually -- for the German-flag shipping industry. Following the model of the Netherlands, Germany allows shipowners to choose between a flat-rate tonnage tax and the normal income tax. Owners have three years after ordering a new vessel to decide whether they want to be covered by the normal German tax system or the tonnage tax, while owners of existing ships must decide by December 31, 2001. The choice, once made, remains in force for 10 years. Operations for vessels under the tonnage tax have to be run from Germany.

Under the special tax regime, taxable income is determined on the basis of a ship's tonnage, and the income so determined is taxable (federal corporation tax and municipal trade tax) at ordinary rates. The annual income for each ship is deemed equal to the following flat rates: Dm1.80 per 100 net tons per day for ships under 1,000 net tons, Dm1.35 for vessels between 1,000 net tons and 10,000 net tons, Dm0.90 up to 25,000 net tons, and Dm0.45 for tonnage above 25,000. The tonnage tax has to be paid even if the vessel produces a loss.

German shipowners are allowed to retain 40 percent of the income tax, which is deducted at source, for seafarers that work at least 183 days a year on German-flag ships in international trades.

In addition, the German government has appropriated more than $128 million (to be paid out between 2001 and 2006) to subsidize the non-wage labor costs of operating German-flag vessels.

In May 2002, the European Commission (EC) approved a euro4.1M ($3.7M) aid scheme to help maritime shipping companies finance the training of seafarers on German merchant ships.

EC approval cleared the way for the German government to allocate up to euro25,500 ($23,000) per trainee.

Aid contributions will be given to seafarers on German-registered ships. European citizens qualify for the training grant if they are trained as additional crew members on merchant ships suitable for training purposes.

The German aid scheme, which aims at safeguarding and developing European maritime expertise while reducing labor costs, is in line with the objectives and principles outlined in the guidelines on state aid to the maritime transport sector that were adopted by the EC in 1997.

The EC ruled that the German aid plan is non-discriminatory, transparent and compatible with European competition rules.

RECENT DEVELOPMENTS: In May 2003, German Chancellor Gerhard Schroeder announced that the share of the income tax paid by seamen that owners can keep as a subsidy would increase from the current 40 percent to 80 percent. (Under European Union guidelines for state aid to maritime transport, owners can be allowed to keep up to 100 percent of the income tax paid by seafarers.)

Germany's latest budget, passed on July 2, includes financial aid for German shipping companies in the amount of 45M euros ($51.7M) a year in 2004 and 2005. The aid, in the form of income tax relief and crew social payment concessions for owners flying the German flag, fulfills the promise made by Chancellor Schroeder in May, the German transport minister said.

SOME KEY PROVISIONS OF GERMANY'S TONNAGE TAX SYSTEM

To qualify for the tonnage tax regime, an applicant must:

	Operate merchant ships in international shipping operations
	Be a German shipowner
	Be a commercial business having its management in Germany
	Make an irrevocable application
	Meet the relevant provisions of the German Income Tax Act

Merchant ships are deemed to be operated internationally if they are mainly used to transport passengers or goods to or between foreign ports, within a foreign port, or between a foreign port and the high seas; or if they are mainly used outside German territorial waters for towage, the survey of energy deposits located below the sea bed, salvage or mineral exploration. Their operation includes incidental and auxiliary activities. They may be owned or chartered.

Ships are considered as being mainly used for international shipping operations if they are so used for more than half of the total number of operating days. (Lay-up days are counted as operating days, provided that "loss of hire" insurance was taken out. So are brief shipyard stays. Extended shipyard stays, for reconstruction or major repair work, are not counted as such.)

Vessels are required to be primarily registered in Germany.

Upon being accepted into the tonnage tax system, an applicant must remain in it for a period of 10 years, and may not exit from it voluntarily during that period.

Ownership of a vessel by a German shipowner includes the commercial, technical and staffing management of the ship. In particular, the following activities are included:

	Entering into contracts for use of the ship
	Equipping ships and providing food and drink
	Recruiting of captains and ship's officers
	Providing cargo for the ship
	Entering into contracts for bunker fuel and lubricating oil
	Maintaining the ship
	Entering into an insurance contract on ship and equipment
	Keeping books of account
	Accounting
	Effecting and implementing the resolution of co-owners of the ship

These major activities must be carried out almost exclusively in Germany.

In the case of partnerships, entry into the tonnage tax system may only be applied for on a joint basis, with each member of a corporate group qualifying individually for tonnage tax.

With respect to the operation of merchant ships, a distinction is made between ships that are owned by a company and ships that are chartered by it:

	In the case of ships that are owned by a company, the operation of merchant ships includes both independent use and chartering, provided the chartered ships are equipped - i.e., staffed with crew and otherwise made operational - by the charterer. Accordingly, "bareboat" chartering is excluded. In addition to use and chartering, the operation of merchant ships, as previously noted, also includes any incidental or auxiliary activities that are directly related to the use and chartering of ships. These activities include the sale of merchant ships, as well as the sale of assets that directly serve the operation of merchant ships.
	In the case of chartered ships, their use in international shipping operations may be covered by the tonnage tax system if the following additional requirements are met:
		In the case of chartered vessels registered in a German ship register, they are covered only if the merchant ships that are owned by the company are simultaneously operated in international shipping transactions
		In the case of chartered ships not registered in a German ship register, there is the additional proviso that the net tonnage of the chartered ships does not exceed three times the net tonnage of the merchant ships that are owned by the company

If a company conducts other activities in addition to operating merchant ships in international trades, profits from those activities are subject to the ordinary corporate tax.

No depreciation or equivalent allowances are available under the tonnage tax system.

Computing the Tonnage Tax

Taxable profit, calculated on the basis of net tonnage, is determined as follows:

STEP 1 - calculate the daily profit per ship

This calculation is made by reference to an amount of profits for each 100 tons, as follows:

For each 100 tons up to 1,000 tons, euro 0.92
For each 100 tons between 1,000 and 10,000 tons, euro 0.69
For each 100 tons between 10,000 and 25,000 tons, euro 0.46
For each 100 tons above 25,000 tons, euro 0.23

STEP 2 - calculate the profit per ship for the accounting period

Multiply the daily profit for each ship by the number of international operating days during the accounting period.

STEP 3 - calculate the corporate tax owed

Under Germany's tonnage tax system, ship profits are taxed at the ordinary rate applicable to corporate profits.

German business profits are subject to two taxes: federal corporation tax and municipal trade tax. Corporation tax is levied at a uniform rate of 25 percent and is then subject to a surcharge (the "solidarity levy") of 5.5 percent. The trade tax rate varies by location from just under 12 percent to 20 percent (around 18 percent for most larger cities). The local tax is deductible as an expense for corporation tax.

Germany's effective tax rate on corporate profits, as quoted by KPMG International in its 2003 tax rate survey, is 39.58 percent. The rate includes corporate tax, the surcharge on the corporate tax, and trade tax.

Greece:

(updated March, 2004)

Greece established a tonnage tax system for Greek-flagged ships in 1975. The majority of the Greek tonnage tax provisions enjoy a special status: They cannot be amended or abolished (save for amendment of the tax rate) as long as the present provisions of the Greek constitution regarding Greek commercial ships remain in force.

The tonnage tax is not elective - it is the only tax imposed on the registered owners of Greek-flagged ships (no corporate tax is payable). It is calculated by reference to a ship's category, age and tonnage. (Actual profits deriving from the shipping business are disregarded for tax purposes.)

At the start of 2002, the tonnage tax on cargo ships that trade regularly between Greek and foreign ports, or exclusively between foreign ports, was reduced by 50 percent. Greek-flagged cruise vessels also received the 50-percent reduction.

At the same time, Greece reduced the tax burden on its seafarers, cutting the income tax for officers from nine percent to six percent and halving the tax rate on ratings to just three percent.

SOME KEY PROVISIONS OF GREECE'S TONNAGE TAX SYSTEM

Greece's tonnage tax law applies to all Greek-flagged ships used for commercial purposes.

Ships under the Greek flag are separated into two categories, with the first category consisting of the following:

	Bulk carriers, tankers and reefers of at least 3,000 gross tons.
	Steel dry or wet cargoes, as well as reefers of between 500 and 3,000 gross tons, which undertake voyages to foreign ports or navigate exclusively between foreign ports.
	Passenger ships that undertake voyages to foreign ports or navigate between foreign ports.
	Passenger ships of more than 500 gross tons that have undertaken, following a public announcement, regular trips exclusively for leisure purposes for a period of at least six months during the previous year.
	Floating rigs having a displacement exceeding 5,000 tons, as well as floating refineries used for exploration, drilling, pumping, refining and storage of oil or natural gas.

Under the Greek tonnage tax system, the treatment of ships in the second category (those not meeting the criteria listed above) differs from that of first-category ships and will not be considered further in this material.

