Invitation to submit comments pursuant to Article 1(2) in Part I of Protocol 3 to the Surveillance and Court Agreement on State aid with regard to State aid to maritime transport in the form of a tonnage tax and a refund scheme for seafarers
Date: 2008-04-17
Institutions: EFTA Surveillance Authority
Subjects: EFTA, Iceland, State aid, control of State aid, maritime transport, tax rebate

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Invitation to submit comments pursuant to Article 1(2) in Part I of Protocol 3 to the Surveillance
and Court Agreement on State aid with regard to State aid to maritime transport in the form of a
tonnage tax and a refund scheme for seafarers

(2008/C 96/07)

By means of Decision No 721/07/COL of 19 December 2007, reproduced in the authentic language on the
pages following this summary, the EFTA Surveillance Authority initiated proceedings pursuant to Article 1(2)
in Part I of Protocol 3 of the Agreement between the EFTA States on the Establishment of a Surveillance
Authority and a Court of Justice (Surveillance and Court Agreement). The Icelandic authorities have been
informed by means of a copy of the decision.

The EFTA Surveillance Authority hereby gives the EFTA States, EU Member States and interested parties
notice to submit their comments on the measure in question within one month from the publication of this
notice to:

EFTA Surveillance Authority
Registry
Rue Belliard 35
B-1040 Brussels

The comments will be communicated to the Icelandic authorities. Confidential treatment of the identity of
the interested party submitting the comments may be requested in writing, stating the reasons for the
request.

SUMMARY

1. PROCEDURE

By letter dated 23 March 2007, the Icelandic authorities notified the Authority of planned aid to the mari-
time transport sector n the form of a tonnage tax and the refund scheme for seafarers. Following an
exchange of correspondence with the Icelandic authorities, the Authority has decided to open a formal
investigation regarding the notified measures.

2. FACTS

2.1. The Tonnage Tax

In Iceland the normal corporation tax rate is 18 %. By Act No 86/2007 on the Taxation of merchant vessel
operations, ‘Lög um skattlagningu kaupskipaútgerðar’ (hereafter: ‘the Tonnage Tax Act’), the Icelandic authorities
introduce a more favourable tonnage tax scheme. The Tonnage Tax Act provides that, instead of the ordinary
corporation tax on profits at 18 %, shipping companies can avail themselves of a more favourable tonnage
tax allowing shipping companies to calculate their profits on the basis of a notional profit per day
depending on the tonnage of the ship concerned. The standard corporation tax rate is then applied to the
amount of profit so established.

The scheme covers ships on the Icelandic International Shipregister (IIS) of at least 100 GT used for trans-
portation of people or cargo abroad and transportation of cargo domestically. It applies to merchant vessels
owned by the vessel operator, leased without crew (bareboat charter) and leased with crew (time charter).

The tonnage tax also applies to certain ancillary activities, such as the use of containers in cargo transporta-
tions, the operation of loading, unloading and maintenance, etc.

To qualify for the Tonnage Tax Act vessels must be registered in the Icelandic International Shipregister and
the shipping companies must be subject to full tax liability. Full tax liability means that companies domiciled
in Iceland are liable there to tax on their global income. Source taxation under Article 3 of the Income Tax
Act does not qualify for access to the tonnage tax.

The tax base (notional profit) will be established as follows:

Up to and including 25 000 NT — ISK 30 per 100 NT (EUR 0,36)

From 25 001 NT — ISK 10 per 100 NT (EUR 0,12).

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Several provisions in the Tonnage Tax Act should guarantee that there is no spill-over of the favourable
tonnage tax into other activities of the ship-owner. A ship-owner opting for the tonnage tax has to stay
within that scheme for three years.

2.2. The refund scheme for the employment of seafarers

The Icelandic authorities have also notified a gross wage support system for seafarers, by which ship-owners
may be paid grants amounting to 90 % of the income tax calculated on the gross wages of the employed
seafarers. In order to qualify for the grants the ship-owner must fulfil the same conditions as for the
tonnage tax (i.e. registration and full tax liability) and employ seafarers who are eligible for taxation in
Iceland.

Both, the tonnage tax scheme and the refund scheme for seafarers are of unlimited duration.

3. ASSESSMENT

The Authority considers that all the conditions of Article 61(1) of the EEA Agreement are fulfilled implying
that State aid is involved.

As to the compatibility of the aid scheme with the EEA state aid provisions, the Authority has assessed the
case under Article 61(3)(c) of the EEA Agreement in conjunction with the Authority's Guidelines on Aid to
Maritime Transport (hereafter ‘the Guidelines’).

The Authority has doubts as to the compatibility of the tonnage tax for the following reasons.

3.1. The Tonnage Tax

Inclusion of ship management activities

The Authority is not sure that ships on time charter or ship management activities for shipping pools can
be included into the tonnage tax system. According to Section 3.1(11) of the Guidelines, aid can be given
only in respect of vessels for which the management companies have been assigned the entire crew and
technical management. In addition, the tonnage of such vessels should not exceed four times the tonnage of
the vessel for which the tonnage tax company ensures all management responsibility, including the commer-
cial management.

The requirement of ship registration in the IIS and the requirement of full tax liability

The requirement that vessels must be registered in the IIS in order to have access to the tonnage tax scheme
leads to the exclusion of vessels not registered in Iceland. It is a well established principle that although
direct taxation falls within the EEA States competence, they must, nonetheless, exercise that competence
consistently with EEA law. This difference in treatment constitutes a restriction on establishment by way of
registration of ships in other EEA States. It follows from the EEA Agreement that state aid that contravenes
other provisions of
the
EEA Agreement. The Authority has so far not identified reasons as to why such a restriction on the freedom
of establishment is necessary to pursue the objectives behind the tonnage tax scheme.

the EEA Agreement cannot be declared compatible with the functioning of

The eligibility for the beneficial tonnage tax regime is, furthermore, limited to those companies who have
full tax liability in Iceland. Still, tax liability in Iceland can, at least in principle, also arise from the so-called
source taxation. This means that a company established in another EEA State might be tax liable for certain
of its operations in Iceland, without having access to the more favourable tonnage tax scheme.

The Icelandic authorities underline that where double taxation agreements are in place, the ship-owners will
pay the tax in the country of permanent establishment and not in Iceland. However, Iceland has not
concluded double taxation agreements with all EEA States. Accordingly, the requirement of full tax liability
in order to qualify for the favourable tax treatment appears to constitute a difference of treatment restricting
the freedom of service providers established in other EEA States to provide maritime transport services in
Iceland.

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The tax base

The Authority has doubts as to the establishment of the tax base which, compared to other tonnage tax
schemes already approved, seem to be low. Section 3.1(18) of the Maritime Guidelines describes that the
EC Commission will only approve schemes giving rise to a tax load for the same tonnage ‘fairly in line with
the schemes already approved. The Authority will
likewise seek to keep an equitable balance in line with already
approved schemes’. For that reason, the Authority needs to assess whether the notified tax base is fairly in line
with the tax base applied in other notified and authorised schemes. The Authority finds that this is not the
case as the tax base values can be between 25 % to 60 % lower than the tax base used in other countries.

Duration of affiliation to the tonnage tax system

The Authority has doubts as to the period for which the ship-owner has to stay within the Icelandic tonnage
tax scheme. In Iceland this period is three years. From Commission case practice it appears that the minimal
duration of that period in other tonnage tax schemes approved so far is ten years. The Authority is
concerned that this shorter affiliation period might make the Icelandic tonnage tax system more desirable
and lead to a re-flagging within the EEA.

