COMMISSION DECISION (EU) 2019/1116

of 19 December 2017

on State aid SA.33829 (2012/C) Maltese tonnage tax scheme and other State measures in favour of shipping companies and their shareholders

(notified under document C(2017) 8734)

(Only the English text is authentic)

(Text with EEA relevance)

THE EUROPEAN COMMISSION,

Having regard to the Treaty on the Functioning of the European Union, and in particular the first subparagraph of Article 108(2) thereof,

Having regard to the Agreement on the European Economic Area, and in particular Article 62(1)(a) thereof,

Having called on interested parties to submit their comments pursuant to the provisions cited above (1), and having regard to their comments,

Whereas:

1. PROCEDURE

(1) Based on a complaint received by an interested party in October 2011 the Commission entered in discussion with the Maltese authorities on the Maltese tonnage tax scheme and further tax measures. Following written and oral discussions with the Maltese authorities between November 2011 and June 2012, the Commission informed Malta by letter dated 26 July 2012 that it had decided to initiate the procedure laid down in Article 108(2) of the Treaty on the Functioning of the European Union (‘TFEU’) on possible illegal aid measures applied by Malta in favour of shipping companies and their shareholders (‘the opening decision’) (2).

(2) In the opening decision the Commission invited interested parties to submit their comments on the measures set out in the opening decision in recitals 3 to 30.

(3) The Commission received comments from six interested parties: European Community Shipowners' Association; Malta Maritime Law Association; Norwegian Shipowners' Association; Malta Chamber of Commerce, Enterprise and Industry; Malta International Shipping Council; Super Yachts Industry Network — Malta. The Commission also received comments from a German shipping sector employee wishing to remain anonymous.

(4) The comments were forwarded to Malta, which was given the opportunity to react; its comments were received by letter dated 15 December 2012.

(5) Malta submitted further observations by letters of 15 October 2012, 21 December 2012, 27 February 2013, 31 October 2013, 25 March 2014 and 24 December 2015.

(6) By letter dated 9 December 2016, Malta waived its right under Article 342 TFEU in conjunction with Article 3 of Regulation (EEC) No 1 determining the languages to be used by the European Economic Community (3) to have this Decision adopted in Maltese and agreed that this Decision be adopted in English.

2. DESCRIPTION OF THE MEASURES

(7) This Decision relates to the following measures: (a) the tonnage tax scheme and specifically: (i) the vessels eligible for tonnage tax; (ii) specific types of income and activities of tonnage tax ships (4) subject to tonnage tax, tonnage tax scheme, including the extension of the tonnage tax to non-core shipping activities; (iii) the level of tonnage tax; (iv) the flag link requirement; (v) ring-fencing measures; (b) the exemption from taxation of capital gains arising from the sale or transfer of ships; (c) the exemption from taxation of capital gains in relation to shares in shipping companies; (d) the exemption from taxation of dividends in relation to shares in shipping companies, (e) the exemption from taxation of interest or other income in relation to financing of shipping companies or tonnage tax ships, (f) the exemption from certain duties on documents and transfers.

2.1. The tonnage tax scheme

2.1.1. General principles — Eligible vessels, income and activities

(8) Under the Merchant Shipping Act (5), as specifically supplemented and amended by the Merchant Shipping Taxation Regulations (6) (‘the Taxation Regulations’), income derived by a licensed shipping organisation from shipping activities may be exempted from income tax under the Income Tax Act (7), provided that all relevant registration fees and tonnage taxes (8) are duly paid. The option to pay tonnage tax relates to income arising from the operation of a tonnage tax ship (9).

(9) A shipping organisation is defined, in the Merchant Shipping Act (10), as organisation having its principal objects as one or more of the following activities provided they are licensed to do so: ‘(a) the ownership, operation (under charter or otherwise), administration and management of a ship or ships registered as a Maltese ship in terms of this Act and the carrying on of all ancillary financial, security and commercial activities in connection therewith; (b) the ownership, operation (under charter or otherwise), administration and management of a ship or ships registered under the flag of another state and the carrying on of all ancillary financial, security and commercial activities in connection therewith; (c) the holding of shares or other equity interests in entities, whether Maltese or otherwise, established for any of the purposes stated in this article and the carrying on of all ancillary financial, security and commercial activities in connection therewith; (d) the raising of capital through loans, the issue of guarantees or the issue of securities by the company when the purpose of such activity is to achieve the objects stated in this article for the shipping organisation itself or for other shipping organisations within the same group; […] (e) the carrying on of such other activities within the maritime sector which the Minister may, on the advice of the Authority, from time to time prescribe by regulations as qualifying for the above purpose.’

(10) The tonnage tax scheme covers the income arising from shipping activities (11). The Taxation Regulations require account separation to be ensured in respect of shipping and non-shipping activities (12). ‘Shipping Activities’ are defined as ‘the international carriage of goods or passengers by sea or the provision of other services to or by a ship as may be ancillary thereto or associated therewith including the ownership, chartering or any other operation of a ship engaged in all or any of the above activities or as otherwise may be prescribed’ (13).

(11) Article 85(1) of the Merchant Shipping Act sets out the requirements for a ship to qualify as ‘tonnage tax ship’ and hence to benefit from the tonnage tax scheme: ‘Tonnage tax ship’ means ‘either a ship declared to be a tonnage tax ship by the Minister in terms of Article 85A of this Act or a Community ship of not less than 1 000 net tons which is owned entirely, chartered, managed, administered or operated by a shipping organisation’. Article 85A(1) of the Merchant Shipping Act allows for any ship, including those below 1 000 net tons (14), to be declared a ‘tonnage tax ship’, therefore eligible for the tonnage tax scheme. The current wording specifies that this may be done ‘irrespective of operations or trade in which engaged’, and on such conditions as the responsible Minister ‘may deem appropriate’.

(12) Income derived from shipping activities of a licensed shipping organisation is exempt from income tax under the Income Tax Act (15).

(13) Summarized, vessels within the tonnage tax scheme (‘tonnage tax ships’) which are eligible for tonnage taxation while being exempted from income tax are vessels which are ‘owned entirely, chartered, managed, administered or operated by a shipping organisation’ (16) and which are engaged in shipping activities (17).

(14) Furthermore, the following is exempt from taxation under the Income Tax Act: any income, profits or gains of a licensed shipping organisation derived from the sale or other transfer of a tonnage tax ship or from the disposal of any rights to acquire a ship which, when delivered or completed, would qualify as a tonnage tax ship (18).

2.1.2. Specific types of income and activities eligible to tonnage tax

2.1.2.1. Bareboat chartering out

(15) Under the Maltese legislation all revenue from bareboat chartering out is eligible for tonnage taxation, without any limitations.

2.1.2.2. Time/voyage chartering

(16) Because of the wide definition of ‘shipping organisation’ (19) in combination with the wide definition of ‘shipping activities’ (20) in the Maltese legislation it may be interpreted that the profits of pure commercial managers of ships without any responsibility for crew or technical management (that is to say, companies which enter into transportation contracts and rely on other companies to deliver the service, through time or voyage chartering) are eligible for tonnage tax.

(17) The use of time-chartered vessels is subject to the flag link requirements set out in recital 24. However, there is currently no explicit rule as to minimum EEA flagging requirement for new entrants into the tonnage tax scheme.

(18) On 6 January 2012 the Registrar General of Shipping issued internal rules on the eligibility for the application of the Maltese tonnage tax scheme (‘2012 Rules on Internal Procedure’) (21). Those include restrictions on time-chartering and similar activities as a percentage of the total tonnage of the fleet. The same internal procedure allows for derogations of up to three years: ‘At the time of opting into the tonnage tax scheme, the total net tonnage of the ships chartered-in and included in the tonnage taxation scheme does not exceed 80 % of the total net tonnage of all ships chartered-in and operated by the qualifying charterer and any other organisation forming part of the same group. Chartered-in ship means a ship taken on a time charter or on a voyage charter or on a contract of affreightment basis. Ships operated means ships owned or bareboat chartered-in. This percentage can reach 90 % provided that every chartered-in ship flies a Community flag or is entirely managed (crew and technical) from the territory of the EU/EEA. Following the entry into the system, the charterer may increase the percentage net tonnage chartered-in from the above mentioned maximum, provided that this excess does not occur for more than three consecutive tax periods’.

2.1.2.3. Ancillary revenues

(19) In relation to carriage of cargo and passengers, the 2012 Rules on Internal Procedure give some details as to which ‘ancillary activities’ would normally be considered by the Maltese authorities to be covered by the definition of ‘shipping activities’. It is specified that in general ‘All activities which are substantially connected to and form a normal part of the ship operating service being offered in the course of the operation of qualifying ships should qualify for the tonnage tax regime’. In particular, the following activities are in that regard specified: (a) In relation to the carriage of passengers by sea (cruise ships), all hotel, catering, entertainment and retailing activities on board a qualifying ship, provided that these services are performed as ancillary activities to the activity of carriage of passengers by sea by that ship and are all consumed or used on board that ship; (b) the operation of office facilities in connection with shipping activities subject to tonnage tax; (c) the operation of ticketing facilities and passenger terminals in connection with shipping activities subject to tonnage tax (22); (d) the provision of excursions for passengers of a qualifying ship operated by the company, where any cabin for the passenger remains available for his exclusive use; (e) any interest or similar return earned on working capital where such interest/return is used for the purposes of financing the licensed shipping organisation or its shipping activities and/or the acquisition and maintenance of a tonnage tax ship.

(20) According to Malta, the activity described in point (a) of recital 19, and in particular consumption or use on board, is interpreted to cover all receipts from goods and services sold to the passengers still maintaining a cabin on board as long as the revenues of the ship mainly stem from the traditional shipping revenues.