Computing the Greek Tonnage Tax

The tonnage tax is calculated annually on the basis of a ship's age and gross tonnage.

STEP 1 - calculate the ship's total taxable tonnage

Multiply tonnage between 0 and 10,000 gross tons by 1.2
Multiply tonnage between 10,001 and 20,000 gross tons by 1.1
Multiply tonnage between 20,001 and 40,000 gross tons by 1
Multiply tonnage between 40,001 and 80,000 gross tons by 0.9
Multiply tonnage above 80,000 gross tons by 0.8

Example for a 20,000-ton ship

First 10,000 tons X 1.2 = 12,000
Second 10,000 tons X 1.1 = 11,000
Total taxable tonnage = 23,000

STEP 2 - multiply the total taxable tonnage by a specified rate (depending on the age of the ship), as follows:

Age of the ship	Rate (in US$) per gross ton*
	2003	2004 (116% increase on 1975 figures)
0 - 4 years	1.1236	1.1448
5 - 9 years	2.014	2.052
10 - 19 years	1.9716	2.0088
20 - 29 years	1.8656	1.9008
30 years or older	1.4416	1.4688

*The amounts payable for each gross ton have been increasing by four percent annually since 1975. These amounts will continue to rise by four percent annually until the year 2005, when the figures will be re-examined.

If a ship that is subject to the tonnage tax is not trading because of repair work, lack of employment or for any other reason, the tonnage tax payable is reduced in proportion to the number of days during which the ship was not trading, provided that this time period exceeds two consecutive months during the previous or relevant financial year.

Greece's tonnage taxation system covers any of a shipowner's income that is derived from that shipowner's use of his Greek-flagged ship(s) for commercial purposes. However, interest from bank deposits comprised of fares and other monies derived from the commercial use of ships is not deemed to constitute income from shipping activities, and is therefore taxed under the general rules of income taxation.

If a company with ships under the Greek tonnage tax regime conducts other business activities in addition to its shipping business, an exemption from corporate income tax is only granted to the portion of the company's net profits or dividends that equals the ratio of the gross income from the company's shipping business to its total gross income.

The following exemptions apply to first category ships under the Greek tonnage tax regime:

	Ships built in Greece and registered under the Greek flag are exempt from tonnage tax until they are six years old
	Ships that undertake regular voyages between Greek and foreign ports, or exclusively between foreign ports, as well as cruise vessels, are entitled to a 50-percent reduction on the tonnage payable.
	Ships less than 20 years old that have been repaired in Greece are exempt from tonnage tax for a number of years corresponding to one year for every US$100,000 spent on the repairs. However, in order to benefit from the exemption, the cost of repairs must have been paid using imported foreign currency. This exemption cannot exceed 50 percent of the total cost of the repairs, is applicable from the year following the date of completion of the repairs, and is valid for a maximum period of six years.

These tonnage tax exemptions are only applicable to ships that are registered under the Greek flag for the first time; that is, they are not applicable to ships that were registered with the Greek shipping registry, were struck off, and were then re-registered.

Ships qualifying for more than one of the above exemptions may benefit from only one exemption, selected by the shipowner by an irrevocable declaration.

India:

(updated November, 2003)

India’s long-pending tonnage tax regime will be implemented from April 1, 2004, Minister of State for Shipping Dilipkumar M. Gandhi announced in September.

India’s parliament was expected to pass implementing legislation during the winter session, around December-January.

Ireland:

(updated January, 2003)

Prior to January 1, 2003, taxable incomes from certain shipping activities qualified for a 10 percent tax rate, as opposed to the standard rate of corporation tax (previously 32 percent).

The current corporate tax rate of 12.5 percent applies to the trading profits of shipping and shipping service companies.

In February 1997, the Irish government announced its decision to substantially reduce the levels of Pay Related Social Insurance, which employers must pay for seafarers on their vessels. Sean Barrett, minister for the marine, said: "The new system is further evidence of the government's commitment to develop and maintain a strong Irish shipping sector." He explained that the aim of the measure was to "significantly increase the employment prospects of Irish seafarers" by making it more cost-effective to employ them on Irish vessels. In April 1996, Ireland introduced a subsidy program for seafarer/trainees to enable them to compete with UK counterparts for training placements on UK vessels.

TONNAGE TAX REGIME IMPLEMENTED:

A tonnage-tax provision was included in the Irish government's 2002 budget, introduced in December 2001.

Frank Fahey, Ireland's Minister for the Marine and Natural Resources, said of the decision to adopt a tonnage-tax regime:

The government approval for this unique flat rate tax linked to tonnage will act as a catalyst to regenerate the Irish shipping industry. The industry has been stagnant in recent years and this new tax regime will ensure a more attractive and enhanced fiscal environment. It will offer certainty and clarity for future investment and ensure the industry's competitiveness with those in other (EU) member states.

Glenn Murphy, director of the Irish Maritime Development Office, also welcomed the measure, saying:

The industry was on the brink of collapse and our larger owners would have been compelled to lower the Irish flag and relocate their core business structures to another country if the tonnage tax had not been announced this year.

Irish maritime interests have welcomed the new tonnage-tax regime.

The 2002 budget also provided Irish seafarers a special income tax allowance, as well as full refunds of pay-related social insurance to their employers.

IRISH TONNAGE TAX GETS EC APPROVAL:

On December 11, 2002, the European Commission (EC) gave its approval to the introduction of a tonnage tax in Ireland.

According to the EC, the "favorable fiscal measures" will benefit the employment of European Union (EU) seafarers and enhance the competitiveness of the Irish fleet.

The new system, based on the net tonnage of the fleet for all Irish maritime companies engaged in international traffic, replaces the standard corporation tax.

The EC granted its approval once it was satisfied that the tax scheme would meet all the EU guidelines on State aid to the maritime transport industry.

"We very much welcome the announcement as this now puts us on a level playing field," said Gary O'Dea, Irish Ferries finance director.

SOME KEY PROVISIONS OF IRELAND'S TONNAGE TAX SYSTEM:

Ireland's tonnage tax is open to shipowners, bareboat charterers, and ship management companies. The scheme does not require the management company to have an ownership interest in the vessels.

The tonnage-tax system offers an alternative method by which shipping companies may calculate their profits for corporation tax purposes. The profits, once calculated using the tonnage-tax method, are subject to the 12.5 percent rate of corporation tax.

Profits are calculated by reference to the tonnage of the ships used in a company's shipping trade. Essentially, the "tonnage" profits replace the accounting profits of the shipping company for tax purposes.

The system is elective: companies may choose whether to stay in the normal corporation tax system or move their shipping activities into tonnage tax.

If a company enters the tonnage-tax system, it must stay in it for a minimum of 10 years. Companies have a three-year period, beginning from the date the minister for finance issues the order commencing the scheme, to decide whether they want to enter it.

To qualify for the tonnage-tax scheme, a company must meet three tests: 1) it must be within the charge of the Irish corporation tax; 2) it must operate qualifying ships; and 3) it must have a sufficient presence in, and economic connection with, the State to satisfy the EU requirement that a beneficiary of State aid should have its strategic and commercial management in an EU State.

All or none of the qualifying companies in a group must enter the scheme.

A "qualifying ship" is a seagoing vessel of an adequate size to engage in reasonable commercial operations and which complies with all the requirements for navigation at sea imposed by the competent authorities of any country or territory. A ship need not fly the Irish flag to qualify.

Excluded from the definition are fishing vessels; recreational vessels (excluding cruise ships); harbor, estuary and river ferries; oil tankers used for the purpose of delivering oil from an offshore oil field to an on-shore storage facility; dredgers, working platforms such as seagoing cranes, and cable-laying vessels; and non-oceangoing tugs.

Moreover, ships that are used to provide "goods or services" of a kind normally provided on land are prohibited from being designated as qualifying ships, including but not limited to businesses such as retail stores, restaurants, hotels, radio stations, casinos, and providers of financial services.

Income sources that qualify for shelter under the tonnage-tax scheme include the following: 1) income from activities that are related to the actual operation of a qualifying ship (for example, the carriage of cargo or passengers, marine research, etc.); 2) income from activities carried out on board qualifying ships that are ancillary to activities related to the actual operation of a qualifying ship, such as the operation of cinemas, bars, shops, restaurants, etc.; 3) income from activities that are undertaken in order for these shipping operations to be undertaken (such as embarkation/disembarkation services, ticket sales, hire of containers, etc.); and 4) income from the provision of ship management services for qualifying ships.

The tonnage-tax scheme contains extensive ring-fencing provisions which are designed to ensure that participants do not include income from non-qualifying activities.