3.2. The refund scheme for the employment of seafarers

The Icelandic authorities have not submitted a written definition of the notion of seafarer in a legislative or
administrative Act, but confirmed that nationality is not a requirement, neither is the residence of the
seafarer. Hence, also third country nationals seem to be able to fall under the scheme. The Authority wishes
to point out that for passenger services between ports of the EEA, aid should only be given for the employ-
ment of EEA seafarers (see also Section 3.2(3) of the Guidelines). The Authority has, on the basis of the
information available to it, doubts whether the definition of EEA seafarers is applied correctly in this regard.

It further appears that ship-owners who are excluded from the tonnage tax scheme are also excluded from
the refund scheme. Companies with full tax liability in Iceland will not be eligible for the subsidy insofar as
their ships are registered in other EEA States. This appears to apply both for situations where the crew
members would be liable to Iceland for income tax (based on residence in Iceland) and situations where the
crew members do not have any tax liability in Iceland. The Authority raises the same concerns in this regard
as it did for the tonnage tax.

Based on the above, the Authority has decided to open the formal investigation procedure with regard to
the notified tonnage tax scheme and the refund scheme for the employment of seafarers.

4. CONCLUSION

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EFTA SURVEILLANCE AUTHORITY DECISION

No 721/07/COL

of 19 December 2007

to initiate the procedure provided for in Article 1(2) of Part I of Protocol 3 to the Surveillance and
Court Agreement with regard to State aid to maritime transport in Iceland in the form of a tonnage
tax scheme and a refund scheme for the employment of seafarers

(Iceland)

THE EFTA SURVEILLANCE AUTHORITY (1),

Having regard to the Agreement on the European Economic
Area (2),
in particular to Articles 61 to 63 and Protocol 26
thereof,

Having regard to the Agreement between the EFTA States on
the Establishment of a Surveillance Authority and a Court of
Justice (3), in particular to Article 24 thereof,

Having regard to Article 1(2) of Part I and Articles 4(4) and 6
of Part II of Protocol 3 to the Surveillance and Court Agree-
ment,

Having regard to the Authority's Guidelines (4) on the applica-
tion and interpretation of Articles 61 and 62 of the EEA Agree-
ment, and in particular the Chapter on Aid to Maritime Trans-
port,

Having regard to the Authority's Decision No 195/04/COL of
14 July 2004 on the implementing provisions referred to under
Article 27 of Part II of Protocol 3 to the Surveillance and Court
Agreement,

Whereas:

I. FACTS

1. Procedure

By letter of 23 March 2007 from the Icelandic Mission to the
European Union forwarding a letter
from the Ministry of
Finance of the same date, both received and registered by the
Authority on 27 March 2007 (Event No 415003), the Icelandic
authorities notified the Authority of planned aid to the maritime
transport sector, pursuant to Article 1(3) of Part I of Protocol 3
to the Surveillance and Court Agreement.

By letter dated 20 April 2007 (Event No 417798),
Authority requested additional
Icelandic
authorities
No 426146).

the
information to which the
replied on 20 June 2007 (Event

A second request for information was sent by the Authority on
10 August 2007 (Event No 428891), to which the Icelandic
authorities replied on 12 September 2007 (Event No 440936).

(1) Hereinafter referred to as ‘the Authority’.
(2) Hereinafter referred to as ‘the EEA Agreement’.
(3) Hereinafter referred to as ‘the Surveillance and Court Agreement’.
(4) Guidelines on the application and interpretation of Articles 61 and 62
of the EEA Agreement and Article 1 of Protocol 3 to the Surveillance
and Court Agreement, adopted and issued by the EFTA Surveillance
Authority on 19 January 1994, published in OJ L 231, 3.9.1994, EEA
Supplement No 32, 3 September 1994. The Guidelines were last
amended on 19 December 2007. Hereinafter referred to as ‘the State
Aid Guidelines’.

By letter dated 2 October 2007, the Authority informed the
Icelandic authorities that the questions raised by the Authority's
Internal Market Directorate at the package meeting on 24 and
25 May 2007 were also relevant for the assessment of the State
aid notification and were therefore considered to form part of
the current investigation. Thus, the Authority considered that its
two months deadline to adopt a decision would not start before
answers to these questions had been provided by the Icelandic
authorities. The Icelandic authorities replied to those questions
by a letter dated 16 October 2007 (Event No 447358).

The notification was discussed between the Authority and the
Icelandic authorities
in a State aid package meeting on
29 October 2007.

2. Description of the proposed measures

The notification concerns State aid to the maritime sector, firstly
by means of the introduction of a tonnage tax scheme, and
secondly by the introduction of a special refund scheme for
ship-owners, who will be entitled to claim a refund for income
tax paid on seafarers' wages. The two measures will be described
below.

2.1. Title and objective of the notified schemes

The title of the scheme ‘Ríkisstyrkur vegna kaupskipaútgerðar á
Íslandi’, i.e. State aid to maritime transport in Iceland comprises
both notified measures. The objective is to support the maritime
transport sector in Iceland by giving advantages to ship-owners
with a view to encouraging them to register in Iceland, rather
than sailing under a convenience flag.

2.2. National legal basis for the notified measures

The legal basis for
the above mentioned measures is Act
No 86/2007 on the Taxation of merchant vessel operations,
‘Lög um skattlagningu kaupskipaútgerðar’ (hereinafter ‘the Tonnage
Tax Act’). This Act was adopted by Parliament on 17 March
2007 and published in the Official Law Gazette on 30 March
2007. According to Article 17 of the Tonnage Tax Act, it will
enter into force on 1 January 2008.

The Tonnage Tax Act needs to be seen in connection with Act
No 38/2007 on the Icelandic International Shipregister (herein-
after IIS). This Act should also enter into force on 1 January
2008. However, the Icelandic Government has submitted to the
Authority a Government draft bill which would postpone the
entry into force of Act No 38/2007 until 1 January 2009. This
would according to the Icelandic authorities not affect the entry
into force of the Tonnage Tax Act. It would, however, render the
Tonnage Tax Act temporarily ineffective since registration in the
IIS is a pre-condition for access to the tonnage tax scheme and
the refund scheme for seafarers.

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2.3. Details of the Tonnage Tax

In Iceland the normal corporation tax rate is 18 %. The
Tonnage Tax Act provides that, instead of the ordinary corpora-
tion tax on profits at 18 %, shipping companies can be subject
to a more favourable tonnage tax calculated on the basis of a
notional profit per day depending on the tonnage of the ship
concerned. The standard corporation tax rate is then applied to
the amount of profit so established.

The scheme has the following eligibility requirements:

2.3.1. Eligible activities

The scheme covers ships on the IIS (1) of at least 100 GT used
for transportation of people or cargo abroad and transportation
of cargo domestically. Article 4 of the Tonnage Tax Act defines
more precisely that the transport of cargo or passengers is to be
done by means of:

1. merchant vessels owned by the vessel operator;

2. merchant vessels leased without crew (bareboat charter);

3. merchant vessels leased with crew (time charter).

Merchant vessel operations do not include the leasing of bare-
boat charter for longer periods than three years.

Article 4 of the Tonnage Tax Act also lists a number of activ-
ities, which are not eligible for any support under the Act, such
as fishing, harbour constructions, diving, piloting and salvage,
educational and schooling activities or other social activities,
sports, entertainment and leisure activities,
including whale
watching and passenger transport between ports within Iceland
that are not ports of calls between countries.

As confirmed by the Icelandic authorities, towing and dredging
activities are not eligible under the Act.

2.3.2. Ancillary activities

The following activities are considered operational elements in
merchant vessel operations pursuant to the Tonnage Tax Act.
These activities qualify for the tonnage tax as well:

1. the use of containers in cargo transportations;

2. the operation of loading, unloading and maintenance facil-

ities;

3. operation of ticket sales and passenger terminals;

4. the operation of offices and management facilities;

5. sales of consumer products on board merchant vessels.