2.1.3. The level of the tonnage tax

(21) Malta charges an annual tonnage tax in the form of a lump sum (23): Table 1 Ship of Net Tonnage (Net Tons) Annual tonnage tax 0 2 500 EUR 1 000 2 500 8 000 EUR 1 000 plus 40 cents for every NT in excess of 2 500 NT 8 000 10 000 EUR 3 200 plus 19 cents for every NT in excess of 8 000 NT 10 000 15 000 EUR 3 580 plus 14 cents for every NT in excess of 10 000 NT 15 000 20 000 EUR 4 280 plus 12 cents for every NT in excess of 15 000 NT 20 000 30 000 EUR 4 880 plus 9 cents for every NT in excess of 20 000 NT 30 000 50 000 EUR 5 780 plus 7 cents for every NT in excess of 30 000 NT Exceeding 50 000 EUR 7 180 plus 5 cents for every NT in excess of 50 000 NT

(22) The standard rate is adjusted depending on the age of the ship. The standard rate is only applied to ships that are 10-15 years old. Ships older than 15 years are subject to a surcharge up to a maximum of 50 %. For ships aged 0-5 years a reduction of 30 % applies, for those aged 5-10 years the reduction is 15 % (24).

(23) The First Schedule to the Merchant Shipping Act states that ‘The Minister may, under such conditions as he may deem appropriate, exempt any ship or any class of ships from the payment of all or part of the fees payable in terms of these regulations.’

2.1.4. The flag link requirement

(24) Pursuant to Article 85A(2) of the Merchant Shipping Act, a non-Community flagged ship can be declared a ‘tonnage tax ship’ where (25): (a) the licensed shipping organisation owns, manages or operates at least 60 % of its total tonnage under a Community flag; or (b) the percentage of the licensed shipping organisation's total tonnage which is Community-flagged immediately after the shipping organisation begins to operate the ship is not less than the percentage of the shipping organisation's total tonnage which was Community-flagged on the reference date (26) or, in the case of ship managers, one year from the date the ship manager started his business (if this is later than the reference date); or (c) the percentage of Community-flagged tonnage of the beneficiary company has not decreased over a period of three years or such lesser period in which the tonnage tax beneficiary was in existence.

(25) Where the requirements of points (b) or (c) are not fulfilled, the non-Community-flagged ship can still be entered into the tonnage tax scheme if the beneficiary commits to increasing or at least maintaining under the flag of one of the Member States the share of tonnage that was being operated under such flags on the reference date.

2.1.5. Ring-fencing measures

(26) The general anti-abuse provisions of Maltese tax law, which provide that schemes aimed at artificially lowering the tax amounts should be disregarded, apply also in respect of the tonnage tax scheme (27).

(27) Switching between the tonnage taxation scheme and the general corporate income taxation system for the purposes of optimising the tax bill is limited by the fact that the decision to leave the tonnage taxation scheme is irrevocable (28).

(28) In respect of any year for which tonnage tax is applied, separate accounts must be kept clearly distinguishing the payments and receipts by the shipping organisation concerned in respect of shipping activities and receipts in respect of any other business (29).

2.1.6. Exemption from taxation of capital gains arising from the sale or transfer of ships

(29) Capital gains arising from the sale or transfer of tonnage tax ships and similar operations are exempt from taxation (30). There are no limitations on this exemption.

2.1.7. Exemption from taxation of dividends in relation to shares in shipping companies

(30) Article 3(1)(a) of the Taxation Regulations stipulates that ‘no further tax under the Income Tax Act shall be charged or payable on the income to the extent that such income is derived from shipping activities of a licensed shipping organisation’, provided that all relevant fees and taxes have been duly paid by the shipping organisation. This tax exemption applies throughout the whole chain of ownership (31).

(31) As regards the general system of income taxation, the treatment of dividends for shareholders is governed by Article 68 of the Income Tax Act, which provides: ‘68. (1) (a) Any person who is not resident in Malta or any individual who is resident in Malta and who is in receipt of a dividend paid out of profits allocated to any of the taxed accounts other than the final tax account shall not be obliged to disclose the existence of such dividend in any return made pursuant to the provisions of the Income Tax Acts. (b) No person shall be charged to further tax under this Act in respect of the income referred to in paragraph (a). (c) Any dividends paid out of profits allocated to the final tax account shall not be charged to further tax and shall not form part of the chargeable income of any person and no person may claim a credit or refund in respect of any tax directly or indirectly paid on such profits …’.

(32) The practical effect of Article 68 of the Income Tax Act is that profits when distributed as dividends are not subject to further tax at shareholder level. It is to be noted that there is also no obligation on recipients to disclose such dividends.

2.1.8. Exemption from taxation of capital gains in relation to shares in shipping companies

(33) Organisations holding equity interests in shipping organisations and shareholders do not pay income tax on capital gains arising from the transfer of those equity interests, provided that the company in which the equity interest is held limits its activities to shipping activities (32). That exemption applies throughout the whole chain of ownership (33).

(34) The Income Tax Act imposes tax on certain capital gains. These are exhaustively specified in Article 5(1) of the Income Tax Act and include in principle those arising from transactions in immoveable property, securities and partnerships. Taxable capital gains are aggregated with taxpayers' other income and are charged at a flat rate of 35 % for companies.

(35) Article 12(1)(c)(ii) of the Income Tax Act provides a tax exemption for persons not resident in Malta. Specifically any gains or profits accruing to or derived by any person not resident in Malta on a transfer of any shares or securities in a company, which is not a property company, are exempt from the tax, provided that the beneficial owner of the gain is a person not resident in Malta and that person is not owned or controlled by an individual or individuals who are ordinarily resident in Malta.

2.1.9. Exemption from taxation of interest or other income payable in relation to financing of shipping companies or tonnage tax ships

(36) The Merchant Shipping Act sets out that besides the ownership, operation, administration and management of a ship or ships registered in Malta or under the flag of another state and the carrying on of all ancillary financial, security and commercial activities in connection therewith (34) an organisation shall qualify as a shipping organisation if its principal object is — and provided a licence is obtained from the Director-General of Shipping — ‘the raising of capital through loans, the issue of guarantees or the issue of securities for the shipping organisation itself or for other shipping organisations within the same group’ (35), or ‘for the carrying on of such other activities within the maritime sector which the Minister may, on the advice of the Authority, from time to time prescribe by regulations as qualifying for the above purpose’ (36).

(37) Article 3(2) of the Taxation Regulations sets out that no tax under the Income Tax Act shall be payable on interest or other income payable in relation to financing of the operations of licensed shipping organisations set out in Article 84Z(1) of the Merchant Shipping Act or the financing of a tonnage tax ship. According to that provision this exemption is applicable only to licensed banks, credit or financial institutions which are resident in Malta and is granted only upon explicit request to the competent authorities.

(38) Loans and guarantees from financial institutions to shipowners as well as to operators, managers or administrators of ships might therefore potentially be exempted from income taxation under the Income Tax Act on the profits arising from the relevant activities (37).

(39) The Maltese authorities have confirmed that since the accession of Malta to the European Union no licence was granted for any organisation other than those active in the ownership, operation (under charter or otherwise), administration and management of a ship or ships and that no bank, credit or financial institution within the meaning of Article 84Z(1) of the Merchant Shipping Act has availed itself of such a benefit.

2.1.10. Exemption from duty on documents and transfers

(40) The Duty on Documents and Transfers Act (38) applies to transfers of marketable securities, immovable property, auction sales and insurance policies. Marketable securities are defined as ‘a holding of share capital in any company and documents representing the same company’ (39).

(41) The Taxation Regulations (40) express that no duty will be payable on (i) the registration of a tonnage tax ship under the Merchant Shipping Act; (ii) the issue or allotment of any security or interest of a licensed shipping organisation; (iii) the purchase, transfer, assignment of any security or interest of any licensed shipping organisation; (iv) the sale or transfer of a tonnage tax ship; (v) the registration, transfer or discharge of any mortgage or other charge over or in relation to any ship or shipping organisation; (vi) the assignment of any rights and interests, or assumption of obligations in respect of any ship.

(42) The Duty on Documents and Transfers Act (41) levies a duty on transactions on securities of two euros for every one hundred euros of the amount or value of the consideration or the real value of the marketable security, whichever is the higher.

(43) However, no duty is applicable to transactions involving securities of a company in which more than half the ordinary share capital, voting rights and rights to profits are held by persons who are not resident in Malta and are not owned or controlled directly or indirectly by persons resident in Malta, provided the company has the majority of its business interests outside Malta (42).

(44) Also exempt from charges generally are transfers made on an intra-group basis in the context of group restructuring exercises (43). There are a significant number of other exemptions mostly focused on various legal persons with significant international interests but also in other circumstances such as for collective investment entities.

3. GROUNDS FOR INITIATING THE FORMAL INVESTIGATION PROCEDURE

(45) The opening decision raised doubts regarding the compatibility of the measures described in sections 2.1 to 2.8 with the internal market and in particular with the Maritime Guidelines (44).