Calculating the tonnage tax is a four-step process:

STEP 1 - calculate the profit per day per ship

This calculation is made by reference to an amount of profits for each 100 tons, as follows:

For each 100 tons up to 1,000 tons, 1.00 euro
For each 100 tons between 1,000 and 10,000 tons, euro 0.75
For each 100 tons between 10,000 and 25,000 tons, euro 0.50, and
For each 100 tons above 25,000 tons, euro 0.25

STEP 2 - calculate the profit per ship for the accounting period

Multiply the daily profit for each ship by the number of days in the accounting period.

STEP 3 - calculate the company's total profits

The profits for the individual ships in a fleet are added together.

STEP 4 - calculate the corporation tax owed

Multiply the total profits by 12.5 percent, the corporate tax rate.

Italy:

(updated January, 2004)

Under the Italian second register, established in 1998, the corporate tax rate on profits generated by Italian-flagged vessels (including on-board revenues and excursion revenues) is 7.4 percent, down from about 50 percent.

In addition, the Italian second register relieves ship-operating companies and seafarers of the responsible for funding social security and state-driven pension schemes. Seafarers employed on second-register vessels still benefit from such facilities, but the state now pays for them. Moreover, shipping companies save the amount of tax on seafarers' income they withhold. Payment of seafarers' income tax has become the responsibility of the state. This applies to all EU seafarers employed on Italian ships, while non-EU seafarers can be paid according to ILO conditions. As for crew nationality, each ship under the second register is required to have at least six EU citizens among its crew.

Currently, only ships operating in international trades are eligible for the second register. Italian ships operating in the national cabotage trades are excluded.

In June 2002, Italian transport minister Pietro Lunardi expressed his willingness to meet shipowners' demands for urgent measures to enhance the competitive position of the Italian fleet. Speaking in Rome at a general meeting of Confitarma, an association of Italian shipowners, Lunardi emphasized the introduction of a tonnage tax system by 2003, the extension of Italy's international ship register to include the cabotage fleet, and a substantial contribution towards the replacement of older tankers under an IMO regulation.

Since then, however, government support for Italy's maritime industry has been declining rather than increasing.

After being excised from the 2002 budget, tax rebates on the social security costs for the crews of Italian ships operating in national cabotage trades were reinserted in a late amendment in the summer of that year, but only for one year, and only at 43 percent, significantly less than the 80 percent owners previously enjoyed. The rebates were withdrawn completely in the draft 2003 budget.

Operators of Italian coastal vessels say they are operating at a significant disadvantage to EU competitors because other EU nations allow coastal operators to register ships on the books of their second registers. And the Italian register is the most expensive in Europe in terms of crew costs and tax rate, according to research by Ernst and Young.

The situation appears to be particularly critical for Italian cabotage shipping. Competition has increased since EU deregulation on coastal trades was implemented in 1999, allowing lines from all EU member states to freely enter the previously protected coastal trades of their neighbors, with the exception of Greece.

So, for example, ships entered in the tonnage tax regimes of the UK and the Netherlands may operate on Italian cabotage routes, in direct competition with Italian cabotage vessels.

"Despite pressure from transport minister Pietro Lunardi, no funding is currently being set aside either for maritime transport or as backing for fiscal relief in 2003 for vessels in domestic cabotage," Confitarma said in an official release. "As a consequence, the running costs of Italian ships are bound to rise, preventing shipping companies breaking even and, therefore, forcing them to flag out and recruit foreign crews."

Fed up with the Italian government's apparent lack of support for Italy's maritime industry, and particularly for ships operating in the nation's coastal trades, Italian shipowners association Confitarma initiated an effort to encourage its members to abandon the Italian flag for the UK register.

On November 6, 2002, Giovanni Montanari, a major Italian shipowner and Confitarma's president, repeated his call for a mass exodus from the Italian flag.

"We are approaching the UK authorities with a view to organizing a mass re-flagging operation," he told a press conference in Rome.

The association has set up a committee to examine ways of facilitating the transfer by its shipowner members.

The wholesale transfer of the Italian-registered coastal trade fleet could see the departure of more than 400 ships.

Italy's amended 2003 budget reduces tax rebates on the social security costs for crews plying the country's coastal trades from 80 percent in the previous year to 25 percent for the following three years- not enough, according to owners' association Confitarma, to enable coastal ships registered in Italy to compete with those flying the flags of other EU states.

"I think that we will probably see a lot more foreign-flagged ships coming to Italy now that the difference in costs is so high," said Giovanni Montanari, Confitarma's president.

Confitarma claims coastal trade operators would cut costs by up to 50 percent if they switched to a competing flag such as that of the UK.

After threatening to organize a mass exodus from the Italian register, Confitarma discovered that such a move would run contrary to current trade union agreements. The association is reportedly planning to deal with the issue during this year's round of union negotiations, with a view to enabling ships to begin departing the Italian register within a year, said Mr. Montanari.

NEW DEVELOPMENTS: In December 2003, after a long campaign of lobbying by Confitarma, the Rome-based association of Italian shipowners, Italy's government approved a tonnage-based taxation system - effective beginning this month - for ships operating on specified international routes.

Japan:

(updated January, 2003)

Japan's government has sent a team to Europe this month to study the tonnage tax, following a sustained campaign for its introduction by the Japanese Shipowners' Association (JSA).

The move comes after consultations between the JSA and Japan's Ministry of Land, Infrastructure and Transport. The team is to report back to the ministry upon its return to Japan.

Thereafter, the JSA will campaign for public support to achieve the necessary changes in the tax laws.

Netherlands:

(updated March, 2004)

Following the introduction of new rules in 1996, shipping companies located in the Netherlands have the option of paying a flat-rate tax based on the net tonnage of each vessel as an alternative to paying company taxes at the rate of 35 percent on net profits (gross income less all costs of operation and finance). Such companies need not fly the Dutch flag on their ships to qualify for the tonnage tax.

However, sailing under the Dutch flag holds other advantages for shipowners, such as a reduction in the wage costs of seafarers. Employers receive relief equivalent to 38 percent of gross wages for seafarers resident in the Netherlands and 10 percent for non-residents subject to Dutch social security. This facility, which typically results in a 30 percent reduction in wage costs for shipowners, only applies to vessels flying the Dutch flag.

From the standpoint of the maritime transportation industry, the Netherlands currently has one of the most attractive tax regimes in the EU, and shipowners scrambled to take advantage of the new rules. According to a report put out in the first half of 1998 by the Dutch association of shipowners (KVNR), the Dutch fleet grew from 106 to 641 vessels (and a total of 3.3 million gross tons) over the previous two years.

As to the number of jobs the reflagging of ships would create, Pieter van Agtmaal, managing director of the Royal Association of Netherlands' Shipowners, was quoted as saying: "The prognosis for employment, not only on board ships but also ashore, is very promising..." In fact the demand for personnel on Dutch-flag vessels has been so great as to create a personnel shortage, with the result that the new rules, which at first only allowed Dutch citizens to work as masters in the national fleet, had to be modified to include masters from other EU countries.

Late in 1997, Aart Korteland, chairman of the Dutch shipowners' association KVNR, described the country's fiscal policy for the shipping sector as a huge success. He observed that the Dutch-flag fleet had grown by 20 percent for the year.

The new Dutch maritime policy has been such a great success, in fact, that a Netherlands Maritime Foundation has been established to examine ways in which elements of the policy can be adapted to shipbuilding, the offshore industry, inland shipping, dredging, ports and maritime services.

SOME KEY PROVISIONS OF THE NETHERLANDS' TONNAGE TAX SYSTEM

In order to qualify for entry into the Netherlands' tonnage tax system, an enterprise must derive profit from the operation of ships for:

	The transport of goods or passengers in international traffic across marine waters.
	The exploration or exploitation of natural resources found in marine waters.
	The towing and/or assistance of ships at sea.
	Activities directly related to the aforementioned activities, such as:
		Ship brokerage
		The loading and unloading of ships by their operator
		The sale of assets relating to the operation of the ships

For purposes of the tonnage tax system, a "ship" is broadly defined and includes floating drilling platforms and other floating structures.

The enterprise must be:

	Mainly in charge of the management (within the Netherlands) of ships that it owns, co-owns (other than ships that it charters out on a bareboat basis) or charters in on bareboat terms;
	Mainly in charge of the commercial management of a ship owned by another person; and/or
	Leasing a ship on a time or voyage charter basis.

"Ownership" includes legal as well as beneficial ownership. The term "management" encompasses four categories, namely:

	Strategic management: investment decisions, decisions on the disposal of ships, and decisions on the manner in which the other categories of management are carried out
	Commercial management, such as activities relating to the acquisition and transport of cargo
	Technical-nautical management: activities involved in actually running the ship
	Crew management: the recruitment and employment of the ship's crew

Where an enterprise actually owns or co-owns a ship, its strategic management of the ship is considered as meeting the management test; however, the tax authorities require the company to have a tangible physical presence in the Netherlands.