Act No 90/2003 on Income Tax, and operating merchant vessels
registered in the Icelandic International Shipregister (IIS), may decide
to pay taxes on their merchant vessel operations in accordance with
this Act instead of Act No 90/2003.’

Hence, in addition to the limitation with regard to eligible trans-
port activities described above, the Tonnage Tax Act stipulates
two requirements to be fulfilled for the ship-owner to qualify
for the favourable tonnage tax rates.

Firstly, the vessels to which tonnage tax applies must be regis-
tered in the Icelandic International Shipregister (hereinafter IIS).
Secondly, the limited liability companies and private limited
companies must be subject to taxation pursuant to Article 2(1)
subparagraph 1 of Act No 90/2003 on Income Tax (hereinafter
‘the Income Tax Act’). That provision states that companies
domiciled in Iceland are liable there to tax on their global
income (full tax liability). A legal person is considered to be
domiciled in Iceland if it is registered in Iceland, if it considers
Iceland as its residence according to its bylaw, or if it has the
real seat of its administration in Iceland. Article 3 of the Income
Tax Act provides that non-domiciled companies are liable in
Iceland to tax on income originating in Iceland (source taxa-
tion).

The Authority assumes that
the reference to ‘limited liability
companies and private limited companies’ does not entail that the
companies have to be incorporated under Icelandic company
law as Icelandic companies in order to qualify for the tonnage
tax scheme. Thus, it assumes that such companies incorporated
under the company law of another EEA State would qualify for
the tonnage tax scheme provided the additional requirements
are met. The Icelandic authorities are requested to clarify this
issue.

2.3.4. Requirement of a flag link

The Icelandic authorities argue that registration in the IIS is not
considered to be a so-called flag link. No explicit flag link with
Iceland strictu sensu is required. Indeed, according to Section 6 of
Act No 38/2007 on the IIS ‘a merchant vessel that is registered in
the Icelandic International Shipregister is considered to be an Icelandic
vessel and has the right to sail under the national flag of Iceland’. The
Icelandic authorities therefore describe the flag link as a right
and not a condition for eligibility under the scheme.

A ship not flying the Icelandic flag could still have access to the
tonnage tax as long as it is registered in the IIS. In that regard,
Article 4 of the same Act prescribes that registration is open to
where the ‘owner of the merchant vessel
is an Icelandic citizen, a
citizen of another State in the European Economic Area or of the
founding States of the European Free Trade Area, a citizen of the
Faeroe Islands or a legal entity registered in Iceland’.

2.3.3. Registration in the IIS and full tax liability

2.3.5. Establishment of the tax rate

According to Article 1 of Act No 86/2007 (Tonnage Tax Act),

‘[l]imited liability companies and private limited companies, subject
to item 1 of paragraph 1 of Article 2 of
to taxation pursuant

According to Article 6 of the Tonnage Tax Act, the tax base
(notional profit) will be established as follows:

Up to and including 25 000 NT — ISK 30 per 100 NT

(1) There is already an Icelandic Ship Register, which covers fishing ships,
sailboats, ferries, etc. which will not be replaced by the newly intro-
duced IIS. The registers will be run separately.

From 25 001 NT — ISK 10 per 100 NT.

No deductions are permitted from the tax base.

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2.3.6. Taxation under the Income Tax Act and Separate Accounting

Article 4 of
the Tonnage Tax Act specifies that if a vessel
operator is also engaged in other activities than the ones quali-
fying for tonnage tax, he should be taxed for those activities in
accordance with the Act on Income Tax.

Article 7 of the Tonnage Tax Act stipulates that income and
costs of merchant vessel operations should be kept separate
from the income and costs of other activities. Article 8 of the
Tonnage Tax Act provides
interest, depreciation and
that
exchange rate gains shall be divided between the merchant
vessel operation and other activities in proportion to the book
value of assets used in merchant vessel operation, on one hand,
and for other uses, on the other hand.

Article 9 of the Tonnage Tax Act stipulates that merchant vessel
operation costs cannot be deducted from the income of the
vessel operator subject to taxation under the Income Tax Act.
Costs, other than financial costs, which relate at the same time
to the acquisition of income in merchant vessel operations and
the acquisition of other income, should be divided in proportion
to the income. In the event that interest expenses, depreciation
and exchange rate losses pursuant to Article 49 of the Income
Tax Act relate at the same time to the acquisition of income in
merchant vessel operation and the acquisition of other income,
such financial costs shall be divided in proportion to the book
value of assets used in merchant vessel operations, on one hand,
and for other uses, on the other hand. Costs which are consid-
ered to relate to the generation of other income than that from
merchant vessel operation shall be governed by the Income Tax
Act.

Losses from merchant vessel operations should not be deduc-
tible with regard to taxation of other activities according to the
Income Tax Act, cf. Article 11 of the Tonnage Tax Act.

2.3.7. Duration of the tonnage taxation

According to Article 2 of the Tonnage Tax Act, the taxation will
apply for a period of three years. This means that a ship-owner
opting for the tonnage tax has to stay within that scheme for
three years.

2.4. Details of the special refund for seafarers' income tax

The Icelandic authorities have also notified a gross wage
support system for seafarers, by which ship-owners may be paid
grants amounting to 90 % of the income tax calculated on the
gross wages of the employed seafarers (1). In order to qualify for
the grants the ship-owner must be a limited liability company
or private limited company with full tax liability in Iceland, the
vessels must be registered in the IIS and the ship-owner must
employ seafarers who are eligible for taxation in Iceland.

The relevant provision, Article 16 of the Act, reads as follows:

‘Limited liability companies and private limited companies subject
to taxation pursuant to Item 1 of Paragraph 1 of Article 2 of Act
No 90/2003 on Income Tax, and which operate merchant vessels,
cf. Article 3, registered in the Icelandic International Shipregister
(IIS), shall receive a subsidy which corresponds to 90 % of the

correctly determined amount of income tax and municipal income
tax in withholding taxes on the wages of the crew of the merchant
vessels in question, having taken into account personal tax allow-
in
ances and seamen's allowances. The withholding tax shall,
other respects, be so disposed of that 5 % shall be paid to the
Treasury and 5 % shall be paid to the municipality of the crew-
member in question. This disposal shall replace the disposal of
withholding tax and division according to the Act on Withholding
Tax, the Act on Income Tax and the Act on Municipal Revenue
Base.

implementation of payments pursuant

The Minister of Finance shall, by means of a regulation, specify
the
to Paragraph 1,
including the form of subsidy applications, payment times and
balancing against unpaid public levies.’

The Icelandic authorities have confirmed that there are no elig-
ibility criteria on the level of the seafarer other than being
employed with a merchant shipping company and having tax
liability in Iceland. The refund is only given for the income tax,
calculated on the seafarers' wages. It does not cover any social
security contributions. The Icelandic authorities have also
confirmed that the seafarer's nationality is not relevant in this
respect. Nor does the seafarer need to have a residence in
Iceland in order for the ship-owner to be able to qualify for the
grant.

2.5. Aid recipients, budget, duration and entry into force of

the notified measures

The Icelandic authorities have not submitted any exact figures
regarding the reduction of State revenue that will follow from
the application of the tonnage tax scheme as compared with the
tax revenue that would have followed from the application of
the ordinary corporation tax rules.

the cost of

The Icelandic authorities state that
the notified
measures will depend on the number of vessels registering in
the IIS. A preliminary estimate points to a registration of
12 vessels for which the tonnage tax is assumed to be on
average ISK 120 000. Hence, the tonnage tax revenue would
amount to some ISK 1 440 000. However, the preliminary esti-
mate does not indicate the amount of ordinary corporate tax
these 12 vessels otherwise would have been liable to.

the Icelandic
For the seafarers' gross wage support scheme,
authorities estimate a budget of ISK 140-150 million per year
(based on 12 estimated vessels which might
register and
200 seafarers employed on those ships).