(46) On the tonnage tax measures the Commission had the following doubts: (a) The Maritime Guidelines limit the application of tonnage tax to ships used for purposes of maritime transport, which is defined as ‘the transport of goods and persons by sea’ (45). However, that definition did not seem to be reflected in the Merchant Shipping Act. Moreover, the Maltese scheme gives the Minister discretion to depart from the broad requirements set out in the Merchant Shipping Act. The Commission considered that profits from ships not involved in maritime transport activities should not be eligible for tonnage tax. In this context, the Commission considered that fishing vessels, pontoons, barges, yachts, cruise vessels, pontoons and oil rigs appeared to be eligible under the Maltese tonnage tax scheme but doubted that this was justifiable. (b) The absence of clear provisions on service/support vessels, tugboats and dredgers gave rise to further doubts on the part of the Commission whether compliance with the rules set out in the Maritime Guidelines is ensured. (c) Concerning capital gains from the sale of ships, the Commission has doubts as to whether exempt transactions were limited to ships bought and sold by shipping companies while under tonnage taxation. (d) The Commission considered that the absence of clear limitations on the eligibility of ancillary activities may lead to the granting of incompatible aid, particularly in case of the sale of certain goods on board of cruise vessels. (e) As to ships clearly involved in eligible activities, the Commission considered that tax benefits should not be extended to all market operators involved in some way with those ships. Ship lessors without any maritime transport activity of their own should not benefit from tonnage tax. Additionally, the Commission had doubts about the unrestricted eligibility of time charterers and similar companies to benefit from tonnage tax. (f) The Commission expressed doubts as to whether, in all cases, the level of taxation was in line with what the Commission had accepted in the past for other Member States. (g) The Commission expressed doubts as to whether the flag link requirements as well as ring-fencing measures were adequate. (h) The Commission questioned the tax treatment of dividends from shares in shipping companies. (i) The Commission also questioned the compatibility with the internal market of the exemption from taxation of capital gains relating to shares in shipping companies. (j) The Commission questioned the compatibility with the internal market of the exemptions from the Duty on Documents and Transfers Act relating to ships. Those exemptions appear to potentially benefit economic operators which are not necessarily genuine shipping companies (notably shareholders). (k) Finally, the Commission considered that exemption from income taxation of profits from the sales of ships and from financing shipping companies was not in line with the Maritime Guidelines.

4. OBSERVATIONS AND COMMITMENTS BY MALTA

4.1. Introduction

(47) Malta stresses that it has always implemented the tonnage tax with the aim of respecting fair competition and the Maritime Guidelines.

(48) In practice, the Maltese scheme has always been limited to vessels recognised by the Commission as eligible for tonnage taxation (essentially, vessels engaged in the international carriage of goods and passengers). Ancillary services such as financing and brokerage have not benefitted from the tonnage tax.

(49) At the end of December 2015, the registered gross tonnage under the Maltese flag was 66,2 million (over 3 000 vessels). The fleet flying the Maltese flag is a fundamental component of the maritime activity of Malta and has a vital bearing on the economic viability of its maritime industry as a whole, particularly when considering its position as a small island on the periphery of the Union and the multiplier effect it generates in the Maltese economy.

(50) This should be compared with 462 ships under the Maltese tonnage tax scheme with a total tonnage of 10,4 million gross tons at the end of 2015.

(51) Those ships that benefit from the Maltese tonnage tax scheme fly the Maltese flag except for two ships that fly the Norwegian flag. None of the ships in question are operated under bareboat chartering out to third parties or time/voyage-chartering arrangements.

(52) Ships operated commercially within Maltese territorial waters do not benefit from the Maltese tonnage tax scheme. These are mainly engaged in port operations such as bunkering operations, conveyance and tourist cruises and employ many of the Maltese seafarers.

(53) There is a distinction to be made between ships that are operated commercially in the transportation of tourists/cargo in Maltese territorial waters and ships engaged in the international trade. It is only the latter that are eligible under the Maltese tonnage tax scheme.

4.2. The tonnage tax scheme

4.2.1. Vessels eligible for tonnage taxation

4.2.1.1. General observations

(54) According to the First Schedule to the Merchant Shipping Act, tonnage tax is payable in respect of all vessels registered in Malta, including fishing vessels and pleasure yachts.

(55) However, Malta stresses that not all types of vessels are eligible as ‘tonnage tax ships’ which benefit from the tonnage tax scheme. This is the case, for example, of fishing vessels and pleasure yachts. Nor is the licensed shipping organisation that owns, operates or manages such vessels entitled to benefit from the tonnage tax scheme on profits that the said licensed shipping organisation derives from such vessels.

(56) Vessels that are not engaged in shipping activities, such as fishing vessels and pleasure yachts, are required to pay income tax in Malta on their chargeable income in addition to registration fees and annual fees based on tonnage payable pursuant to the Merchant Shipping Act. The latter fees and taxes are also referred to in Malta as ‘tonnage tax’, however only what Malta has referred to in the past as ‘tonnage tax ships’ are required only to pay the tonnage tax under the tonnage tax scheme in lieu of income tax under the Income Tax Act.

(57) The Taxation Regulations provide an exemption from income tax only in respect of income derived from ‘shipping activities’. The 2012 Rules on Internal Procedure list a number of vessels which are not eligible for tonnage taxation in exemption of regular income taxation, since the income derived from those vessels does not qualify as income from ‘shipping activities’. In particular fishing vessels, pleasure yachts, fixed offshore installations including oil rigs that are not used for maritime transport, non-ocean-going tugs, non-self-propelled floating cranes, and vessels the main purpose of which is to provide gambling and/or casinos do not benefit. Also mobile platforms and pontoons do not qualify for exemptions from regular income taxation. All those vessels simply pay a registration fee and an annual fee based on their tonnage, which is referred to as ‘tonnage taxation’ or ‘tonnage tax’ but which does not exempt them from regular income taxation.

(58) Malta submits that in the future, the registration fee and the annual fee payable by fishing vessels and similar non-qualifying vessels will no longer be called ‘tonnage tax’ to avoid misunderstandings.

(59) The discretion of the responsible Minister to accept ships below 1,000 net tons does not mean that vessels which are not involved in shipping activities could be covered by the tonnage tax. The discretion does not eliminate the need for the vessel to be involved in the international carriage of goods or passengers.

(60) For the sake of clarity Article 85A(1) of the Merchant Shipping Act will be reformulated to read: ‘The Minister may with the concurrence of the Minister responsible for finance and subject to such conditions as would be deemed appropriate in line with these Regulations, declare to be a tonnage tax ship, a ship of any net tonnage, which is engaged in shipping activities’.

(61) Only the categories of ships mentioned in Table 2 have ever been accepted as eligible for tonnage taxation in Malta (with parallel exemption from regular income taxation). Also the composition of the fleet in 2015 is shown in Table 2. Table 2 Type of ship Total number of tonnage taxed ships (December 2015) barge 7 bulk carrier 113 car carrier 5 cement carrier 2 commercial yacht (46) 29 container 12 general cargo 120 passenger 24 roll-on/roll-off (ro/ro) 5 support vessel (47) 3 tanker 155 tug 2 TOTAL 477

(62) Malta has confirmed that 100 % of the ships benefiting from exemptions from regular income taxation (the ‘Maltese tonnage taxed fleet’) is EU/EEA-flagged/registered (48) and that no non-EU/EEA-flagged ship has ever been part of the tonnage taxed fleet since 2004.

(63) In terms of tonnage, the Maltese tonnage taxed fleet amounted to approximately 10,4 million gross tons at the end of 2015 which is less than 20 % of ships registered in Malta.

(64) Malta submitted a commitment to continue to limit the vessels which are eligible for the tonnage tax scheme to those involved in the international carriage of goods or passengers by sea and certain other shipping activities as have been previously approved by the Commission as eligible under the Maritime Guidelines for tonnage tax purposes on application by other Member States.

(65) Malta will furthermore specify that only genuine shipping organisations will be able to benefit from tonnage taxation under the scheme, specifically organisations which have assumed risks and responsibilities related (i) to the operation of a ship that carries out maritime transport as defined in the Maritime Guidelines (49) (such as responsibilities related to technical management and crewing); or (ii) to the carrying out of maritime transport as defined in the Maritime Guidelines (including with vessels chartered in with crew under certain conditions (50)).

4.2.1.2. Application of tonnage tax to barges

(66) Barges which are not engaged in the ‘international transport of goods’ are not eligible for the Maltese tonnage tax system irrespective of whether they are self-propelled or otherwise. Barges that are designed and normally used for navigation in open seas and that are also engaged in international maritime transport may qualify for the Maltese tonnage tax scheme. This is deemed necessary for cargo that cannot be transported by conventional vessels.

(67) The energy industry uses barges to transport components such as anchors, pipes, and chains that cannot be transported on conventional ships. Modules for new platforms for drilling and production and drill rigs are also barge-transported. Other barges carry equipment for laying pipe lines in deep water or very high-capacity cranes and derricks. Non-propelled barges are also used to supply power stations with coal.

4.2.1.3. Application of tonnage tax to cruise vessels

(68) Cruise (passenger) ships qualify for the Maltese tonnage tax scheme. Malta stressed that Cyprus, Denmark France, Germany, Ireland, Italy, the Netherlands, Norway and the United Kingdom consider cruise ships to be qualifying ships, provided that such ships are not mainly used for gambling/casino or similar non-shipping purposes.

(69) The sector is highly beneficial for the Union maritime cluster and yields a lot of added value to a considerable number of Member States. The industry is subject to aggressive international competition and employs a substantial number of skilled and expert personnel.

4.2.1.4. Application of tonnage tax to commercial yachts

(70) Commercial yachts used in the international transport of passengers may qualify for the tonnage tax scheme, provided they are registered as commercial yachts in Malta. They must be engaged in the commercial carriage of up to 12 passengers (51) and must comply with a set of rigorous safety and operational standards. Yachts that are certified as commercial yachts are considered equivalent to small passenger ships as they are able to sail in international waters. The Malta Commercial Yacht Code (52) sets the technical standards which those commercial yachts must meet to qualify as tonnage tax ships. Those standards are equivalent to those regulating the construction and operation of merchant ships which are contained in international conventions such as SOLAS and MARPOL (53). The rest of the eligibility criteria applicable for commercial yachts are the same as for other types of vessels.

(71) Owners of these commercial yachts enter into third-party management agreements with yacht management companies. The Taxation Regulations allow both owners and managers to be eligible under the tonnage tax scheme. To date there were no instances where both the owner and the manager of a commercial yacht registered under the Merchant Shipping Act have benefitted from the scheme.

(72) The international commercial yachting industry is very competitive and yachts registered in the Union/EEA, are facing increased competition from operators of commercial yachts established outside the EEA. Third countries provide corporate tax incentives to register yachts there.