An enterprise that manages a ship for another person or leases a ship on a time charter basis is eligible for the tonnage tax system, provided that the total net tonnage of the ships that it manages commercially or leases on a time charter basis does not exceed three times the total net tonnage of the ships that the enterprise operates as owner, co-owner or bareboat charterer.

Co-ownership is not taken into account unless it comprises at least five percent of the ship. However, a co-owner is allowed to take into account 100 percent of the net tonnage of the ship he co-owns, even if the ownership share amounts to as little as five percent.

Although a ship does not have to be registered in the Netherlands to qualify for the tonnage tax, only enterprises operating Dutch-flag vessels qualify for certain payroll tax breaks. Pursuant to the payroll tax concession, Dutch-flag enterprises are excused from paying the following:

	40% of the payroll tax and general social security premiums usually withheld from the wages of seafarers who are resident in the Netherlands and subject to Dutch payroll taxes.
	10% of the payroll tax and general social security premiums usually withheld from the wages of seafarers who are subject to Dutch payroll taxes but not residents of the Netherlands.

Computing the Tonnage Tax

The taxable profit for each ship is calculated on the basis of a fixed amount per 1,000 net tons, multiplied by the number of days that the ship is actually operated during the accounting period, as follows:

STEP 1 - calculate the daily profit per ship

This calculation is made by reference to an amount of profit for each 1,000 net tons, as follows:

Up to 1,000 tons, euro 9.08
For each 1,000 tons between 1,001 and 10,000 tons, euro 6.81
For each 1,000 tons between 10,001 and 25,000 tons, euro 4.54
For each 1,000 tons above 25,000 tons, euro 2.27

STEP 2 - calculate the profit per ship for the accounting period Multiply the daily profit for each ship by the number of days that the ship is actually operated during the accounting period.

STEP 3 - calculate the tax owed

Multiply the total taxable profit for each ship by 34.5 percent (29 percent on the first 22,689 euros).

Norway:

(updated April, 2004)

Norway has two ship registers: the Norwegian Ordinary Ship Register (NOR) and the Norwegian International Ship Register (NIS). The NIS was established in 1987. Its purpose was twofold: to offer a flexible and commercially attractive alternative to the open register while retaining the essential standards of "quality" registers such as the NOR.

In several areas the administrative procedures governing the NIS were simplified compared to those for the NOR.

There are no restrictions on the nationality of crew members on NIS vessels except that the master must be Norwegian. NIS shipowners are allowed to hire foreign seafarers on union-approved local terms.

The law establishing the NIS register included provisions aimed at precluding a head-on competition between NOR and NIS. For that reason, NIS ships are barred from carrying cargo or passengers between Norwegian ports. Nor are they allowed to engage in regular, scheduled passenger transport between Norwegian and foreign ports. In addition, they are prohibited from making multiple calls at Norwegian harbors, as ships do in feeder-type operations. An NIS ship is allowed to call at any domestic harbor only once, either to load or unload cargoes.

However, foreign-flag ships are free to call at as many Norwegian harbors as they wish, leading to complaints from NOR-flag operators about "dumping" by foreign-flag shipowners in Norwegian cabotage. Consequently, threats to abandon the NOR flag for a foreign one are commonplace among coastal operators.

Shipping companies are refunded 12 percent of the wages paid to Norwegian seafarers if a certain number of nationals are employed. In addition, a substantially higher refund is granted for Norwegian employees in training positions on NIS ships.

Effective January 1996, the Storting (parliament) implemented a system under which ship earnings are exempt from corporation tax in exchange for the imposition of a moderate tonnage tax. The tonnage tax provisions, generally recognized as Norway's most sweeping maritime reforms since the establishment of the NIS, exempt ship owners from the 1992-tax reform that placed a standard 28 percent earnings tax on all Norwegian companies. However, profits not reinvested in shipping continue to be taxed at the normal 28 percent rate.

The tonnage tax system allows taxes to be deferred until such time as profits are distributed; at which point the normal corporation tax rate of 28 percent applies. However, for a group of companies that are all subject to the tonnage tax, dividends may be distributed within the group without triggering the higher rate.

Norway modeled its new shipping taxation system on that introduced by the Netherlands at the beginning of 1996. The new tax regime is "flag blind" -- vessels do not have to be on the Norwegian register to be eligible. All that is required is that a limited company, whose sole activity is the owning or chartering of ships, is established in accordance with Norwegian rules and regulations.

Moreover, seafarers living in Norway may be entitled to an allowance on their pre-tax income. The allowance amounts to 30 percent of income earned on board, subject to a maximum allowance of NKr70,000 ($7,602).

The Norwegian-owned and -operated fleet experienced its first significant growth in the third quarter of 1996 following five years of steady decline. It grew by 35 vessels, totaling 1.2m dwt. As of June 1997, the fleet stood at 1,482 ships totaling 50.5 million dwt, compared with 1,386 vessels of 46.9 million dwt a year earlier.

Commenting in regard to the increases, for which the tax changes are held partly responsible, Rolf Saether, managing director of the Norwegian Shipowners' Association, said: "I believe that Norwegian shipping companies will continue to expand both at home and abroad. We are very happy at present." Speaking on a separate occasion about the new shipping taxation system, Mr. Saether said: "After 10 years without a clear and precise shipping policy, the parliament decided on an aggressive, internationally-minded one."

NOTE: Norwegian shipowners are no longer quite so pleased with Norway's shipping policy. Legislation enacted in 1999 doubled Norway's tonnage tax, and it was increased again in 2000 as a result of the minority government's compromise with the opposition Labor Party on the 2000 budget. Norwegian shipowners saw a further increase in their tax burden with the implementation of provisions to deny deductions of ship financing costs and to increase the minimum debt requirement for companies subject to tonnage tax. These developments prompted the Norwegian Shipowners' Association to complain of the government's apparent inconsistency on shipping tax policy.

According to a report in a special May 2000 Lloyd's List publication devoted to Norway's shipping industry, Norwegian shipowners complained of having the most unfavorable tax regime of all the major European shipping nations. It noted that they were paying four times as much tonnage tax as their counterparts in the Netherlands.

RECENT DEVEOPMENTS: Under a "net wage" scheme introduced in July 2002, passenger ferry operators who employ domestic seafarers on their vessels end up keeping 100% of the income tax and social security contributions for their Norwegian crews.

In October, however, Norway's government sent shock waves through the country's maritime sector when it revealed budget proposals to abolish the new tax breaks.

Maritime unions and shipowners joined forces to oppose the proposed tax changes, which they said would force ship operators to relocate their businesses to neighboring Sweden or Denmark.

Color Line, Norway's largest ferry operator, said it would be forced to move its operations out of Norway if Oslo implemented the proposed changes. The company opted to delay a $294 million order with Kvaerner Masa Yards in Finland for a new cruise ferry until Norway's parliament made a decision on the tax proposal.

On November 22, 2002, politicians reached an agreement ensuring passage of the government's 2003 draft budget in parliament.

While the net wage system was reintroduced for passenger vessels, and some slight improvements were made to Norway's tonnage tax, cargo vessel owners would only receive partial refunds of taxes and social security contributions they pay on behalf of seafaring personnel. In January, over the government's objections, the Storting passed a motion to extend the "net wage" scheme to the offshore industry.

On November 22, 2002, politicians reached an agreement ensuring passage of the government's 2003 draft budget in parliament.

While the net wage system was reintroduced for passenger ships, and some slight improvements were made to Norway's tonnage tax, cargo vessel owners will only receive partial refunds of taxes and social security contributions they pay on behalf of seafaring personnel.

In January 2003, over the government's objections, the Storting passed a motion to extend the "net wage" scheme to the offshore industry, effective as of July.

NEW DEVELOPMENTS: In its national budget proposal, put forward in October 2003, Norway's center-right government proposes to maintain a net wage scheme for passenger ferries, while abolishing it for seafarers on shuttle tankers and offshore vessels and replacing it with a ten percent refund scheme.

Norway's shipping industry, which has lobbied hard for a net wage system and a long-term policy on seafarers' wages, is now resting its hopes for maintaining the status quo on a White Paper on shipping policy due in the spring of next year.

SOME KEY PROVISIONS OF NORWAY'S TONNAGE TAX SYSTEM

Norway's tonnage tax system is voluntary and has no minimum commitment period. Companies may remain in the system for as long as they meet the qualifications. They may voluntarily withdraw from it by giving notice to the Inland Revenue that they wish to be taxed in accordance with the ordinary tax rules.