The Icelandic authorities have not limited the duration of the
schemes. They have, however, confirmed to the Authority that
they would be willing to re-notify the scheme after a given
number of years.

The Tonnage Tax Act will enter into force on 1 January 2008.
Still, according to the Icelandic authorities, the Act will not be
effective before the entry into force of the Act on the IIS which
is supposed to enter into force on 1 January 2009 (2).

2.6. Overlap with other schemes

Cumulation of the scheme with other schemes will be moni-
tored by the Icelandic tax authorities.

(1) Letter of

the Icelandic authorities dated 23 March 2007 (Event

No 415003).

(2) Cf. point 2.2 above.

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2.7. Information on the expected macro-economic return on

1.4. Conclusion

the maritime cluster

Pursuant to Section A12(2) of the Authority's State Aid Guide-
lines for Aid to the Maritime Transport Sector, the Icelandic
authorities carried out a cost effect analysis to establish the
macro-economic return of the notified tax schemes. The analysis
states that it is difficult to foresee the economic effects of the
Tonnage Tax Act as it will depend on the number of ships regis-
tered on the IIS. On the estimate of jobs created or saved, the
Icelandic authorities estimate that the effect of both support
measures is that in the next six years 200 seafarers will be
employed as new crew on qualifying merchant vessels.

II. ASSESSMENT

1. The presence of State aid

State aid within the meaning of Article 61(1) of
EEA Agreement

the

Article 61(1) of the EEA Agreement reads as follows:

‘Save as otherwise provided in this Agreement, any aid granted by
EC Member States, EFTA States or through State resources in any
form whatsoever which distorts or threatens to distort competition
by favouring certain undertakings or the production of certain
in so far as it affects trade between Contracting
goods shall,
Parties, be incompatible with the functioning of this Agreement.’

The individual criteria of that provision will be examined below.

1.1. Presence of State resources

The aid measure must be granted by the State or through State
resources. The application of the lower tonnage tax rather than
the ordinary corporate tax leads to a loss of State revenues. Like-
wise are the subsidies from the national budget given to ship-
owners for the income tax of the seafarers State resources.

1.2. Favouring certain undertakings or the production of

certain goods

The two measures give ship owners advantages by way of subsi-
dies and tax concessions. The two measures are limited to the
maritime sector and therefore favour only certain undertakings.
Hence, they must be viewed as selective within the meaning of
Article 61(1) of the Agreement.

The Authority therefore takes the preliminary view that the noti-
fied support measures constitute State aid within the meaning
of Article 61(1) of the EEA Agreement (1).

2. Procedural requirements

Pursuant to Article 1(3) of Part I of Protocol 3 to the Surveil-
lance and Court Agreement, ‘the EFTA Surveillance Authority shall
be informed, in sufficient time to enable it to submit its comments, of
any plans to grant or alter aid. […]. The State concerned shall not
put its proposed measures into effect until the procedure has resulted in
a final decision’.

By submitting notification of
the two support measures,
forwarded with a letter from the Icelandic Mission to the
European Union dated 23 March 2007 (Event No 415003), the
Icelandic authorities have complied with the notification require-
ment. The Tonnage Tax Act has not yet entered into force. The
Authority can therefore conclude that the Icelandic authorities
have respected their obligations pursuant to Article 1(3) of Part I
of Protocol 3 to the Surveillance and Court Agreement.

That being said, according to the notification, the entry into
force of the new Tonnage Tax Act does not seem to be depen-
dent upon a final positive decision from the Authority. An entry
into effect before a final decision would be a breach of the
standstill obligation. Any aid paid out in breach of the standstill
obligation would be unlawful within the meaning of Article 1(f)
in Part II of Protocol 3 to the Surveillance and Court Agree-
ment. If such aid is not found compatible with the functioning
of the EEA Agreement, it would be subject to a recovery order
from the Authority, see Article 14 in Part II of Protocol 3 to the
Surveillance and Court Agreement.

3. Compatibility of the aid

Under Article 61(3)(c) of the EEA Agreement, aid to facilitate
the development of certain economic activities or of certain
economic areas may be considered compatible with the func-
the EEA Agreement where such aid does not
tioning of
adversely affect trading conditions to an extent contrary to the
common interest. The Authority considers Article 61(3)(c) of
the EEA Agreement together with the Authority's State Aid
Guidelines on State aid to maritime transport (hereinafter ‘the
Guidelines’) to form the correct legal basis for assessing the
compatibility of the notified measures.

1.3. Distortion of competition and effect on trade between

Contracting Parties

The aid measure must distort competition and affect
trade
between the Contracting Parties. The tax relief and the subsidy
for the seafarers' income tax strengthens the ship-owners posi-
tion towards their competitors within the EEA. The maritime
transport activities in question are carried out within the EEA
and internationally. Hence, the measures affect trade between
the Contracting Parties.

These Guidelines allow the EEA EFTA States to support the
maritime transport industry in pursuit of general objectives such
as to encourage a flagging or re-flagging to the registers of the
Contracting parties, the contribution to the consolidation of the
maritime cluster established in the Contracting Parties while
maintaining a competitive fleet on world markets, etc.

(1) For the tonnage tax, the Maritime Guidelines specify that ‘the system of
replacing the normal corporate tax system by a tonnage tax is a State aid’, see
Section 3.1(4) of the Guidelines.

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The Authority has already approved, on the aforementioned
legal basis, tonnage tax and seafarers' tax refund schemes in
Norway (1). Likewise the European Commission has a long
standing case practice in this area (2).

In the following, the Authority will assess the compatibility of
the notified schemes with the criteria laid down in the Guide-
lines. The Authority will below make first an analysis of the
notified tonnage tax (Section 3.1) and subsequently of the noti-
fied gross wage scheme (Section 3.2). The Authority will then
analyse topics relevant to both schemes (3.3).

It should be noted that the current notification concerns oper-
ating aid, i.e. aid which is intended to relieve an undertaking of
the expenses which it would normally have had to bear in its
day-to-day management or its usual activities. Operating aid
should normally not be allowed, unless it is explicitly authorized
by the Authority's State Aid Guidelines. The Authority's Guide-
lines in the maritime transport sector provide for operating aid
in Section 3.1 — tonnage tax and Section 3.2 — labour related
costs.

3.1. Tonnage tax scheme

The tonnage tax criteria are laid down in Section 3.1 of the
Guidelines. In the following, the Authority will assess the elig-
ibility criteria (3.1.1), the requirements of registration in the IIS
and full tax liability in Iceland (3.1.2), the ring fencing measures
applied by Iceland (3.1.3), the establishment of the tax base
(3.1.4) and the length of period for which the ship-owner has to
stay within the tonnage tax scheme (3.1.5).

3.1.1. Eligible activities

I n t e r n a t i o n a l t r a n s p o r t a n d c a b o t a g e

The Authority has no objections regarding the coverage by
tonnage tax of the international maritime transport of freight
and/or passengers and cabotage (maritime transport within a
Contracting Party).

A n c i l l a r y a c t i v i t i e s

As to the ancillary activities notified by the Icelandic authorities,
the Authority considers that these activities are closely linked
with the provision of maritime transport services. The services
of:

4. the operation of offices and management facilities;

5. sales of consumer products on board merchant vessels

integral

are all
to maritime transport and covered by the
tonnage tax if they are provided by the tonnage tax company
itself (3).

S h i p m a n a g e m e n t

Maritime transport management is normally divided into the
following three functions:

— commercial management of vessels,

— technical management of vessels,

— crew management.