4.2.1.5. Application of tonnage tax to towage and dredging vessels

(73) Where a licensed shipping organisation derives income from towage vessels which are tonnage tax ships, the organisation is only entitled to the tonnage tax scheme in respect of that income which it derives from ‘shipping activities’. Towage services within harbours are excluded from the tonnage tax scheme. Tugs are only eligible when it is confirmed that the majority of their operational time is spent in the international carriage of goods, respecting the 50 % threshold set out in the Maritime Guidelines (54).

(74) The 2012 Rules on Internal Procedure exclude non-ocean going tugs from the tonnage tax scheme and make clear that that those ships not prescribed are not simply eligible for the tonnage tax scheme but must meet the requirements contained in the Taxation Regulations. The new draft Merchant Shipping Taxation Regulations will state expressly that for tugboats or dredgers to be eligible, they must be registered in an EU/EEA register. Whilst this was not previously spelled out clearly, the latter requirement has always been respected.

(75) Malta committed to transpose the exact wording of the Maritime Guidelines as regards towing and dredging activities into the relevant texts.

4.2.1.6. Application of tonnage tax to service vessels

(76) Malta explained that only a few service/support vessels have been covered by the tonnage tax scheme. Those have been multipurpose/break-bulk vessels (55).

(77) Malta argues that service/support vessels are subject to the same operational and regulatory framework as vessels that perform maritime transport (within the meaning of the Maritime Guidelines), in terms of: (a) technical requirements, including all relevant international instruments and regulations governing ship structure, safety, and protection of the environment, as well as classification rules; (b) manning: these ships are manned in compliance with international legislation that also applies to merchant vessels, in particular the International Convention on Standards of Training, Certification and Watchkeeping for Seafarers of the International Maritime Organisation (STCW convention) and the Maritime Labour Convention of the International Labour Organisation; seafarers employed on board these vessels are subject to the same training requirements and to the same working and living conditions as those employed on board traditional merchant vessels; (c) legal environment: ship owners operating these vessels are subject to the same legal constraints as regards security, liability in case of accident or pollution, and competition rules.

(78) Service vessels are confronted with competition from international competitors, with competitors benefiting from lower wages for crews, lower taxes, reduced maintenance programmes, etc.

(79) Furthermore, service vessels contribute to the fulfilment of the objectives of the Maritime Guidelines as other (merchant) vessels do. They contribute to the development of the maritime cluster and have a positive impact on employment and on maritime knowhow in the Union.

(80) Malta has given a commitment to limit the eligible vessels to those involved in international carriage of goods or passengers by sea in accordance with the Maritime Guidelines.

(81) Malta noted that the Commission has already accepted cable-laying, pipe-laying, research and crane vessels as eligible for tonnage taxation (56).

4.2.2. Income eligible for tonnage taxation

4.2.2.1. Eligibility of ancillary services provided in the context of maritime transport

(82) The term ‘ancillary activities’ referred to in the definition of ‘shipping activities,’ contained in Article 85(1) of the Taxation Regulations, has always been interpreted as requiring the existence of a strict link between the international transport of goods and passengers and the ancillary activity. Whether a particular activity is considered ancillary is examined on a case by case basis.

(83) In determining whether an activity is ancillary account is taken of the Commentary to Article 8 of the OECD's Model Tax Convention (‘the Commentary’), including paragraph 4.2 of the Commentary that states that, in the context of international transport, income derived from ancillary operations is income derived from activities which ‘make a minor contribution relative to [the operation of ships in international traffic] and are so closely related to such operation that they should not be regarded as a separate business or source of income of the enterprise’.

(84) Malta stresses that passenger transport normally includes a variety of complementary services which are included in the ticket price. These services include the provision of sleeping accommodation and catering and also other services which form part of the passenger's expectation during the same journey such as embarkation and disembarkation services. Passengers of large passenger ships would also expect to have a cinema, spa, hairdresser and similar services. Such services and local excursion services are to be considered ancillary activities to the shipping activity provided the relevant service represents a bought-in service at arm's-length conditions. Malta also stressed that it is a legal requirement that the shops on board cruise ships are closed while the ships are at port.

(85) Ticket sales are the primary source of revenues for cruise ships' operators and on-board earnings are an ancillary but key component for the sustainability of the passenger carrying activity. Industry reports estimate that the majority of cruise ship revenues (60 % or more) are derived from ticket sales.

(86) The 2012 Rules on Internal Procedure specifically exclude from the tonnage tax scheme ‘vessels the main purpose of which is to provide goods or services normally provided on land (e.g. floating hotel, supermarket or restaurant)’ and floating or cruising casinos. Of the 26 passenger ships that have benefitted from the tonnage tax scheme 17 do not have a casino service or sell luxury goods.

(87) Malta submitted a commitment that upon the entry into force of the new Merchant Shipping Taxation Rules a number of activities that may be in competition with land-based companies and that are therefore not eligible for the tonnage tax scheme will be explicitly excluded. Those activities will include the sale on board of goods or services not customarily provided to passengers, for example, cars, domestic appliances or livestock or ship-based holidays where the ship remains moored and there is no sea transportation element.

(88) Furthermore, Malta has given a commitment to cap revenues from ancillary activities at a maximum of 50 % of the gross revenues for each ship. Verification of compliance by the tax authorities will be carried out at the level of each ship within a group.

(89) The capped ancillary activities that can benefit from tonnage tax will include: ‘(a) the carriage of passengers or cargo otherwise than on board a tonnage tax ship operated by the licensed shipping organisation, where (i) there is a single contract with the customer for a journey which includes a voyage on the tonnage tax ship; and (ii) the transport for the remainder of the journey is purchased or obtained by the licensed shipping organisation by provision which would have been made as between independent enterprises; (b) sales and facilities which are normally provided to customers by seagoing passenger ships, including: (i) the sale of alcoholic beverages, perfume and tobacco; (ii) the exchange of amounts of different currencies for personal expenditure; (iii) health and beauty and spa and wellness services; (c) administrative and insurance services which are directly related to the carriage of passengers or cargo, including under a single journey contract which includes a voyage on the tonnage tax ship; (d) the provision of holidays, sold to the customer under a single contract, where (i) part of the holiday is a voyage on a tonnage tax ship operated by the licensed shipping organisation, and the remaining part is land-based (“the land-based part”); (ii) the land-based part is purchased or obtained by the licensed shipping organisation by arm's length provision; (e) the loading and unloading of cargo carried on a tonnage tax ship operated by the licensed shipping organisation, and the provision by the licensed shipping organisation of facilities used exclusively for those purposes; (f) the consolidation or breaking of cargo carried on a tonnage tax ship operated by the licensed shipping organisation, immediately before or after the voyage, where the activity is not haulage-related; (g) the temporary placement of cargo carried on a tonnage tax ship operated by the licensed shipping organisation, on or at the dockside, where the activity is not part of a long-term storage operation; (h) the rental or provision to customers of containers for goods to be carried on a tonnage tax ship operated by the licensed shipping organisation; (i) the provision of excursions for passengers of a tonnage tax ship operated by the licensed shipping organisation, where any cabin for the passenger remains available for exclusive use;’.

(90) Furthermore, the following ancillary revenues will be covered by the capped: (a) advertising and marketing, if these correspond to the sale of advertising space on board tonnage tax ships; and (b) betting or gambling facilities normally offered to customers by seagoing passenger ships for on-board entertainment, and the sale to passengers on seagoing ships of luxury goods of a kind normally offered to such passengers, provided that the turnover from such activities amounts to less than 25 % of the gross revenues of the tonnage taxed ship.

(91) According to the 2012 Rules on Internal Procedure non ship-specific ancillary activities, which are currently subject to tonnage tax in Malta, comprise (i) the operation of ticketing facilities and passenger terminals in connection with shipping activities subject to tonnage tax; (ii) any interest or return earned on working capital, where the interest/return is used for the purposes of financing the licensed shipping organisation or its shipping activities; (iii) and/or the acquisition and maintenance of a tonnage tax ship. Those activities will in the future legislation continue to benefit from tonnage tax under the heading ‘Other ancillary activities recognised as eligible for tonnage tax purposes by the European Commission’, as long as it will not lead to overall gross revenue from ancillary revenues (both ship-specific and other) exceeding 50 % of tonnage taxed revenues of a beneficiary company.

(92) From a review covering the period 2004-2016 by the Registrar-General of Shipping and Seamen it resulted that all those which benefited from the tonnage tax scheme had respected the 50 % ceiling, in terms of the gross revenue as far as the ancillary activities are concerned. Particular attention was paid to cruise ships given the significance of this revenue. Checks carried out, per vessel, on the companies benefiting from tonnage tax, demonstrated that revenues from ancillary activities were well below the 50 % limit. Malta has subsequently confirmed that a 50 % threshold has been observed since May 2004 in respect of ancillary revenues. Malta stressed that the profits of any sub-contractors have never been eligible for tonnage tax.

4.2.2.2. Application of tonnage tax to entities chartering out eligible vessels on a bareboat basis

(93) Malta argues that, in contrast to financial lessors, owners of ships which charter their ships out on a bareboat basis are not extraneous to the shipping industry and carry a certain level of responsibility for their vessels.

(94) When the ship is exclusively involved in eligible activities and operated by the owner of the ship, the entire income from the ship is subject to tonnage tax. In this context, Malta considers that the same principle should be followed when the relevant income is shared between the owner of the ship and the operator, provided the necessary conditions (including the payment of tonnage tax by each party) are satisfied. Malta argues a too strict approach on this matter may lead to ship owners flagging out their ships outside the Union and higher ship rent rates for Union shipping companies.

(95) No bareboat chartered out ships which were accepted in the past under the tonnage tax scheme were ships bareboat chartered out to third parties, as demonstrated by the overview covering the period 2004-2016 submitted to the Commission services.

(96) Bareboat chartered out ships form approximately 10 % of ships falling under the Maltese tonnage taxation scheme. The charters were intra-group (57).