To qualify for the tonnage tax system, a company is required to meet both of the following conditions:

	It must be established in accordance with either the Norwegian 1997 Act relating to Limited Liability Companies or the Norwegian 1997 Act relating to Public Limited Liability Companies.
	It must own qualifying ships either directly or indirectly.

Indirect ownership of a qualifying ship may take the form of a) shares in another company within the tonnage tax system, b) partnership shares in a general or limited partnership that owns a qualifying ship, or c) shares in certain Norwegian-controlled foreign companies. In all cases, however, the number of shares owned by a company must amount to at least three percent of the total number of shares.

Ships that are bareboat chartered qualify for the tonnage tax system, provided the company chartering them owns (directly or indirectly) at least one qualifying ship.

The term "qualifying ship" applies to either of the following:

	A "ship in traffic"
	A movable vessel or structure for use in offshore petroleum activity

A ship in traffic must have its own propulsion machinery and (unless it is engaged in international trade) be of at least 100 gross tons. It must not be used essentially on Norwegian inland waterways or rivers, or in stationary or port or other limited activities where the distance sailed does not exceed 30 nautical miles. Ferries and other passenger vessels in scheduled traffic between Norwegian ports do not qualify if the distance between the first and last place of call is less than 300 nautical miles. Pleasure craft, accommodation ships and support vessels working essentially within or between Norwegian ports do not qualify. Nor do fishery or catching vessels when they are engaged in the activities for which they are designed.

The requirements pertaining to a ship in traffic do not apply to movable vessels or structures used in offshore petroleum activity. In order to qualify for the tonnage tax system, however, companies engaged in this activity may not have income that is subject to the special offshore petroleum taxation scheme. This means that a company within the tonnage tax system that owns movable vessels or structures operating on the Norwegian Continental shelf cannot itself perform the operations for its own account, but must bareboat charter the units to a company outside the tonnage tax system which performs the operations for its account. However, income from tugs, supply vessels and other support vessels is exempt from this restriction, notwithstanding the reference to such activity in section one of the Petroleum Taxation Act.

If a sole qualifying ship is sold, another qualifying ship must be acquired, or a binding contract for a newbuilding must be entered into, within one year of the sale.

In order to qualify for the tonnage tax, a company may not carry on activities other than the operation or bareboating out of owned or bareboat chartered ships; have its own employees; own assets other than ships and certain financial assets, except as specified in legislation; or extend a loan to any taxpayer outside the system who has a direct or indirect ownership interest in the company or in related companies or persons.

Among other things, the no-employees requirement means that the ship's crew must be employed by a company outside the tonnage tax system, and that even the managing director of the qualifying company may not be a salaried employee. Companies outside the system can perform management tasks.

Computing the Tonnage Tax

The tonnage tax is computed purely on the basis of a qualifying ship's net tonnage, as follows:

STEP 1 - calculate the daily tax per ship

This calculation is made for each day of operation during the fiscal year, as follows:

For the first 1,000 tons, NOK 0
For each 1,000 tons between 1,000 and 10,000 tons, NOK 72
For each 1,000 tons between 10,000 and 25,000, NOK 48
For each 1,000 tons above 25,000 tons, NOK 24

The rates may be reduced for ships meeting certain environmental criteria, with the amounts varying depending upon which category the ship qualifies for.

STEP 2 - calculate the tax per ship for the accounting period

Multiply the daily tax per ship by the number of operating days during the fiscal year.

With the exception of certain financial assets and income, which are taxed in accordance with the ordinary tax system, non-qualifying assets and activities create a breach of the tonnage tax conditions.

The following are excluded from the tonnage tax computation: 1) gains from currency and other financial assets, 2) interest income, and 3) capital gains from the sale of shares (except for gains from shares in companies qualifying for tonnage tax). These items are taxed in the usual manner at a rate of 28 percent.

No depreciation or equivalent allowances are available under the tonnage tax system.

Pakistan

(updated April, 2004)

In 2001, Pakistan adopted a new merchant marine policy designed to attract ship operators to its national flag by offering them a range of incentives, including a tonnage tax.

In lieu of income tax, operators of vessels registered in Pakistan pay tonnage tax at the rate of one US dollar per gross ton, per fiscal year, irrespective of their actual profits or losses. The tax applies to ships and other floating craft (including tugs, dredgers, survey vessels and other specialized craft) that are either owned or bareboat chartered.

South Korea:

(updated January, 2004)

The South Korean government is set to implement a tonnage tax, which is scheduled to take effect in 2005, the Ministry of Maritime Affairs and Fisheries announced last month.

It is expected that the new tax system for South Korean shipping companies, which will allow them to calculate their taxes based on their vessels' tonnage rather than operating profits, will make them more competitive by significantly reducing their tax burden.

Spain

(updated March, 2004)

Spain implemented a tonnage tax system for commercial ships in 2002. It went into effect in April of that year, after receiving the European Commission's approval.

SOME KEY PROVISIONS OF SPAIN'S TONNAGE TAX SYSTEM

The Spanish tonnage tax is elective. Those who opt for the system must apply it to all their vessels, whether owned or chartered, for a minimum of ten years, and each of the owner's vessels must be commercially and strategically managed in Spain or another European Union (EU) country.

Tonnage tax applies to companies registered in the Spanish Shipping Companies Register. Foreign shipping companies in other EU member states may enter the regime if they have a subsidiary in Spain.

If a company electing to enter the tonnage tax system belongs to a group, the election applies to all group members that qualify as tonnage tax companies.

Companies wishing to enter the tonnage tax regime must own their ships or charter them in. However, the net tonnage of ships chartered in by a company or group must not exceed 75 percent of the total net tonnage of the fleet of the company or group.

To qualify for Spain's tonnage tax system, ships must be suitable for open sea navigation and operated exclusively for the transport of goods or passengers, salvage or towing activities, or other services performed exclusively on the high seas.

The tonnage tax ceases to apply to a company that fails to meet the conditions required under the regime. In that event, the company must wait five years before it can make a further application to enter the regime, as does a company that opts to withdraw from the tonnage tax before the end of the ten-year period.

Computing the Tonnage Tax

The tonnage tax is calculated on a ship-by-ship basis by applying the ordinary corporation tax (35%) to tonnage profits (daily profit per ship) multiplied by the number of days that the ship is actually operated by the company during the accounting period, as follows:

STEP 1 - calculate the daily profit per ship

This calculation is made by reference to an amount of profit for each 100 net tons, as follows:

	For each 100 tons up to 1,000 tons, euro 0.90
	For each 100 tons between 1,001 and 10,000 tons, euro 0.70
	For each 100 tons between 10,001 and 25,000 tons, euro 0.40
	For each 100 tons above 25,000 tons, euro 0.20

STEP 2 - calculate the profit per ship for the accounting period.

Multiply the daily profit for each ship by the number of days that the ship is actually operated by the company during the accounting period.

STEP 3 - calculate the tax owed

Multiply the total taxable profit for each ship by 35 percent, the corporate tax rate.

Income from the following activities is included in a company's tonnage tax profits:

	Income derived from the transport of goods or passengers, salvage and towing activities, or other services that need to be performed on the high seas.
	Charges in connection with the above-mentioned activities.
	General administrative expenses proportionate to the turnover generated by the above-mentioned activities.

Income derived from non-tonnage tax activities is taxed according to general tax rules.

Gains on the disposal of assets covered by the tonnage tax are included in tonnage tax profits.

Losses generated prior to election of the tonnage tax regime, or from non-tonnage tax activities, cannot be set off against a company's tonnage tax profits.

Capital losses accrued by a company before it entered the tonnage tax regime can be set off against gains from the sale of a ship.

Leasing: A lessor cannot make a tonnage tax election based solely on its ownership of a vessel.

Sweden:

(updated November, 2003)

On October 1, 2001, Sweden switched to a "net wage" system to cover crews on both cargo and passenger vessels, including passenger ferries.

The change marked an important victory for Swedish shipowners, who had been demanding enactment of a net wage model for several years.

Under a net wage system, shipowners pay seafarers their wages net of their assumed taxes and social security contributions, without paying the government anything.

Under the so-called gross model, shipowners are required to pay the government taxes and social contributions for the seafarers; then they must wait for full or partial refunds.

Sweden's gross model offered full restitution for tax payments plus a standard annual refund per seagoing employee to help offset social security payments.

RECENT DEVELOPMENTS: In June 2003, Sweden's finance minister disappointed the country's ship owners by announcing that the government would not be introducing a bill to establish a tonnage tax system because it would conflict with the principles of the Swedish tax system.

In October, in a multi-party motion supported by all six main opposition parties, Sweden’s parliament (Riksdag) called on the ruling Social Democratic Party to move quickly toward the introduction of a tonnage-based tax system in line with the rest of Europe.

The motion, passed by an overwhelming vote, isolated the minority government over its refusal to implement a tonnage tax regime, which it views as an industry subsidy.