Ship management companies, which do not have the legal title
to the ship and are not ship-owners, but assume certain
management responsibilities for a vessel, may also qualify for
aid. According to Section 3.1(11) of the Guidelines this aid can
be given only in respect of vessels for which the management
companies have been assigned the entire crew and technical
management. In particular, as stipulated in Section 3.1(11) of
the Guidelines, ship managers have to assume from the owner
the full responsibility for the vessel's operations. They moreover
have to take over from the owner all duties and responsibilities
imposed by the International Management Code for the Safe
Operation of Ships and for Pollution Prevention, the so-called
ISM code. The Commission describes these conditions to mean
that where in practice the ship management company does not
ensure the commercial management of the vessel it must simul-
taneously ensure at least the two last functions (4).

When a vessel is chartered without crew (bare-boat charter), this
is generally considered as being close to operating an own vessel
and therefore can profit from the tonnage tax (5).

However, if chartered with a crew (time charter), the manage-
ment is less close to operating an own vessel and for that
reason, additional
restrictions as described above must be
fulfilled. The Commission has in its case practice also dealt with
cases,
the commercial
in which the company takes over
management of the vessels, e.g. for a shipping pool (6).

According to Commission's case practice in all cases (7) revenues
derived from the management of vessels, on its own account or
on the account of third parties, may be eligible for tonnage tax
where the tonnage tax company ensures:

— either both the crew and technical management of the said

1. the use of containers in cargo transportations;

vessels,

2. the operation of loading, unloading and maintenance facil-

— or their commercial management,

ities;

3. operation of ticket sales and passenger terminals;

three

schemes

(1) Decision No 412/06/COL and No 280/06/COL, which replaces
the
authorised in Decisions No 164/98/COL,
No 117/02/COL and No 187/03/COL as far as the tax refund to ship-
owners for the employment of seafarers is concerned. Decisions
No 143/03/COL and No 164/98/COL dealt with the Norwegian
tonnage tax scheme.

(2) References for tonnage tax schemes approved by the European
Commission can be found in Decision No 93/06 — Poland, Introduc-
tion of a tonnage tax scheme in favour of international maritime trans-
port, which in paragraph 62 lists all the adopted decisions in this field.

(3) State aid N 563/01 — Denmark and State aid N 93/06 — Poland

approve almost identical activities.

(4) State aid N 93/06 — Poland, paragraph 78.
(5) This means that the person chartering the boat can count the tonnage
for taxations purposes in the same manner as he would do for his own
ships. See also State aid N 93/06 — Poland, paragraph 77.

(6) Shipping pools are defined as ‘joint ventures between ship-owners to pool
vessels of similar types, with central administration, which are marketed as a
single entity, negotiating voyage/time charterparties and contracts of affreight-
ment, where the revenues are pooled and distributed to owners …’, see
Murray, R. (1994). Shipping Pools and EC Competition Law; A Guide
for the Shipping Industry. London, 2-4 March.

(7) Except for bare boat charter for which it is normally assumed that the

charter is close to the operation of an own vessel.

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and provided that the tonnage of such vessels does not exceed
four times the tonnage of vessels for which the tonnage tax
company ensures together the crew, technical and commercial
management (1). This should ensure that aid is only given to
maritime transport activities. Tonnage tax companies should not
lose the characteristics of a maritime transport company (2).

The Icelandic authorities refer in this regard to Section 4 of the
Tonnage Tax Act. This Section stipulates that maritime transport
eligible for support should be carried out by merchant vessels
owned by the vessel operator, merchant vessels leased without
crew (bareboat charter) and merchant vessels leased with crew
(time charter).

The Icelandic authorities have not clarified whether the above
conditions will be met under the Tonnage Tax Act, but limited
themselves to repeat the conditions set out in Article 3 of the
Tonnage Tax Act. Article 3 of the Tonnage Tax Act however
does neither stipulate which kind of management must be
carried out by the ship manager, nor does it have any stipula-
tions on the amount of tonnage for a managed vessel in relation
to the tonnage for which the tonnage tax company ensures all
management functions.

Consequently, the Authority has doubts whether application of
the tonnage tax to ship management activities is in line with the
Guidelines.

3.1.2. The requirements of registration in the IIS and full tax liability

It follows from the EEA Agreement that State aid that contra-
venes other provisions of
the EEA Agreement cannot be
declared compatible with the functioning of the EEA Agree-
ment (3). The Authority will
therefore assess below whether
certain requirements of the Tonnage Tax Act, in particular the
requirement of registration in the IIS and the requirement of full
tax liability are in conformity with other provisions of the EEA
Agreement.

T h e r e g i s t r a t i o n r e q u i r e m e n t

The requirement in Article 1 of the Act to have the vessels regis-
tered in the IIS in order to have access to the tonnage tax
scheme leads to the exclusion of vessels not registered in
Iceland. This also applies in cases where the revenues generated
by the operation of such vessels can be subject to Icelandic taxa-
tion. To give an example, a ship-owner with two ships, one
registered in the IIS, the other registered in another EEA State
can be subject to taxation in Iceland on profits from the opera-
tions of both ships (4).

(1) State aid N 93/06 — Poland, paragraph 84.
(2) State aid N 93/06 — Poland, paragraph 83.
(3) Case C-204/97, Portugal v Commission, [2001] ECR I-3175, para-
graph 41. See also Case E-9/04, The Banker's and Securities' Dealers Asso-
ciation of Iceland v the EFTA Surveillance Authority, [2006] EFTA Court
Report, paragraph 82.

(4) Where double taxation agreements are in place, full tax jurisdiction will
be given to the State where the place of effective management of the
company is, including for operations which take place in other EEA
States through a branch, etc. Hence, in the above given example, the
taxation of a ‘permanently established company in Iceland would be in
Iceland, also for income generated outside the Icelandic territory’. It
would, nevertheless, only be the profits from the ship registered in the
to the
Icelandic International Shipregister that would be subject
tonnage tax regime. The profits from the operations of the other ship
would be taxed according to the normal company tax scheme. The
Icelandic authorities confirmed this finding to the Authority.

It is a well established principle that although direct taxation
falls within the EEA States competence, they must, nonetheless,
exercise that competence consistently with EEA law (5). The
right of establishment includes the right for nationals (natural
and legal persons) of one EEA State to set up and manage
undertakings in another EEA State under the conditions laid
down by the law of the host State for its own nationals. The
abolition of restrictions on the right of establishment applies to
restrictions on the setting up of agencies, branches or subsidi-
aries (6). Moreover, the prohibition on restrictions to the right of
establishment also applies to tax provisions (7). Consequently,
this
the right of a company established in one
EEA State, and having its seat, registered office, central adminis-
tration or principal place of business within the EEA to pursue
its activities in another EEA State through a branch or an
agency, and be subject to the same tax treatment as companies
established in that State. A difference in tax treatment can only
be compatible with the provisions of the EEA Agreement if it
concerns situations which are not objectively comparable or if it
is justified by overriding reasons in the public interest (8).

includes

Registration of a ship can constitute establishment where the
ship constitutes an instrument for pursuing economic activity
which involves a fixed establishment. Restrictions on registering
ships in other EEA States can therefore be contrary to the right
of establishment in Article 31 EEA (9).

vessels

illustrated above, a ship-owner with full

tax liability
As
in Iceland and merchant
registered in another
EEA State will be subject to less favourable tax treatment than a
ship-owner with full tax liability in Iceland and its merchant
vessels registered in the IIS. This difference in treatment consti-
tutes a restriction on establishment by way of registration of
ships in other EEA States.