(97) To ensure that de jure there is no possibility in the future for pure ship lessors (including those leasing small yachts to natural persons (58) to benefit from the tonnage tax scheme Malta has provided a commitment to limit the eligibility of bareboat chartering out transactions to: (a) intra-group transactions (59); (b) transactions of genuine shipping companies with third parties due to short-term over-capacity where the term of the charter does not exceed three years and provided that net tonnage chartered out on bareboat charter basis to third parties is below 50 % of the total tonnage of the tonnage tax company/group; the term ‘short-term over-capacity’ refers solely to ships acquired by the licensed shipping organisation for the purposes of carrying out its own shipping activities and does not include any ships specifically acquired for the purposes of chartering out on a bareboat basis.

4.2.2.3. Application of tonnage tax to transport services provided with ships rented from other companies with crew (time/voyage chartering)

(98) Malta has confirmed that since 2004 no tonnage tax beneficiary in Malta has engaged in time chartering or similar activities.

(99) Malta stressed, however, that the very nature of shipping calls for a possibility of flexible and swift decision-making from ship owners to adapt to developments on the market. Malta stressed that the Maritime Guidelines do not provide a limitation on the maximum tonnage which an organisation is able to charter in with crew in order to be entitled to the aid allowed under the Maritime Guidelines.

(100) A time-chartered fleet is subject to the general flag link requirements of the Maltese law. The flag link requirement applies to the entire tonnage taxed fleet (60). All time/voyage chartered ships that have been accepted under the Maltese tonnage tax scheme since May 2004 are EEA-flagged.

(101) Malta clarified that it would require new entrants to have at least 25 % of their tonnage-taxed fleet under EEA flags, in line with the approach approved by the Commission in the French tonnage tax case (61).

4.2.3. Application of the flag link rule

(102) It is only since 2010 that the Taxation Regulations allow also non-EEA/EU registered vessels to be covered by the tonnage taxation subject to the conditions described in recital 27. Therefore the vast majority of the Maltese tonnage taxed fleet (90 %) is EEA/EU-flagged.

(103) Malta has provided a commitment to require that any new entrant has at least a 25 % share of EEA-flagged vessels in the tonnage taxed fleet it operates (62) which it will have to maintain or increase in accordance with section 3.1 of the Maritime Guidelines. Under this commitment the share of the EEA-flagged fleet of tonnage tax beneficiaries must not decrease on average over a period of three years. A derogation from this obligation will be granted only when 60 % of the tonnage taxed fleet (63) that the beneficiary company operates is EEA-flagged. A check will be done whenever a vessel is added or taken out of a tonnage tax fleet.

(104) Malta has also submitted a commitment that the entire strategic and commercial management must take place within the EEA.

(105) Vessels which are not commercially and strategically managed from the EEA, will be accepted under the tonnage tax scheme only if flying an EEA flag, except for vessels bareboat chartered out, under conditions respecting certain limitations (64).

4.2.4. Tonnage tax rates

(106) Malta stressed that its tonnage tax scheme is based on a similar principle as the Cypriot tonnage tax scheme approved by the Commission in 2010. Malta charges an annual tonnage tax in the form of a lump sum depending on the tonnage of the vessel.

(107) The rates of tonnage tax payable in Malta vary according to the net tonnage of the vessel as well as age. Table 3 provides a comparison of the level of tonnage tax payable in Malta in relation to the Cypriot and Polish tonnage tax schemes approved by the Commission.

(108) Malta stresses that if one were to consider the change in tax payable as determined solely by the tonnage of the vessel (65), the estimated annual tonnage tax payable in Malta would be very similar to that payable in Cyprus and Poland: Table 3 Net Tonnage Malta Cyprus Poland 2 500 1 000 830 711 8 000 3 200 2 537 2 046 10 000 3 580 3 158 2 531 15 000 4 280 4 161 3 225 20 000 4 880 5 165 3 918 25 000 5 330 6 169 4 473 30 000 5 780 6 808 4 820 40 000 6 480 8 086 5 513 50 000 7 180 8 816 6 207 60 000 7 680 9 546 6 900

(109) Malta furthermore stresses that the tonnage tax calculation shown for Poland in table 3 assumes that the vessels will be operational for 365 days in a year. Vessels under the Polish tonnage tax scheme not operational for the full year are entitled to a pro-rata reduction. In Cyprus where the vessel is laid-up for a period of at least three months, the amount of tonnage tax payable in respect of such vessel is reduced by 25 %.

(110) Malta provides a reduction from the standard tonnage tax rate where the vessel is less than 10 years old. At the same time, Malta increases the tonnage tax payable when the vessel is 15 years old or more. The purpose of this rule is to encourage shipowners and operators to register younger (and therefore more efficient and environmentally-friendly) vessels and discourage them from registering older vessels. Since newer vessels are in general likely to be safer, more secure, more efficient and more environmentally friendly than older vessels, such a rule is considered to support the first objective listed in section 2.2 of the Maritime Guidelines, that is, ‘improving a safe, efficient, secure and environment friendly maritime transport’. This also contributes towards the 2020 targets on the mitigation of greenhouse gas emissions adopted by the EU.

(111) Malta argued that the increase in the tonnage tax rate when the vessel becomes older should be taken into account when considering the rate overall. However, in any event, given the reductions applied in Poland and Cyprus relating to the non-operation of vessels, even with the reduction applied in Malta the rates are comparable. For purposes of proper comparison Malta submitted that where a vessel was in operation 75 % in Poland the comparison between Malta and Poland would look as set out in table 4: Table 4 Net Tonnage Poland Malta (vessel 0-5 y) Malta (vessel 5-10 y) 2 500 533,25 700 850 8 000 1 535 2 240 2 720 10 000 1 898 2 506 3 043 15 000 2 419 2 996 3 638 20 000 2 939 3 416 4 148 25 000 3 355 3 731 4 530 30 000 3 615 4 046 4 913 40 000 4 135 4 536 5 508 50 000 4 655 5 026 6 103 60 000 5 175 5 376 6 528

(112) With regard to the discretion of the Minister to ‘[…] under such conditions as he may deem appropriate, exempt any ship or any class of ships from the payment of all or part of the fees payable in terms of these regulations’ Malta explained that this rule applies solely to annual and registration fees, also called tonnage taxes, and only to ensure flexibility in cases involving humanitarian and philanthropic situations. This rule has never been applied.

(113) As to reductions on the account of tonnage tax paid in another State, Malta explained that the purpose of the relevant rule is prevention of the double taxation. An entity that has been subjected to tonnage tax in respect of a vessel in another country should not then be made to pay again the full tonnage tax in Malta. The system of relief from double tonnage taxation that is granted by Malta is based on the ordinary credit method that applies also in the context of income taxes. Malta pointed to previous statements of the Commission on the matter consistent with this approach (66).

(114) The double taxation relief is limited to the lower of the actual tonnage tax incurred in respect of the vessel outside Malta or 75 % of the Maltese tonnage tax that would be payable before the granting of any credit. Relief is only granted for tonnage tax paid in respect of the same vessel by the same licensed shipping organisation in another Member State.

4.2.5. Ring-fencing measures

(115) Malta maintains that the ring-fencing measures contained in the Taxation Regulations effectively dissuade abuses and prevent spill-overs into non-eligible activities.

(116) The Taxation Regulations impose the obligation on a licensed shipping organisation to maintain separate accounts that distinguish income and gains derived from shipping activities from other sources of income. In addition, a licensed shipping organisation is also obliged to prepare financial statements that are in accordance with International Financial Reporting Standards endorsed by the Union and submit them to audits by a certified public accountant.

(117) Failure to maintain separate accounts will automatically disqualify a shipping organisation from benefitting from any of the tax exemptions.

(118) A licensed shipping organisation has an obligation to register with the Minister responsible for Finance, if it wishes to benefit from the tonnage tax system.

(119) A licensed shipping organisation that derives benefits from the tonnage tax system is required to submit an annual income tax return that clearly shows the split between eligible and non-eligible income. In situations where the entire income of a licensed shipping organisation falls within the scope of the tonnage tax system, in lieu of a tax return the said organisation has the option to submit a declaration which must be submitted by a qualified person that is independent of the licensed shipping organisation being either a certified public accountant and auditor or a person holding the warrant of advocate. Severe penalties exist in case of false declarations or gross negligence of such duties.

(120) Losses from activities subject to income tax cannot be set off against tonnage tax liability.

(121) A shipping organisation cannot decide whether to opt in or out of the Maltese tonnage tax system depending on whether it has taxable profits or losses. Unless the licensed shipping organisation elects otherwise, it falls within the scope of the tonnage tax scheme. Where the organisation opts out this decision is irrevocable (67).

(122) No Maltese shipping organisation may have part of its ships under the tonnage tax scheme and part under the income tax scheme (68).

(123) Article 51 of the Income Tax Act contains wide ranging anti-abuse provisions intended to counter artificial arrangements and schemes aimed at obtaining any unjustified tax advantage. This general anti-abuse rule follows the Commission Recommendation of 6 December 2012 on Aggressive Tax Planning (69). The anti-abuse measures are supported by severe penalties that are imposed in case of breaches. Thus, in such cases, apart from payment of the unpaid tax, interest is imposed at the rate of 0,54 % per month (i.e. 6,48 % per annum), together with additional penalties at the rate of up to 1,5 % per month (i.e. 18 % per annum) on such unpaid tax.

(124) The rules on deductibility of expenses contained in the Income Tax Act require the existence of a direct link between an expense and the income it produces. Article 14(1) of the Income Tax Act only allows an expense to be deductible if the expense is ‘wholly and exclusively incurred in the production of the income’. It is therefore not possible to claim deductions for expenses incurred in generating exempt profits (including tonnage taxed profits) against other types of taxable income.

(125) All licensed shipping organisations are required to maintain proper and sufficient records of its income and expenditure to enable the respective income and allowable deductions to be readily ascertained.

(126) Malta submitted a commitment to require beneficiaries of tonnage tax to submit mandatory annual compliance declarations for all controllable parameters such as type of vessel, activities performed with the vessel, net tonnage, days in use, flag, types of operation and compliance with the aid ceiling.