The Riksdag called for a fresh inquiry, without delay, into the potential benefits to the shipping industry from a tonnage tax scheme.

United Kingdom:

(updated June, 2003)

A tonnage tax regime for Britain's shipping industry - legislation for which was proposed by the British government in 1999 and included in the Year 2000 Finance Bill - became law in July 2000.

Shipping companies now have the option of either remaining in the standard UK corporation tax regime (with taxes calculated based on actual profits or gains from business), or placing its shipping operations within the tonnage tax regime (with taxes based on tonnage size and payable irrespective of actual profits or losses). In effect, income and capital gains (see below) from most types of shipping activity become tax exempt under the tonnage tax regime. However, the standard corporation tax rules continue to apply to the non-shipping activities of companies that opt into the tonnage tax system.

Companies may apply the new tonnage tax rules to any accounting period that commences, or commenced, on or after January 1, 2000. For existing UK shipping businesses, the initial period in which a company may elect to enter the regime runs for one year starting from July 28, 2000, the date of enactment of the legislation. Non-UK businesses may enter the system within one year from the date on which they first satisfy the qualifying conditions. And HM Treasury has the authority to declare further periods during which companies outside the regime may elect to enter for the first time.

Under the tonnage tax regime, corporation tax (currently 30 percent) is charged on a notional profit in relation to each qualifying ship controlled by an eligible company or group. The notional profit is calculated according to the following scale, by reference to the net tonnage of each ship:

For each 100 tons up to 1,000 tons - - £0.60

For each 100 tons between 1,000 and 10,000 tons - - £0.45

For each 100 tons between 10,000 and 25,000 tons - - £0.30

For each 100 tons above 25,000 tons - - £0.15

The notional profit for a ship is calculated by multiplying the notional daily profit by the number of days in the accounting period. For example, with the current UK corporate tax rate of 30 percent, the tonnage taxes for a 35,000 n.t. ship for a 365-day accounting period would come to £11,663 ($16,511).

Capital gains made by a company while it is within the tonnage tax system are not taxed; however, capital gains are treated on a tax-free basis only to the extent that they arise from assets used "wholly and exclusively" for tonnage tax activities and the capital gain arose during the asset's period of use within the tonnage tax system. If the asset in question is used both within and outside the tonnage tax system during the period when the capital gain arises, only the portion of the capital gain or loss that is referable to the asset's period of use outside the system would be a taxable gain or allowable loss.

Any company that has one or more qualifying ships that are "strategically and commercially managed" in the UK, and which is involved in "qualifying shipping activities," is eligible to participate in the tonnage tax system.

The "strategic and commercial management" test arises from the European Commission's (EC) guidelines on state aid in the maritime sector. Since no specific EC guidance is available on the meaning of the term, the Inland Revenue Service has adopted its own interpretation. In determining whether strategic and commercial management is carried out in the UK, all elements of management activity relevant to the ships in question will be taken into account, including the following:

A. Strategic functions

i) Location of headquarters, including senior management staff
ii) Decision-making of the company board of directors
iii) Decision-making of operational board
iv) UK stock exchange listing

B. Commercial management factors

i) Route planning
ii) Taking bookings for cargo or passengers
iii) Managing the bunkers; provisioning requirements
iv) Personnel management
v) Training organization
vi) Technical management including decisions on the repair and maintenance of vessels
vii) Extent to which foreign offices/branches work under the direction of UK-based personnel
viii) Support facilities in the UK (e.g. training center, terminal, etc.)

The fact that a vessel may be flagged, classed, insured or financed in the UK is likely to add further weight to the aforesaid indicators in deciding whether that vessel is strategically and commercially managed in the UK. The more elements that are carried out in the UK, the more likely it is that the company will be accepted as satisfying this test. However, the method for determining whether a company meets the test is not purely mechanistic: Some factors (high level decision making, for example) are accorded greater weight than others. In assessing the weight and relevance of the various elements of commercial management activity, the Inland Revenue Service will take account of such factors as:

i) The extent to which each element is carried out in the UK, as compared with the extent to which it is carried out elsewhere ii) The nature and extent of the accommodation occupied in the UK
iii) The number of employees engaged in these activities in the UK
iv) The country of residence of key management staff, including company directors
v) For an international group, the extent to which such activities in the UK correspond to the UK's share of the worldwide fleet.

An activity, such as ship management, contracted out to a third party still counts as a positive indicator, provided that it is carried on in the UK.

To satisfy the management test, it is not required that every ship operated by a UK tonnage tax company be managed in like manner and to the same extent as every other one. As long as each ship can satisfy some of the aforesaid criteria, and the company's fleet as a whole is strategically and commercially managed in the UK, the company is likely to be accepted as satisfying the test.

A tonnage tax company will be taxed on its notional profit instead of actual profits to the extent that its actual profits are derived from certain "core qualifying activities" (listed in the following paragraph) and activities "integral and necessary" to a ship's operation.

A "qualifying ship" means a seagoing ship of over 100 gross tons used for the carriage of passengers by sea; the carriage of cargo by sea; towage, salvage or other marine assistance; or transport in connection with other services of a kind necessarily provided at sea.

"Necessary and integral" activities are those activities that are essential to enable a ship to operate. These include ship management operations such as purchasing fuel and hiring crew and commercial management operations such as booking cargo. They do not include activities that are merely customary or desirable, although such activities may count as "qualifying secondary activities." For example, providing food for short-sea ferry passengers, though not essential to their transport, is a wholly qualifying secondary activity.

Secondary activities are allowed up to a certain limit. Where the limit is breached, then the entire profit or loss from that activity will fall outside the tonnage tax ring-fence. Activities that are not listed in the regulations, and which are not core qualifying activities, fall outside the ring-fence.

Vessels may be used for non-qualifying purposes and yet remain eligible for the tonnage tax system as long as such use is for less than 30 days in an accounting period.

The following specific types of vessels are excluded from the tonnage tax system: fishing vessels or factory ships, pleasure craft, harbor or river ferries, offshore installations, and tankers dedicated to a particular oil field. But any vessel whose primary use is to provide "goods or services of a kind normally provided on land" (e.g. a floating casino, radio station or prison) also is excluded.

By and large, shipping activities in the energy sector fall outside the tonnage tax regime. The use of ships for energy sector activities on the UK continental shelf (North Sea sector) for more than 30 days per accounting period leads to the income from such ships being liable to ordinary corporation tax. Capital allowances and other standard tax breaks may be claimed and set against such income, and there is a corresponding reduction in the tonnage tax liability. However, the training obligation (see below) is not reduced.

Although the aim of the tonnage tax system is to attract shipowners to the UK registry by making it competitive with other flags, there is no requirement that a vessel fly the British flag or employ a British crew in order to qualify for the tonnage tax.

Companies that opt into the tonnage-based tax scheme are generally committed to it for a minimum of 10 years. The election to enter the scheme may be renewed at any time before expiry, meaning that it can be renewed annually on a "rolling" basis so that, at any given time, there may be an election in place for the succeeding ten years. If a company is expelled from the tonnage tax system for breach of the rules, it will be prohibited from re-entering the system for 10 years. If, on the other hand, an election to the system simply expires without renewal, a company may later re-enter the system by making a new election.

The move to a tonnage tax system is widely considered the biggest boost to Britain's shipping industry in more than two decades.

"This is marvelous news," said Graeme Dunlop, president of the UK Chamber of Shipping, chairman of P&O Ferries and a P&O main board director. "The new policy package will underpin the future of British-owned shipping and of British seafarers."

Since the capital allowance system permits tax liabilities to be deferred, the tonnage tax system may not necessarily reduce tax payments. However, it will give rise to a lower tax liability and give certainty that a major liability will not arise. It will also obviate the need for tax-driven investment, giving companies greater flexibility in planning and financing their capital expenditures, as they will not be inhibited by the need to defer tax. However, as the amount payable under the tonnage tax regime is fixed, a company will have to make tonnage tax payments even in the event of an operating loss in relation to its shipping activities.

For UK taxpayers who have claimed capital allowances under the regular corporate tax system, there is the additional benefit under the tonnage tax regime of having potential balancing charges written off over seven years.

As with any other wage expense incurred wholly and exclusively for the purposes of a trade of a company in the UK, the wage costs of seafarers are deductible when calculating taxable profits.

There is a 100 percent foreign earnings deduction for seafarers that are resident and ordinarily resident in the UK. This provision applies for any year of assessment in which the duties of a seafarer are performed wholly or partly outside the UK, and any of those duties are performed in the course of a qualifying period which falls wholly or partly in that year and consists of at least 365 days.