The Authority has so far not identified reasons as to why such a
restriction on the freedom of establishment is necessary in order
to pursue the objective behind the tonnage tax scheme, namely
to improve the competitive conditions of ship-owners in Iceland
vis-à-vis the conditions in non-EEA jurisdictions. The national
authorities have neither presented any convincing overriding
reasons in the public interest capable of justifying such a restric-
tion on ship-owners establishment in other EEA States. In the
absence of such convincing justification grounds the Authority
has doubts as to the compatibility of the registration require-
ment with Article 31 EEA and thereby whether the State aid
scheme at issue can be declared compatible with the functioning
of the EEA Agreement.

The Authority furthermore has doubts whether the Icelandic
registration requirement is compatible with Section 3.1(7) of the
Guidelines, which stipulates that a tax relief scheme should
require a link with an ‘EEA flag’. The Guidelines explain that
this is so since the purpose of State aid within the context of
the maritime transport is to ‘promote the competitiveness of the

(5) Case E-6/98, The Government of Norway v EFTA Surveillance Authority,
[1999] EFTA Court Report, p. 74, paragraph 34; Case E-1/04, Fokus
Bank, [2004] EFTA Court Report, p. 11, paragraph 20.

(6) See for example Case C-270/83, Commission v France, [1986] ECR 273,
paragraph 13, and Case C-311/97, Royal Bank of Scotland, [1999] ECR
I-2651, paragraph 22.

(7) C-471/04, Keller Holding, [2006] ECR I-2107, paragraph 49.
(8) Case 270/83, Commission v France, [1986] ECR 273, paragraph 13;
Case C-311/97, Royal Bank of Scotland cited above, paragraphs 23-31;
and Case C-253/03, CLT-UFA SA,
[2006] ECR I-1831, para-
graphs 14-17.

(9) Case C-221/89, Factortame Ltd and others, [1991] ECR I-3905, para-
judgment of

graph 22, and Case C-438/05, Viking Line ABP,
11 December 2007, not yet reported, paragraph 23.

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EEA fleets in the global shipping market’. The wording ‘an EEA
State’ read in the light of this objective does not support the
introduction of a requirement of registration in the specific
EFTA State granting the aid. Rather, it supports the view that
registration in any EEA State should be the criterion (1).

The Icelandic authorities underline that they do not require
what they call a ‘flag link’ as each ship registered in the IIS still
remains free to fly another flag. As explained above in point
Section I point 2.3.4 of this Decision, Article 6 of the Act on
the IIS states that a merchant vessel that is registered in the IIS
is considered to be an Icelandic vessels regardless of whether it
sails Icelandic flag. Moreover, according to Article 4 of the Act
on the IIS the registration is open to all EEA citizens. As
mentioned above under point 2.3.4, that Article states that the
condition of registration is that the ‘owner of the merchant vessel is
an Icelandic
citizen, a citizen of another State in the European
Economic Area or of the founding States of the European Free Trade
Area, a citizen of the Faeroe Islands or a legal entity registered in
Iceland’.

It is the Authority's understanding that the reference to ‘citizen’
means natural persons and not legal entities. Moreover, it is the
Authority's understanding that ‘legal entity registered in Iceland’
covers only the entities that have full tax liability in Iceland
under Article 2(1), paragraph 1 of the Income Tax Act, cf. point
2.3.3 above. Hence, it appears that vessels owned by legal enti-
ties established in other EEA States with limited tax liability in
Iceland are not eligible for registration in the IIS. The Authority
has doubts whether
this limitation is compatible with the
EEA Agreement, in particular the freedom of establishment in
Article 31 EEA, as it appears to discriminate against companies
established in other EEA States. Indeed, even if the condition in
the Tonnage Tax Act regarding full tax liability was amended to
also cover companies with limited tax liability, the limitation
with regard to registration would disqualify such companies
from the tonnage tax scheme.

I.e. even if

the ship-owner

the Authority is not convinced that

Finally,
the argument
concerning the voluntary use of the Icelandic flag is relevant, as
the possible discrimination mentioned above stems from the
registration requirement (2).
is
allowed to fly a flag other than the Icelandic one, he is still
obliged to register in the IIS in order to profit from the more
favourable tonnage tax. The Authority has despite questions to
this end, not received the necessary information and explana-
tions from the Icelandic Government, and has, therefore, not
been able to establish what (legal) consequences result from the
fact that there might be a separation between the registration
and the flying of the flag under Icelandic law. The Icelandic
authorities are hereby invited to explain this point further and
in particular to state whether (and in case of a positive answer),
which obligations and rights are associated with the flag, and
which obligations and rights are associated with the registration
in the IIS (e.g. manning and security requirements, taxation,
etc.).

T h e r e q u i r e m e n t o f f u l l t a x l i a b i l i t y

As demonstrated above in Section, point 2.3.3 of this Decision,
is,
the

the beneficial

eligibility for

tax regime

tonnage

(1) The Authority is aware that the European Commission has accepted a
requirement of a flag link with the State granting the aid in a Finish and
a Polish case State aid N 93/06 — Poland, Section 3.4.1.2(88) et seq.
and State aid N 195/02 — Finland. However, the Authority has not full
knowledge about all the factual circumstances and conditions of the
national schemes for which this requirement has been accepted.

(2) Normally, in the Authority's and the Commission case practice, the

notifion of ‘flag link’ is understood as a registration requirement.

limited to those companies who have full

furthermore,
tax
liability in Iceland. Hence, as confirmed by the Icelandic
authorities, the effect of
the Tonnage Tax Act is that ship-
owners established in other EEA States who perform transport
services in the Icelandic territory are not eligible for
the
beneficial regime of the tonnage tax. Still, tax liability in Iceland
can, at least in principle, also arise from the so-called source
taxation, which is laid down in Article 3 of the Income Tax Act.
This means that a company established in another EEA State
might be tax liable for certain of
its operations in Iceland,
without having access to the more favourable tonnage tax
scheme.

The Icelandic authorities underline that where double taxation
agreements are in place, the ship-owners will pay the tax in the
country of permanent establishment (3) and not in Iceland. And
indeed, where double taxation agreements do exist, no taxation
would normally arise on the operations in Iceland of companies
established in other EEA States because the tax jurisdiction
would normally be in the place of effective management of the
company, i.e. outside Iceland. However, as regards EEA States,
Iceland has not concluded double taxation agreements with
Bulgaria, Cyprus and Liechtenstein. Agreements with Greece and
Italy are ratified, but not in force yet. Agreements with Austria,
Romania and Slovenia are likewise not in force.

As explained above, the right of establishment in Article 31 EEA
includes the right of a company established in one EEA State
and having its seat, registered office, central administration or
principal place of business within the EEA to pursue its activities
in another EEA State through a branch or an agency and be
subject to the same tax treatment as companies established in
that State, insofar as different treatment is not based on objec-
tive differences or can be justified by overriding reasons in the
general interest. The companies, accordingly, have the right to
choose the appropriate legal form in which to pursue their activ-
ities in another EEA State, and that freedom of choice must not
be limited by discriminatory tax provisions (4).

Moreover, the freedom to provide and receive services requires,
according to Article 36 EEA, in the same way the elimination of
all discrimination on grounds of nationality against service
providers who are established in another EEA State. It moreover
requires the abolition of all restrictions which are liable to
prohibit,
impede or render less advantageous the activities of
service providers from other EEA States, who lawfully provide
services in their EEA State of origin (5) and wish to provide
those services in another EEA State.