4.3. Tax treatment of dividends in relation to shares in shipping companies

(127) Malta explained the operation of the general Maltese tax system. Under this system dividends paid to shareholders by Maltese companies do not incur liability to declare the dividend (70) and pay taxation (71). This system applies without exception to all sectors.

4.4. Exemption from taxation of capital gains from the sale or transfer of ships

(128) Malta refers to the relevant Maltese legislation which requires that a ship be a tonnage tax ship in order for it to take advantage of the tax exemption (72).

(129) Malta furthermore explains that only ship sales and transactions related to tonnage tax ships bought and sold by shipping companies while under tonnage taxation have ever benefitted from the tax exemption in the past. Furthermore, in Malta the decision to leave the tonnage tax regime is irrevocable.

4.5. Exemption from taxation of capital gains in relation to shares in shipping companies

(130) Malta submitted that in order to ensure the competitiveness and attractiveness of European registers compared to those of third countries shipowners (i.e. shareholders) should be able to enjoy the fruits of the shipping activities carried out.

(131) Under Article 12(1)(c)(ii) of the Income Tax Act any gains or profits accruing to or derived by any person not resident in Malta on a transfer of any shares or securities in a company, which is not a property company, are exempt from the tax, provided that the beneficial owner of the gain is a person not resident in Malta and such person is not owned and controlled by an individual or individuals who are ordinarily resident in Malta. Additionally a participation exemption applies under Article 12(1)(u)(1) of the Income Tax Act which stipulates that any income or gains derived by a company registered in Malta from a participating holding or from the transfer of such holding is exempt from the tax.

(132) The double taxation agreements entered into by Malta, in line with the provisions of Article 13(5) of the OECD Model Tax Convention, allocate the right to tax such capital gains to the country of residence of the person. Malta has double taxation treaties with all EEA Member States.

(133) The only share transfer transaction involving a Maltese shareholder since Malta's accession to the Union was a transaction which took place in 2006. This transaction related to the transfer of shares in […]. The benefit of the relevant tax exemption was well below the de minimis threshold (73), involving a maximum — theoretical — aid amount of below EUR 1 400 given the sales price, even counted together with the benefit of the related exemption from the duty as regards transaction with ships. The shareholder received no further aid in the relevant period and has also not benefitted from tonnage tax (74).

(134) All share transactions carried out otherwise since 2004 would have benefited from the exemption from capital gains tax for non-residents, enshrined in Article 12(1)(c)(ii) of the Income Tax Act.

(135) Malta provided a commitment to remove the current sector-specific exemption from taxation of capital gains stemming from the sale of shares in shipping companies for Maltese residents.

4.6. Exemption from taxation of interest of other income in relation to financing of shipping companies or tonnage tax ships

(136) Article 3(2) of the Taxation Regulations provides that, ‘no tax under that Act [the Income Tax Act] shall be payable by any person on interest or other income payable to him in relation to any financing of the operations […] of licensed shipping organisations, or the financing of any tonnage tax ship […]. This exemption is not granted automatically but upon request. Malta has confirmed that no enterprise has ever been granted such an exemption. The Maltese authorities have confirmed that such exemption has never been granted including since the accession of Malta to the European Union and that ‘no company has availed itself of such benefit’.

(137) Malta has given a commitment to delete Article 3(2) of the Taxation Regulations.

4.7. Absence of duty as regards transactions with ships

(138) Malta submitted that the provisions contained in the Taxation Regulations providing that no duty shall be charged as regards certain transactions with ships (75) are of an informative nature. They do not provide any benefit to shipping companies as such transactions with ships are not subject to a duty under the Duty on Documents and Transfers Act, since duty is in general only chargeable on transfers of marketable securities, immovable property, auction sales and insurance policies.

4.8. Exemption from duty on documents and transfers

(139) Similarly as in the case of capital gains from the sale of shares, Malta explained the exemption from duty (76) set out in Article 5 of Taxation Regulations did not have a significant impact in the period since 2004 given the shareholder structure of the companies subject to the tonnage tax and the general exemptions existing under the Duty on Documents and Transfers Act.

(140) Based on Article 47(3)d and 47(4) of the Duty on Documents and Transfers Act, no duty is applicable on transactions involving securities of a company in which more than half the ordinary share capital, voting rights and rights to profits are held by persons who are not resident in Malta and are not owned or controlled directly or indirectly by persons resident in Malta, provided the company has the majority of its business interests outside Malta. Transfers made on an intra-group basis in the context of group restructuring exercises, between companies which are majority owned and controlled by the same shareholders, benefit from an exemption under Article 42(1)(b) of that Act.

(141) Malta has confirmed that only one transaction not covered by the general exemption from duty mentioned in recital 140 has taken place since 2004, involving shares owned by a Maltese shareholder. This transaction did not — in terms of tax benefit — exceed the de minimis threshold, even after adding the benefit of exemption from the capital gains taxation (77).

(142) Malta, has submitted a commitment to remove the exemption set out in Article 5 of the Taxation Regulations in respect of Maltese residents.

4.9. Entry into force of the commitments

(143) Malta committed that the new rules that would render the measures of this Decision compatible with the internal market will come into force within three months of the date of this Decision. From the moment of adoption of this Decision and until the entry into force of the commitments, Malta gave a commitment to continue to administer the tonnage tax scheme and the other measures forming the object of this Decision in a way that does not lead to payment of incompatible aid that would then need to be recovered from the beneficiaries.

4.10. Legitimate expectations, legal certainty, existing aid status

(144) Malta has submitted that the scheme should be treated as existing aid and that there is a legitimate expectation to that effect on the part of Malta and shipping organisations.

(145) Malta's tonnage tax scheme and accompanying measures were established in 1973. In this respect Malta submitted the relevant parts of the Merchant Shipping Act of 1973 in its original version (78) and in particular Articles 85 and 86, which define exempt ships and the income exempt from income tax.

(146) Malta submits these aid measures were subjected to the pre-accession screening process. Competition issues related to transport, including tonnage tax, were explicitly included under the Transport chapter during accession negotiations. Malta highlights that its tonnage tax scheme was not flagged as problematic by the Commission at the time. Malta asserts, by reference to correspondence, that the information it provided about this scheme proved satisfactory to the Commission. Malta refers specifically to the meeting of the Accession Conference of Malta to the EU held on 26 October 2001 where its notes reflect it was agreed to recommend the provisional closure of the negotiations on the transport Chapter. Malta asserts that, like those shipping organisations that have benefitted from the tonnage tax scheme, it has always understood and believed that the scheme was fully in line with the Maritime Guidelines.

(147) The relevant Maltese legislation, the Merchant Shipping Act and the Taxation Regulations, were communicated to the Commission before 31 August 2004 as required by the Accession Act (79). The tonnage tax scheme was communicated to the Commission in document CONF-M 51/00 of 19 October 2000 as supplemented by document CONF-M 65/01 of 18 September 2001.

(148) The relevant legislation did not change between the date of accession and 1 May 2007. The national provisions were amended only in 2010 to transpose the principles introduced by the Communication from the Commission providing guidance on State aid to ship-management companies (‘the Ship-management Guidelines’) (80).

(149) Malta reminded the Commission that the tonnage tax scheme was not mentioned among the schemes needing to be adjusted when the three-year period granted by the Accession Treaty for amending existing aid measures was about to expire and that it therefore considered the scheme existing aid. In its letter of 24 April 2007 the Commission mentioned only two aid measures: Public Service Obligation — Gozo Channel Co Ltd and Public Service Obligation Sea Malta Co Ltd.

5. COMMENTS FROM THIRD PARTIES

(150) As mentioned at recital 3 comments were received from six interested parties and a German shipping sector employee wishing to remain anonymous. These are summarised in recitals 151 to 177

5.1. Vessels eligible for tonnage taxation

(151) The European Community Shipowners' Association (‘ECSA’) agreed with the Commission's initial assessment that fishing vessels, oil rigs and non-commercial leisure yachts should not be eligible for tonnage tax.

5.2. Application of tonnage tax to barges

(152) The Malta International Shipping Council stressed that non-propelled barge carry cargo while the towing vessel ensures that the cargo reaches its destination. This was therefore one single operation and each ship had to be eligible for tonnage taxation.

5.3. Application of tonnage tax to cruise vessels

(153) The Malta International Shipping Council stressed that operation of cruise ships is synonymous with the carriage of passengers.

(154) The ECSA submitted that the primary purpose of cruise ships is maritime transport even if used for leisure. ECSA also stressed cruise ships are subject to the same control and regulation as other large ocean-going vessels and their seafarers must meet the same certification requirements. They are also subject to the same flag and port state control and the same international conventions as all other vessels travelling internationally. The cruise industry has contributed significantly towards achieving the objectives of the Maritime Guidelines. The cruise industry faces competitiveness constraints from outside the Union. To the extent that a Contracting Party to the EEA Agreement or a Member State imposes taxes (or other costs) that are not imposed by other countries, the Member State can anticipate a movement of vessels to flag to another state where the overall cost is lower.

5.4. Application of tonnage tax to commercial yachts

(155) Malta International Shipping Council, Malta Chamber of Commerce, Enterprise and Industry as well as Super Yachts Industry Network — Malta stressed that commercial yachts are active in the transportation of passengers where a great deal of international competition exists with offshore centres to attract the business of setting up ownership companies and registering commercial yachts.

5.5. Application of tonnage tax to service vessels

(156) The ECSA insisted that there should not be a definitive and exclusive list of eligible vessel-types. It submitted there is no real difference between ‘service’ and ‘transport’ activities, all being commercial shipping activities. It welcomed recognition by the Commission of the eligibility of some service ships (for example, cable-layers) for State aid.