While not required to employ British officers or ratings, shipowners opting for the tonnage tax regime will have to operate an officer-training scheme administered by the Department of the Environment, Transport and the Regions (DETR). All other aspects of the tonnage tax regime are administered through the Inland Revenue Service.

Training Requirement

The system for administering the tonnage tax regime's training requirement has three main elements:

• The Core Training Commitment (CTC), an annual plan - produced by the company and approved by the DETR - setting out the company's training obligation and how it will be met;
• The End-of-Period Adjustment (EPA), an update made three times a year and covering the preceding four-month period, comparing actual training performance against the CTC and accounting for any incremental training obligation arising from a net increase in the number of vessels a company has within the tonnage tax regime; and
• Payments in Lieu of Training (PILOT), which are made by the company to the Maritime Training Trust (MTT), if any are required to meet the MTO.

Minimum Training Obligation

With respect to officers, the MTO requirement calls for the training of one officer trainee per year for every 15 deck and engineer officer posts of the company's effective officer complement. This complement is calculated as the number of relevant officers entered on the Safe Manning Document (or equivalent) for all vessels entered in the tonnage tax regime.

With respect to ratings (unlicensed), the MTO requires companies with vessels entered in the tonnage tax regime to review annually the feasibility of adopting each of the ratings employment and development options agreed to by the Ratings Task Force, a tripartite (industry/unions/government) group chaired by the Chamber of Shipping. The group has already approved the following options:

• employ more British/EEA ratings;
• employ more highly trained British/EEA ratings in some technical posts;
• recruit British/EEA ratings in a planned stream towards officer qualifications (the Merchant Navy Training Board's new "Apprenticeship" scheme); and
• assist existing British/EEA ratings to advance towards officer qualifications and posts.

Core Training Requirement

The CTC, which a company must produce at or before election into the tonnage tax regime, and on an annual basis thereafter, runs from October 1 to September 30. The CTC relates to all vessels (owned/leased/chartered-in, regardless of flag) entered in the tonnage tax regime on the date the training commitment comes into force. It represents the minimum level of training to be provided during the year.

CTCs, which are set out in standard format, contain certain required information for each vessel within the tonnage tax regime. Based on this information, the CTC sets out the company's training obligation.

End-of-Period Adjustment

As previously mentioned, the end-of-period adjustment (EPA), performed three time a year (in February, June and October), compares actual training performance against the CTC, and also accounts for any additional training obligation arising as a result of a net increase in the number of ships operated within the tonnage tax regime during the preceding four-month period.

Compliance with the CTC is assessed in terms of the number of trainee-months achieved in each period compared with the number agreed under the CTC.

Payment in Lieu of Training

Due to the practical constraints on a company's ability to take on additional trainees at short notice, any training shortfalls during each four-month period covered by an end-of-period adjustment are addressed through a PILOT, which goes to the MTT. Where a company is already training more officer trainees than is required under the CTC, such "extra" trainees may be set against EPA incremental training obligations arising from net fleet expansion.

Only in "exceptional circumstances," in cases where it is unable to provide training, may a company opt out of the training requirement. Where companies are unable to provide in-house training, they may still be able to have other companies do the training for them. Where neither of these options is available to a company, its CTC must be discharged through a PILOT.

PILOT liability is calculated on a net basis, with CTC performance averaged over each four-month period. The level of the PILOT charge for FY 2000/2001 is set at a basic rate of £500 (approximately $719) per officer trainee per month.

Enforcement of the Core Training Commitment

It is not intended that a company should be hit with a surcharge or otherwise penalized for minor or short-term shortfalls against its CTC. However, long-term and significant failure by a company to comply with its CTC while remaining within the tonnage tax regime will trigger enforcement action.

Failure to meet half of the agreed CTC over a period of a year will trigger a surcharge of 50 percent on the level of PILOT payable throughout the following year. Failure to meet at least half of the CTC over two or more successive years will result in a surcharge of 100 percent on the level of PILOT applying in the third and subsequent years.

And should a company remain in default of its CTC obligations over three successive years, the DETR will issue a notice of non-compliance, rendering the company ineligible to make a renewal election into the tonnage tax regime. Upon receiving a notice of non-compliance, a company would generally have to leave the regime at the end of its current election period - unless, during the time remaining in its current election period, it was able to demonstrate to the satisfaction of the DETR a commitment to meet its future training obligations. The DETR would then have discretion to cancel the non-compliance notice, and the company would again be eligible to seek renewal of its election into the regime, subject to obtaining a certificate of approval for its CTC.

Race Relations Act Decision - 2003

In June 2003, following a review of the Race Relations Act, the UK government made a number of changes to the 1976 legislation, but retained an exemption for seafarers that allows owners of British-flagged ships to pay their foreign crew members "at rates of pay appropriate to their countries of domicile".

The UK Chamber of Shipping welcomed the decision, while the RMT (National Union of Rail, Maritime and Transport Workers) denounced it.

Action By The European Commission:

(updated April, 2005)

In October of 2003, the European Commission released its latest Communication regarding individual state aid programs for the maritime transportation sector. In many ways mirroring the United States, the 15-member European Union (EU) is confronting the growing practice of flagging-out to open, flag of convenience registries. From 1970 to 1995, the European Union national fleets witnessed their share of world tonnage dwindle from 32 to 14 percent. In the meantime, open registry countries increased their share of world tonnage from 19 to 38 percent. This significant decline has detrimentally impacted not only the respective vessel fleets, but has generated a corresponding decline in the trained seafaring manpower base and associated ancillary industries as well. The situation deteriorated to the point where the European Commission specifically addressed the matter in a series of three Communications.

1989 Community Guidelines on State Aid to Maritime Transport

In an effort to stem this tide, in 1989 the European Commission issued its first guidelines for state aid to the maritime industry. Although the integrity of individual states to formulate aid packages unique to their own needs and practices was preserved, the Commission attempted to construct a broad umbrella of acceptable aid programs designed to benefit the EU fleet as a whole. At first, the Commission proposed to create a single European Union ship register named the Euros. The Euros was intended to operate in conjunction with individual Member State national registries allowing for State aid in return for accepting EU national crewing commitments. However, after considerable deliberation, this approach was abandoned.

The Commission did agree on a framework of guidelines for individual State aid programs that was deemed consistent with the interests of the Community at large. The Commission acknowledged that Member States' fleets were at a distinct fiscal disadvantage when compared to open registry practices. In order to alleviate this disadvantage, the Commission developed a method to govern State aid maritime arrangements. This method, referred to as 'the ceiling' by the European Commission, calculates the hypothetical operating cost between the lowest cost Member State fleet (Portugal) and a flag of convenience fleet (Cyprus). Once modified to account for the different vessel types of each Member State fleet, the resulting figure became the national ceiling for State Aid programs.

In a separate measure, the Commission endorsed the reimbursement of up to 50 percent of the cost of repatriation of Member States national-flag seafarers sailing in the Community's international trade.

1997 Community Guidelines on State Aid to Maritime Transport

By 1996, it became evident that the 1989 Guidelines were not fully abating the problem of flag of convenience registries. The Commission acknowledged the industry was undergoing a technological and market transformation, one that introduced new demands on design, safety, and training. The Commission concluded that the ceiling method of calculating State aid, based exclusively on operating cost factors, failed to encompass the new industry demands pertaining to vessel size, productivity, skill training, crewing practices and market demands. Accordingly, the following year, the Commission released a revised set of guidelines on Member State aid to the maritime industry.

In its place, the Commission endorsed a variety of maritime stimulus packages to allow Member States to address issues relative to both shipowners' fiscal needs and to offset costs associated with seafarers social provisions. The Commission emphasized the need to provide Member States with the administrative flexibility to address factors that are unique to their situation while enhancing the Community's overall maritime infrastructure.

a. Shipowner Aid Packages

In response to the concerns of Member State shipowners, the Commission generally endorsed a variety of proposals, including an accelerated depreciation schedule for vessels, the ability to reserve tax-free profits from the sale of vessels for future ship construction, and the application of a tonnage tax system as an alternative to corporate taxation.