As is explained above, only domiciled companies subject to full
tax liability in Iceland are eligible for the tonnage tax scheme.
The Icelandic authorities have not at
this point provided
information allowing the Authority to conclude whether
shipping companies established in other EEA States and
to income
providing services in Iceland would be subject
the
taxation in Iceland on those
tax liability in order to qualify for the
requirement of

activities. Accordingly,

full

(3) Wording used by the Icelandic authorities in their letter dated

16 October 2007 (Event No 447358).

Säger,

(5) Case C-76/90,

(4) Case C-270/83, Commission v France cited above, paragraph 13;
Case C-311/97, Royal Bank of Scotland cited above, paragraphs 23-31;
and Case C-253/03, CLT-UFA SA cited above, paragraphs 14-17.
[1991]

paragraph 12;
Case C-279/00, Commission v Italy, [2002] ECR I-1425, paragraph 31;
Case C-131/01, Commission v Italy, [2003] ECR I-1659, paragraph 26;
Case C-244/04, Commission v Germany, [2006] ECR I-885, para-
graph 30; Case C-255/04, Commission v France, [2006] ECR I-5251,
paragraph 37; and Case C-433/04, Commission v Belgium, [2006] ECR
I-10653, paragraph 28.

ECR I-4221,

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favourable tax treatment appears to constitute a difference of
treatment
providers
established in other EEA States to provide maritime transport
services in Iceland.

freedom of

restricting

service

the

C o n c l u s i o n

To limit the tonnage tax regime to companies with their seat,
registered office or the place of residence according to their
bylaw in Iceland (requirement of full tax liability), and, further-
more, to extend the benefits of that tax regime only to the part
of those companies' income which derives from the operation
of ships registered in Iceland (requirement of registration in the
IIS), appears liable to place comparable companies established in
other EEA States, and/or operating ships registered in other
EEA States, at a disadvantage.
In the same manner, the tax
regime appears liable to place providers of maritime transport
services established in other EEA States, and providing services
in Iceland, at a disadvantage, as compared to service providers
established in Iceland.

Based on the above, the Authority has doubts whether the regis-
tration requirement and the requirement of full tax liability in
Iceland, are compatible with the functioning of the EEA Agree-
ment, in particular the right of establishment in Article 31 EEA
and the freedom to provide services in Article 36 EEA, and can
be allowed under the EEA State aid rules.

3.1.3. Ring-fencing measures, separate accounting

The Authority finds that there are sufficient rules which should
ensure that no spill over between tonnage tax activities and
other activities occurs. Article 4 and 7 of the Tonnage Tax Act

the

eligible

activities

should be

establish that
separately
accounted for. The requirement of separate accounts also applies
to companies within a group. There are several provisions in the
Tonnage Tax Act which establish that operating costs and losses
of merchant vessel operations cannot be deducted from the
income tax to which the operator
is submitted for other
activities.

in its

formal

investigation regarding the Polish
However,
tonnage tax scheme the Commission took note of the commit-
ment of Poland that when opting for a tonnage tax,
the
company agrees to putting all
its eligible vessels and related
activities under the tonnage tax. This rule is also applied by
Poland to groups of companies that are tax liable in Poland (the
so-called ‘all or nothing rule’). The Authority is not aware how
the Icelandic tonnage tax deals with this situation and will inves-
tigate this point further during the formal investigation proce-
dure. The Icelandic authorities are invited to provide further
information to that end.

3.1.4. Tax rates

Section 3.1(18) of the Maritime Guidelines describes that the
EC Commission will only approve schemes giving rise to a tax
load for the same tonnage ‘fairly in line with the schemes already
approved. The Authority will likewise seek to keep an equitable balance
in line with already approved schemes.’

For that reason, the Authority needs to assess whether the noti-
fied tax base are fairly in line with the rates applied in other
notified and authorised schemes. The Authority has doubts that
this is the case and points to the comparative table, based on
adopted decisions after the 2004 Guidelines came into force,
below:

Iceland

Denmark
No 171/04

Lithuania
No 330/05

Italy (**)
No 114/04

Every amount until 25 000 NT
ISK 30 (EUR 0,36) per 100 NT (*)

Until 1 000 NT
EUR 0,90 per 100 NT

Until 1 000 NT
EUR 0,93 per 100 NT

Until 1 000 NT
EUR 0,90 per 100 NT

From 1 001 NT until 10 000 NT
EUR 0,70 per 100 NT

From 1 001 NT until 10 000 NT
EUR 0,67 per 100 NT

From 1 001 NT until 10 000 NT
EUR 0,70 per 100 NT

From 10 001 until 25 000 NT
EUR 0,40 per 100 NT

From 10 001 until 25 000 NT
EUR 0,43 per 100 NT

From 10 001 until 25 000 NT
EUR 0,40 per 100 NT

More than 25 000 NT
ISK 10 (EUR 0,12) per 100 NT

More than 25 000 NT
EUR 0,30 per 100 NT

More than 25 000 NT
EUR 0,27 per 100 NT

More than 25 000 NT
EUR 0,20 per 100 NT

(*) All the value are given per day.
(**) The Italian decision has an even larger comparative table of tax bases applied in the EU Member States.

As can be seen from the table, the Icelandic scheme operates
with tax base considerably lower than in the three EU Member
States.

In the case practice of the Commissions lower tax base for
larger ships which were going to be re-flagged were only
allowed in very special circumstances (1), which do not seem to
be fulfilled in the present case. The Commission's concern
against this tax base divergence was that a low tax base might

lead to a distortion of competition if it encourages non-Belgian
ship-owners to transfer their ship from a Community register to
the Belgian register. These concerns are also valid in the current
case in relation to a distortion of competition towards the
Icelandic ship register.

The Authority therefore must at the current stage of the proce-
dure express doubts whether these tax base can be declared
compatible with the EEA State aid provisions.

(1) Commission Decision 2005/417/EC of 30 June 2004 concerning a
series of tax measures which Belgium is planning to implement for
maritime transport (OJ L 150, 10.6.2005, p. 1). There was a reduced
rate for the tranche above 40 000 tons in the Belgium case, which was
accepted provided that the ship is new or have been registered under
the flag of a third country during the five years preceding their entry
into the Belgian system.

3.1.5. Period,

for which the ship-owner has

to stay within the

tonnage tax regime

The period, for which the ship-owner has to stay within the
Icelandic tonnage tax scheme, is three years. From Commission's

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tonnage

tax schemes,

a risk exists

case practice it appears that the minimal duration of that period
in other tonnage tax schemes approved so far is ten years. The
Commission stresses that by allowing diverging criteria for
that unfair
different
advantages are created and that there might be a competition
between Member States on the level of tonnage tax schemes.
Consequently,
the Commission expressed doubts towards a
Polish tax scheme, which allowed for a minimal duration of five
years, pointing out that this might lead to a harmful divergence
between tonnage tax systems as it might make the Polish
tonnage tax system more desirable and lead to a re-flagging
within the Community (1).

The period of staying within the tonnage tax system is even
shorter in the current notification, namely three years. Hence,
the Authority has doubts as to whether the Icelandic scheme
might lead to harmful divergence between tonnage tax systems
in the EEA.

3.2. Special refund scheme for seafarers

According to Section 3.2(2) of the Guidelines support can be
granted in the form of reduced rates of contributions for the
social protection of EEA seafarers employed on board ships
registered in an EEA State as well as reduced rates of income tax
for EEA seafarers on board ships registered in a EEA State. The
Icelandic authorities do not envisage a support
for social
security contribution, but only for the seafarer's income tax, of
which 90 % can be refunded to the ship-owner.

According to Section 3.2(2) of the Guidelines an EEA seafarer is
defined as the citizen of the EEA State, in the case of seafarers
working on board vessels (including ro-ro ferries) providing
scheduled passenger services between ports of the EEA. It more-
over covers all seafarers liable to taxation and/or social security
contribution in an EEA State, in all other cases. The Icelandic
authorities have not submitted a written definition of the notion
of seafarer in a legislative or administrative Act, but confirmed
that nationality is not a requirement, neither is the residence of
the seafarer. Hence, also third country nationals seem to be able
to fall under the scheme. The Authority wishes to point out that
for passenger services between ports of the EEA, aid should
only be given for the employment of EEA seafarers (see also
Section 3.2(3) of the Guidelines)). The Icelandic authorities are
invited to clarify that the Icelandic law will be applied in compli-
ance with the Guidelines as described above. The Authority has,
on the basis of the information available to it, doubts whether
the definition of EEA seafarers is applied correctly in this regard.