5.6. Income eligible for tonnage taxation

5.6.1. Taxation of capital gains from the sale of tonnage tax ships

(157) The ECSA submitted that profits derived from buying and selling assets related to the normal operations of a ship operator should only be excluded from tonnage tax where a company has no other activities than buying and selling shipping assets. In that case, the company itself cannot be regarded as performing shipping services.

(158) The ECSA argued capital gains from ship sales should also be covered by tonnage tax for ships acquired before entry into the tonnage tax scheme, whereby tonnage tax schemes should include fair and equitable transitional arrangements taking account of any fiscal claim accrued in the period before applying the tonnage tax.

5.6.2. Application of tonnage tax to ancillary services provided in the context maritime transport

(159) According to the ECSA ancillary activities should be a normal part of the shipping service being offered by a shipping organisation. They argue there is no need to define ‘ancillary activities’ for the purpose of the application of the Maritime Guidelines but to leave it to Member States to make their own detailed interpretation under the monitoring of the Commission.

(160) The ECSA agree with the Commission that services offered by financial institutions to shipping companies which happen to be in tonnage tax — such as loans and guarantees — should not be regarded as eligible ‘ancillary activities’.

(161) If the sole business of a company is the operation of qualifying ships, then the whole profit from the ship-operating business should fall inside the ring-fence as long as the business activities accord with custom and practice for the sector.

(162) The ECSA noted many companies charge for their services on an inclusive basis and the broad approach would allow them to avoid the requirement to make arbitrary calculations for the purposes of apportioning profits. The ECSA stressed that the broad approach is supported by the OECD's Model Tax Convention.

(163) The ECSA submitted that separately charged services are a necessary and normal element in the economic operation of most passenger shipping services. Without them the shipping activity would be unattractive to customers and not viable for shipping companies, therefore they should qualify for tonnage tax.

(164) As regards cruise operations, the transport package consists also of a variety of services offered during the trip which form part of the passenger's expectations. The ECSA submitted these include communication services, bars, currency exchange, shore excursions, shopping, health & beauty, and entertainment. In some cases, like shore excursions, these ancillary activities are a service bought-in by the cruise line — they are normally ‘packaged’ by local agents who sell to the cruise line — and therefore they should be included as an eligible activity.

(165) The ECSA recognises the principle of avoiding unfair competition with on-shore domestic businesses, noting that using ships primarily as floating supermarkets, casinos, or static hotels would not be acceptable.

(166) The Malta International Shipping Council made similar representations about cruise and passenger packages.

5.6.3. Application of tonnage tax to entities chartering out eligible vessels on a bareboat basis

(167) The ECSA argued Member States should decide whether any restrictions should be introduced, taking into account, for example, how the national shipping industry and maritime cluster are organised.

(168) The Norwegian Shipowners' Association explained that bareboat chartering is a common arrangement for shipping companies. However, only a small percentage of the shipping companies' total tonnage is usually chartered out on bareboat term. There are few companies which only own ships that are bareboat chartered out. If income from bareboat chartering out is not fully tax exempt, EEA-based vessel owners would not be able to provide competitive charter rates. Furthermore, companies servicing the oil and gas industry operating on foreign shelves will usually separate the vessel ownership and operational activities in order to be competitive in the operating state. Often bareboat chartering out is the only possibility for entering protected foreign markets. Also, when the charterer is an oil-related company, the charterer often has its own in-house crewing and technical ship-management services organisation, which the charterer wishes to employ. There are also territories where the risk related to crew cost and availability, cost and timely access to ship repairs and other necessities for running the ship are deemed unacceptable and therefore bareboat chartering out arrangements are preferred.

(169) The Norwegian Shipowners' Association argue that allowing tonnage taxed companies to bareboat charter ships out, will not lead to an increase of State aid to the shipping industry (81). The tax exempted shipping income is merely split between the ship owning company, which charter the ship out, and the company operating the ship (for the ship operating company the tax exempted income is reduced with the bareboat hire, which is tax exempted income for the ship owning company).

(170) Malta International Shipping Council submitted that ship owning and ship operating must be treated as a whole. Ship owning and ship operating activities can be carried out by the same organisation. At other times different entities focus on one activity. The different entities all have costs and responsibilities including that of seeing that the primary operation is run safely and efficiently. It is stressed that Maltese law and international law place heavy obligations and responsibilities on the owner of the ship even when it is bareboat chartered out. Therefore, if a ship chartered out is engaged in the international carriage of goods and passengers both the owner and the charterer should be included in the tonnage tax scheme.

5.6.4. Application of tonnage tax to leasing of ships with crew (time/voyage chartering)

(171) The ECSA stressed that the chartering activity creates direct and indirect employment for a lot of shipping professionals across Europe and a flexible approach contributes to keeping shipping companies' head offices within the EU.

(172) Concerning some of the Commission's decisions which requested a minimum share of own shipping activity for time charterers to benefit from tonnage taxation, the ECSA considered that this requirement should be loosened.

(173) According to the Norwegian Shipowners' Association, for commercial reasons, most shipping companies are represented in a number of maritime hubs across the world, and should an international shipping organisation have a strategy of increasing the share of time-chartered vessels in its fleet, it can do so regardless of any limitations in the European tonnage tax schemes. It will simply do so through a non-EEA resident subsidiary.

5.7. Flag-link rule

(174) The ECSA considered that, essentially, the Maritime Guidelines contain a pragmatic degree of flexibility regarding the use of Member States' flags and this should not be further tightened.

5.8. Ring-fencing rules

(175) The ECSA stressed that tonnage tax schemes need to provide a clear definition of qualifying activities.

(176) A ship operator may bring within ring-fence the activity of ‘buying in’ services from other businesses but not the profits from carrying out other businesses. This arm's length principle is commonly used in the administration of tax and is known as a requirement for transfer-pricing. For example: if a ship operator provides land services such as road transport or hotel accommodation as part of a package, any mark-up it charges on the services above an arm's length cost should fall within tonnage tax. Thus if the services are provided at market rates by a third party, whatever profit the operator makes will fall inside the ring-fence. However, if the services are provided from within the ship operator's group, they will be subject to transfer-pricing and profits from the business of road transport or hotels will be excluded from tonnage tax — only the computed mark-up on such group services will qualify for tonnage tax.

5.9. Exemption from taxation of profits from financing shipping companies

(177) The ECSA agreed with the Commission, that services offered by financial institutions to shipping companies which come under the tonnage tax scheme — such as loans and guarantees — should not be regarded as ‘eligible’ or ‘ancillary’ activities.

6. COMMENTS FROM MALTA ON THIRD PARTY COMMENTS

(178) Malta believes that, from the majority of submissions received, it clearly emerges that there is a general satisfaction with the application of the Maritime Guidelines in Malta. Malta noted the stakeholders did not raise objections and supported the current arrangements.

7. ASSESSMENT OF THE AID

7.1. Existence of aid

(179) According to Article 107(1) TFEU, ‘any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the provision of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market’.

(180) Accordingly, for a support measure to be considered aid within the meaning of Article 107(1) TFEU it must meet the following conditions cumulatively: (i) it must be financed by the State through State resources and the measure must be imputable to the State; (ii) it must confer a selective advantage on its recipient by favouring certain undertakings or the production of certain goods; (iii) it must distort or threaten to distort competition and (iv) it must have the potential to affect trade between Member States.

(181) In the following the Commission will assess whether the (i) tonnage tax scheme; (ii) the exemption from taxation of capital gains arising from the sale or transfer of ships; (iii) the exemption from taxation of capital gains in relation to shares in shipping companies; (iv) the exemption from taxation of dividends in relation to shares in shipping companies; (v) the exemption from taxation of interest or other income in relation to financing of shipping companies or tonnage tax ships; (vi) the exemption from certain duties on documents and transfers (hereinafter collectively referred to as ‘the national measures’), satisfy the criteria mentioned in recital 180 and consequently constitute State aid.

State resources, imputability and advantage

(182) The Commission notes that the national measures concern exemptions from usual taxes and levies normally payable to the Maltese State. The tonnage tax scheme grants a tax reduction compared to the income tax normally payable on corporate income under the Income Tax Act. The exemption from taxation of dividends and capital gains in relation to shares in shipping companies and of capital gains relating to the sale of transfer of ships and of interest or other income in relation to financing of shipping companies or tonnage tax ships, consist in exemptions — relating to the Income Tax Act — granted by the Merchant Shipping Act and the Taxation Regulations. Likewise, the exemption from certain duties on documents and transfers stipulated by the Duty on Documents and Transfers Act is granted by the Merchant Shipping Act and the Taxation Regulations. The exemption from payment of fees at ministerial discretion is also an exemption from usual taxes and levies normally payable to the Maltese State.

(183) The Commission notes that a loss of tax revenue for the State is equivalent to consumption of State resources in the form of fiscal expenditure. By allowing a reduction or exemption from taxes and duties under the Merchant Shipping Act, Malta foregoes revenue which constitutes State resources. Hence, the tax reduction and exemptions and the exemption from duties is granted through State resources. Those measures have been put into effect in the form of State regulation (the Merchant Shipping Act which is a parliamentary act and the Taxation Regulations which Malta considers subsidiary legislation implementing the Merchant Shipping Act). Since those fiscal measures are therefore granted by the Maltese authorities the measures are imputable to the State.

(184) For a measure to constitute State aid the measure must confer a financial advantage to the recipients. The Commission notes that the national measures consist in an exemption from taxes and duties which confers an advantage to the beneficiary within the meaning of Article 107(1) TFEU.

(185) The Commission therefore concludes that (i) the tonnage tax under the tonnage tax scheme; (ii) the exemption from payment of fees at ministerial discretion; (iii) the exemption from taxation of capital gains arising from the sale or transfer of ships; (iv) the exemption from taxation of capital gains in relation to shares in shipping companies; (v) the exemption from taxation of dividends in relation to shares in shipping companies; (vi) the exemption from taxation of interest or other income in relation to financing of shipping companies or tonnage tax ships; (vii) the exemption from certain duties on documents and transfers; are granted from State resources and imputable to the State and confer an advantage to the beneficiaries.