While these fiscal incentives are intended for Member State national fleets, exceptions were allowed for those Member State shipowners who operate vessels flying both national and other flags, for example those engaged in chartered vessel agreements and alliance arrangements. The Commission requires that all such exceptions must be fully transparent, and document all the economic and social benefits derived to the Member State from the national shipowners operating multi-flag fleets. Additionally, multi-flag vessel operators engaged in other commercial ventures must document the extent of these operations in order to target marine transport aid programs exclusively to shipping activities.

b. Labor Aid Packages

Regarding European Community seafarers social matters, the Commission recognized that its Member States treat these social obligations in a disparate fashion. In order to compete with flag of convenience registries, the Commission would endorse State Member actions that would reduce or eliminate the costs associated with social security protections. Similarly, the Commission would look favorably on a reduction of the seafarers personal tax liabilities. The Member States retain the option of reducing or eliminating these obligations through either a direct reduction in the seafarers tax and social security obligations or as a reimbursement to the shipowners for the associated costs. Member States can elect to exempt seafarers from all personal tax and social security liabilities, thereby matching flag of convenience registers common practice of exempting seafarers from all tax and social security liabilities.

c. Repatriation

The 1989 guidelines granted State aid up to 50 percent of the costs incurred for the repatriation of Member States national seafarers. The Commission upwardly revised this limitation up to a full reimbursement of repatriation costs, payable either directly to the seafarer or through reimbursement to the shipowner.

d. Investment

The 1997 guidelines, like the 1989 guidelines, are not applicable to the shipbuilding sector. Matters pertaining to shipbuilding interests are the subject of a separate Commission Communication entitled Shipbuilding Policy - Options for the Future. First Reflections that was released in 1997. However, the Commission did allow for exceptions in certain instances. State aid could be targeted to upgrade Member State registered vessels to standards exceeding current international environmental and safety standards.

e. Training

In general, academic and vocational training activities are not subject to Commission notification or oversight. However, in the case of onboard maritime training programs where the beneficiary is the training organization, seafarer, or shipowner, prior Commission approval is required. Furthermore, these onboard programs can only be given to trainees that are not active members of the crew.

The Commission also endorsed research and development initiatives, particularly those concentrated on safety, productivity, quality and environmental protection within the limitations imposed by existing research and development treaties.

f. Public Service Obligations

Public Service Obligations (PSO) are defined by the Commission as "any obligation imposed upon a carrier to ensure the provision of a service satisfying fixed standards of continuity, regularity, capacity and pricing, which standards the carrier would not assume if it were solely considering its economic interest." Examples offered included scheduled marine services to sparsely populated distant territorial regions of a Member State or lightly served routes deemed vital for the Member State's economic vitality.

The Commission determined that assuming the bids for such PSOs are fully transparent, these activities would not be considered as State aid initiatives. The duration of these PSO contracts should be limited to normally no more than five years. If evidence is presented to the Commission that a PSO contract was not awarded in a fair and cost effective manner, the Commission could take corrective action.

g. Aid Ceilings

As previously mentioned, the Commission intended to provide the Member States maximum flexibility to design State aid programs to fit their particular environment. However, in order to protect against a subsidy race between Member States, absolute aid ceilings were established. A Member State may offer a cumulative maritime aid package not to exceed the total amount of revenue collected from corporate and seafarers social services and personal tax. This aid ceiling replaces the previous 1989 ceiling method.

2003 Community Guidelines on State Aid to Maritime Transport

The European Community polled its Member States last year to evaluate the results of the initiatives espoused in the 1997 Guidelines. Member States that had implemented aid measures consistent with the 1997 guidelines witnessed a significant volume of tonnage returning to their national flag, averaging 1.5 percent per year. Vessels re-flagging with their national flag increased .4 percent per year for the same time period. However, the presence of the open registries continued to increase at a rate exceeding the Member State national registries.

Seafaring employment aboard Member State-flagged vessels declined from 188,000 to 180,000 during the 1996 to 2001 timeframe. In large part, this decline is attributed to the increase in vessel productivity that demands a smaller, but more highly skilled crew.

Overall, the Commission determined that the policies adopted by the 1997 guidelines proved successful, at least to the extent it stemmed the loss of vessels and tonnage to open registries. As such, the Commission decided to retain the fundamental policies of the 1997 guidelines and focused its efforts on refining its specific policies and enhancing transparency provisions.

The Commission retained the 1997 Guidelines regarding repatriation, investment and training aid provisions. The aid ceiling limit remains in force, namely the cumulative aid package cannot exceed the total amount of revenue collected from the imposition of corporate and seafarer tax (for both personal and social security services). In regard to Public Service Obligations, the normal duration of these PSO contracts was extended from five to six years.

a. Shipowner Aid Modifications

The 2003 Guidelines further defined the eligibility requirements necessary for a multi-flag Member State shipowner to benefit from State aid programs. First, the Member State must demonstrate that the multi-flag national shipowner effectively manages the fleet in the territory of the Member State, and that its commercial activities tangibly serve the greater needs of the entire Community. In this regard, the Member State must document the vessels operated and under what flag(s), the number of onboard and shoreside nationals employed, and the value of its fixed assets. Furthermore, multi-flag national entities must either operate at least 60 percent of their tonnage under a Member State flag, or commit to increasing or maintaining their current share of tonnage under a Member State flag. This documentation is required to be updated and re-submitted to the Commission every three years.

Ship management companies are entitled to the same State aid benefits under the same conditions, provided that the management companies assume full operational responsibility from the owner and assume all obligations for ISM Code compliance.

The Commission also addressed the eligibility of towing and dredging activities to receive State aid benefits. In regard to towing services, 50 percent of its operations must entail the movement of material in deep-sea environments. Ship docking and intra-port operations would not qualify for State aid benefits. Without any exception, the towing entity must fly the flag of a Member State. In the case of dredging operations, in general these activities are not eligible for State aid. The one exception applies to those dredging activities that expend in excess of 50 percent of operational time transporting extracted materials in deep-sea waters. State aid could be applied to only that time consumed in the deep sea transport of dredged materials, and must be supported by separate accounting procedures. Lastly, consistent with its towing eligibility determination, only Member State flagged dredging concerns would be eligible for State aid programs.

b. Labor Aid Modifications

The Commission continued to support the partial or total elimination of seafarers personal tax and social security obligations. As originally stated in the 1997 Guidelines, Member States retain the flexibility to apply these benefits directly to the seafarer or through reimbursement to the shipowner. In reference to international trade, these benefits can be extended to all seafarers regardless of nationality or place of residence. In the case of passenger transport within the Member States, these benefits are reserved exclusively for European Union seafarers.

c. Aid to Short Sea Shipping

Since the release of the 1997 Guidelines, the concept of short sea shipping has emerged and was addressed by the Commission. State aid to promote short sea shipping was approved by the Commission predicated upon the following conditions:

	Duration of aid is not to exceed three years
	The aid would be project-specific and include an environmental impact assessment
	No more than one project per operating line, with no possibility of renewal or extension
	Aid can finance up to 30 percent of operating or 10 percent of equipment costs
	Project must be considered commercially viable
	Project must be separate and distinct from any Public Service Obligation service

Recent Developments

In October of 2004, the European Commission adopted a "White Paper" which explores the possibility of repealing, modifying or retaining the current antitrust immunity to fix freight rates and capacity regulation for the European liner conferences. The White Paper is the result of both a 2002 OECD Secretariat Report advocating the repeal of anti-trust exemptions and a 2003 European Commission review of conference immunity. The White Paper could culminate in specific legislative proposals in 2005.

The Commission noted that the exemptions, in force since 1986, were premised on the "assumption that the rate-setting and other activities of liner conferences lead to stable freight rates, which in turn assured shippers of reliable maritime transport services." However, the White Paper concluded that the conditions "to justify an exemption for liner conference price fixing, supply and market regulation would appear to be no longer fulfilled."

The European Liner Affairs Association (ELAA), composed of EC liner carriers, expressed their position that there is "no hard evidence" to support the abolishment of existing antitrust immunity. The ELAA commented that the White Paper justification for repeal was "incoherent and speculative" and did not offer a "proper assessment of the likely effect of any legislative change or repeal." However, should the Commission feel compelled to go forward, the ELAA would be amenable to terminating the immunity for rate setting only, while retaining the current immunity status for the exchange of market trade and capacity information and the setting of surcharges and other ancillary charges.

The International Chamber of Shipping (ICS) submitted comments late last year urging caution prior to the implementation of any changes in liner conference immunity protections. The ICS has long maintained that the current regime provides price and service stability in the liner markets. However, if the EC feels that the status quo is no longer satisfactory, the aforementioned alternative offered by the European Liner Affairs Association would be acceptable to the ICS.

All industry responses to the White Paper are anticipated to be published in the early months of 2005. By the later part of 2005, the EC is expected to issue a revised White Paper on the subject.
In April of 2005, the European Commission extended antitrust immunity to liner operators serving European ports until April of 2010.

Conclusion

The challenges facing the European Union largely parallel the difficulties confronting the U.S.-flag maritime industry - the increasing presence of flag of convenience registries in the international trades. In response to these difficulties, the European Community endorsed a variety of proposals, most notably the tonnage tax and the suspension of personal and social security obligations on the part of the seafarer. All of these measures have been championed in certain quarters of the U.S.-flag industry. Because of the interest generated in these and other avenues of maritime proposals on both continents, the success of the European Commission's initiatives might prove to be a useful measure of approaches that could be undertaken by our own government.