The Guidelines accept, in Section 3.2(3), that instead of a reduc-
tion, a refund of the taxes can be granted by the State, which is
the model chosen by the Icelandic authorities.

According to Article 16 paragraph 1 of the Tonnage Tax Act
limited liability companies and private limited companies with
full tax liability in Iceland, pursuant to Article 2 paragraph 1
point 1 of
receive a subsidy
corresponding to 90 % of the correctly assessed income tax and
municipality income tax paid by the crews on the ships they
operate that are registered in the IIS. Paragraph 2 of that Article
provides that the Minister of Finance shall issue a regulation on

the Income Tax Act,

shall

(1) State aid N 93/06 — Poland.

inter alia how the payments
shall be conducted and the
application forms to be used. Such a regulation has not yet been
issued.

Thus, it appears that ship-owners who are excluded from the
tonnage tax scheme are also excluded from the refund scheme.
Companies with full tax liability in Iceland will not be eligible
for the subsidy insofar as their ships are registered in other
EEA States. This appears to apply both for situations where the
crew members would be liable to Iceland for income tax (based
on residence in Iceland) and situations where the crew members
do not have any tax liability in Iceland.

Also, since companies established in other EEA States cannot
register ships in the IIS those companies would not be eligible
for the subsidy. This is,
in the Authority's understanding, so
even if the crew of those ships were paying income tax and
municipal income tax in Iceland, and the companies were taxed
in Iceland on their income originating in Iceland.

These measures, therefore, appear to lead to difference in tax
treatment based on where the companies are established to the
detriment of companies with establishments in other EEA
States. So far the Icelandic Government has not demonstrated
that companies established in other EEA States, or Icelandic
companies with secondary establishments in other EEA States
based on the registration of their ships, are not in comparable
situation to companies established solely in Iceland. The
Authority, therefore, has doubts as to the compatibility of the
refund scheme with the EEA fundamental freedoms, in particu-
lar the right of establishment in Article 31 EEA.

3.3. Cumulation

According to Section 11 of the Guidelines, a reduction to zero
of taxation and social charges for seafarers and a reduction of
corporate taxation of shipping activities is the maximum level
of aid which might be permitted. To avoid distortions of compe-
tition, other systems of aid may not provide any greater benefit
than this. The aid should not exceed the total amount of taxes
and social contributions collected from shipping activities and
seafarers.

According to the Authority's knowledge no existing aid scheme
in Iceland would be capable of adding to the benefits of the
present regime. In particular, not the full
income tax of the
seafarer, but only an amount of 90 % is granted a subsidy. The
Authority however reminds the Icelandic authorities of the need
to verify that the ceiling of the Guidelines is respected in any
case of an individual ship-owner who is eligible both for aid
under the present schemes and for any other aid. The Icelandic
authorities are hereby invited to confirm that the aid thresholds
of the Guidelines will be respected.

3.4. Duration of the aid scheme

As stated above, the two notified measures concern operating
aid. Operating aid should normally not be allowed for an unlim-
ited period of time. The Icelandic authorities have stated that
they are willing to re-notify the schemes to the Authority after a
given period of time. They have, however, not given indication
of any limitation to the notified scheme. The Commission has
accepted a re-notification after ten years in the Polish tonnage
tax case (1),
the
Polish scheme which was originally not limited in time.

thereby effectively limiting the duration of

17.4.2008

EN

Official Journal of the European Union

C 96/49

The Authority would normally not accept aid schemes with an
unlimited scheme. A scheme with limitation might however be
re-notified and prolonged if the Authority should take a positive
decision on the re-notified scheme. As long as the duration is
not limited, the Authority must however raise doubts as to the
compatibility of the Icelandic aid measures.

4. Conclusion

Based on the information submitted by the Icelandic authorities,
the Authority preliminary concludes
the tonnage tax
scheme and the refund for the seafarers' income tax constitute
State aid within the meaning of Article 61(1) of the EEA Agree-
ment.

that

in combination with the requirements

Furthermore, the Authority has doubts that the tonnage tax can
the EEA
be regarded as complying with Article 61(3)(c) of
Agreement,
in the
Authority's Guidelines on State aid to maritime transport. The
Authority thus doubts that the tonnage tax is compatible with
the functioning of the EEA Agreement. This concerns in particu-
lar the following aspects:

1. requirement of registration of the vessel in the IIS, thereby
excluding from the tax scheme operations of ships registered
in other EEA States;

2. requirement of full tax liability according to Article 2 of the
Income Tax Act,
to
source taxation according to Article 3 of the Income Tax
from access to the tonnage tax;

thereby excluding activities subject

3. requirement that only legal entities registered in Iceland can

register in the IIS, see Article 4 of the Act on the IIS;

4. treatment of ship-management companies;

5. establishment of the tax base;

6. duration of the period for which the ship-owner has to stay

within the tonnage tax scheme; and the

7. unlimited duration of the aid scheme.

Further,
the Authority would like to clarify the divergence
between the flag link and the registration requirement and in
particular which obligations and rights are associated with them
respectively. The Authority would also like to receive more
information regarding the notion of ‘limited liability companies
and private limited companies’ as set out in point I.2.3.3 of this
Decision. The Authority would also like to receive more infor-
mation on the so-called all or nothing rule.

As to the refund scheme for seafarers, the Authority has the
same doubts as expressed above under (1), requirement of regis-
tration in the IIS and (2), requirement of
tax liability.
Further, the Authority doubts whether for scheduled passenger
services between ports of the EEA ensures that aid would only
be given to the employment of EEA seafarers.

full

For both schemes, the Authority would appreciate a confirma-
tion that the cumulation rules of Chapter 11 of the Guidelines
and the respective upper thresholds will be respected.

II of
Consequently, and in accordance Article 4(4) of Part
Protocol 3 to the Surveillance and Court Agreement,
the
Authority is obliged to open the procedure provided for in
Article 1(2) of Part I of Protocol 3 of the Surveillance and Court
Agreement. The decision to open proceedings is without preju-
dice to the final decision of the Authority, which may conclude
that the measures in question are compatible with the func-
tioning of the EEA Agreement.

In light of the foregoing considerations, the Authority, acting
under the procedure laid down in Article 1(2) of Part I of
Protocol 3 to the Surveillance and Court Agreement, requests
the Icelandic authorities to submit their comments within one
month of the date of receipt of this Decision.

In light of the foregoing consideration, the Authority requests
the Icelandic authorities, within one month of receipt of this
Decision,
information and data
needed for assessment of the compatibility of the tonnage tax
measure,

to provide all documents,

HAS ADOPTED THIS DECISION:

Article 1

The EFTA Surveillance Authority has decided to open the
formal investigation procedure provided for in Article 1(2) of
Part I of Protocol 3 to the Surveillance and Court Agreement
against Iceland regarding the notified tonnage tax scheme and
the refund scheme for seafarers.

Article 2

The Icelandic authorities are invited, pursuant to Article 6(1) of
Part II of Protocol 3 to the Surveillance and Court Agreement,
to submit their comments on the opening of the formal investi-
gation procedure within one month from the notification of
this Decision.

Article 3

The Icelandic authorities are requested to provide within one
month from notification of this Decision, all documents, infor-
mation and data needed for assessment of the compatibility of
the aid measure.

This Decision is addressed to the Republic of Iceland.

Article 4

Only the English version is authentic.

Article 5

Done at Brussels, 19 December 2007.

For the EFTA Surveillance Authority

Per SANDERUD

Kristján STEFÁNSSON

President

College Member