(186) In the following the further elements necessary for a measure to constitute State aid, namely the selective nature of the measure, its potential to distort competition and effect trade, are assessed separately for each measure.

7.1.1. The tonnage tax scheme

Selective advantage

(187) For a measure to constitute State aid it must be selective in as much it favours certain undertakings or the production of certain goods according to Article 107(1) TFEU. Concerning the interpretation of the condition of selectivity, it is settled case law that a measure can be regarded as selective if it is ‘intended partially to exempt those undertakings from the financial charges arising from the normal application of the general system of compulsory contributions imposed by law’ (82). A measure is therefore considered to be selective if it constitutes a departure from the normal application of the general tax framework.

(188) For purposes of the assessment, the Court of Justice has emerged with a three-step analysis (83). First, the system of reference must be identified. Second, it should be determined whether a given measure constitutes a derogation from that system insofar as it differentiates between economic operators who, in light of the objectives intrinsic to the system, are in a comparable factual and legal situation. Assessing whether a derogation exists is the key element of this part of the test and allows a conclusion to be drawn as to whether the measure is prima facie selective. If the measure in question does not constitute a derogation from the reference system, it is not selective. However, if it does (and therefore is prima facie selective), it needs to be established, in the third step of the test, whether the derogation is justified by the nature or the general scheme of the (reference) system (84). If a prima facie selective measure is justified by the nature and general scheme of the system, it will not be considered selective and will thus fall outside the scope of Article 107(1) TFEU (85).

(189) Undertakings in Malta are subject to taxation at 35 % under the Income Tax Act (86). Shipping organisations which have opted for the tonnage tax scheme are exempted from taxation under the Income Tax Act as regards income generated from shipping activities and pay a lump sum instead. The Commission notes that the tonnage tax scheme described in section 2.1 or a comparable scheme is not available to all sectors or undertakings and is therefore prima facie selective. The tonnage tax enables the beneficiaries to save on their tax expenses. This derogation is not justified by the nature of the general system but is put in place with the specific objective of benefitting and promoting certain activities.

(190) In view of the above, the Commission concludes that the tonnage tax scheme confers a selective economic advantage.

Distortion of competition and effect on trade

(191) A measure granted by the State is considered to distort or threaten to distort competition when it is liable to improve the competitive position of the recipient compared to other undertakings with which it competes (87). For all practical purposes, a distortion of competition within the meaning of Article 107 TFEU is thus assumed as soon as the State grants a financial advantage to an undertaking in a liberalised sector where there is, or could be, competition (88). Where financial aid by a State strengthens the position of an undertaking as compared with other undertakings competing in intra-Community trade, the latter must be regarded as affected by the aid (89).

(192) Shipping activities are essentially carried out on a worldwide market. In addition, the markets for both maritime cabotage routes and maritime services are fully liberalised (90). Thus, services provided by shipping companies benefiting from the tonnage tax scheme are open to competition within Member States, between Member States and between Member States and third countries. Consequently, the scheme threatens to distort competition and could affect trade between Member States.

Conclusion

(193) In view of the above, the Commission considers that the tonnage tax constitutes State aid within the meaning of Article 107(1) TFEU.

7.1.2. Exemption from payment of fees at ministerial discretion

(194) The current legislation does not adequately restrict the use of the discretion of the Minister to exempt ships from the payment of fees under the Taxation Regulations discussed in recitals 23 and 112. It is not drafted precisely enough to restrict the reduction to the intended non-economic activities with a humanitarian or philanthropic purpose.

(195) The same considerations as set out in recitals 187 ff on selective advantage and in 191 ff on competition distortions and effect on trade apply also to the measures which potentially can be granted at the Minister's discretion.

Conclusion

(196) The Commission therefore concludes that the possibility to exempt further vessels at the Minister's discretion constitutes State aid within the meaning of Article 107(1) of the Treaty.

7.1.3. Exemption from tax on capital gains from the sale of ships

(197) Article 5(1)(a) of the Income Tax Act imposes a tax burden on capital gains derived from the transfer of capital assets. Article 3 (1) of the Taxation Regulations provides for an exemption from capital gains from the sale and transfer of tonnage tax ships.

Selective advantage

(198) As mentioned in recital 187, a measure is considered to be selective if it constitutes a departure from the normal application of the general tax framework. Article 3(1) of the Taxation Regulations provides for an exemption from tax on capital gains from the sale of ships, while in the general tax framework Article 5(1) of the Income Tax Act imposes a tax burden on capital gains derived from the transfer of capital assets which amounts in principle to 35 %. Shipping organisations which have opted for the tonnage tax scheme are exempted from taxation under the Income Tax Act as regards capital gains from the sale of tonnage tax ships. The Commission notes that such exemption is not available to all sectors or undertakings and is therefore prima facie selective. The tax exemption enables the beneficiaries to save on their tax expenses. This derogation is not justified by the nature of the general system but is put in place with the specific objective of benefitting and promoting certain activities.

(199) In view of the above, the Commission considers that the exemption from tax on capital gains from the sale of ships constitutes a selective advantage within the meaning of Article 107(1) TFEU.

Distortion of competition and effect on trade

(200) As set out in recital 191 where financial aid by a State strengthens the position of an undertaking as compared with other undertakings competing in intra-Community trade, the latter must be regarded as affected by the aid (91).

(201) As set out in more detail in recital 192 shipping activities are essentially carried out on a worldwide market. Thus, services provided by shipping companies benefiting from the capital gains tax exemption are open to competition between Member States. Consequently, the measure threatens to distort competition and could affect trade between Member States.

Conclusion

(202) In view of the above, the Commission considers that the exemption from tax on capital gains from the sale of ships constitutes State aid within the meaning of Article 107(1) TFEU.

7.1.4. Exemption from taxation of dividends in relation to shares in shipping companies

Selective advantage

(203) The system of reference should be defined as being the general taxation system for dividends. Article 68 of the Income Tax Act provides that no person whether resident or non-resident in Malta shall be charged to tax on income from dividends. Furthermore, Article 68 sets out that nobody is obliged to declare dividend income in the tax return. The Maltese authorities have confirmed that, in essence, the general tax rate for dividends received by any kind of shareholder in Malta is zero. With respect to shareholders of shipping organisations, Article 3(1)(a) of the Taxation Regulations stipulates that ‘no further tax under the Income Tax Act shall be charged or payable on the income […] derived from shipping activities of a licensed shipping organisation’, provided that all relevant fees and taxes have been duly paid by the shipping organisation. Therefore, both shareholders in a non-shipping company and in a shipping organisation having received a dividend from a company have no tax payable on the dividend. The tax exemption from dividends tax in relation to shares in shipping companies therefore constitutes a general measure which is not selective in nature.

Conclusion

(204) Based on the foregoing assessment, the exemption from dividend tax is not selective and, therefore, does not constitute State aid within the meaning of Article 107(1) TFEU.

7.1.5. The exemption from taxation of interest or other income payable in relation to financing of shipping or tonnage tax ships

Selective advantage

(205) The Commission notes that Article 84Z(1) of the Merchant Shipping Act provides for a wide variety of activities (92) which qualify an organisation as shipping organisation. Article 3(2) of the Merchant Shipping Act provides that no tax under the Income Tax Act is payable by financial institutions on interest or other income in relation to any financing of the activities by a licensed shipping organisation listed in Article 84Z(1) of the Merchant Shipping Act or the financing of a tonnage tax ship.

(206) As mentioned in recital 187, a measure is considered to be selective if it constitutes a departure from the normal application of the general tax framework. Article 3(2) of the Taxation Regulations provides for an exemption from taxation of interest or other income payable in relation to financing of the operations of licensed shipping organisations set out in Article 84Z(1) of the Merchant Shipping Act or the financing of a tonnage tax ship, while in the general tax framework Article 4(1) of the Income Tax Act imposes a tax burden in the form of a flat rate of 35 % on interest income derived from financing activities like the granting of loans and guarantees. Hence, financial institutions are exempted from income tax with regard to income derived from the financing of broadly defined activities of licensed shipping organisations and from financing tonnage tax ships.

(207) The Commission notes that such exemption is not available to financial institutions with regard to the financing of companies other than licensed shipping organisations. The exemption is therefore prima facie selective as it favours financial institutions which are active in financing the shipping sector. The tax exemption enables the beneficiaries to save on their tax expenses.

(208) The Commission does not consider that there is any objective in the nature of the general scheme of Maltese income taxation which could justify the derogation in question but that the measure is put in place with the specific objective of benefitting and promoting certain activities.

(209) In view of the above, the Commission considers that the exemption from taxation of interest or other income payable in relation to financing of the operations of licensed shipping organisations or to financing of tonnage tax ships constitutes a selective advantage within the meaning of Article 107(1) TFEU.

Distortion of competition and effect on trade

(210) Financial services are essentially carried out on a European market where financial institutions are competing against each other. Thus, services provided by financial institutions benefiting from the tax exemption are open to competition between Member States.

(211) Where financial aid by a State strengthens the position of an undertaking as compared with other undertakings competing in intra-Community trade, the latter must be regarded as affected by the measure (93). Consequently, the measure threatens to distort competition and could affect trade between Member States.

Conclusion

(212) For the above reasons, the Commission concludes that the exemption from taxation of interest or other income payable in relation to financing of shipping or tonnage tax ships constitutes State aid within the meaning of Article 107(1) TFEU.

7.1.6. Exemption from taxation of capital gains relating to shares in shipping companies

Selective advantage

(213) As mentioned in recital 187, a measure is considered to be selective if it constitutes a departure from the normal application of the general tax framework. Capital gains on shares for residents of Malta would normally be subject to a 35 % income taxation under the Income Tax Act (94). However, the Taxation Regulations contain a tax exemption in favour of capital gains relating to shares in shipping companies (95). The Commission notes that such exemption is not available to all sectors or undertakings and is therefore prima facie selective