Clarification on the rules on tonnage tax – the desination requirement

On 4 March 2024, the Danish Ministry of Taxation announced that they had withdrawn the appeal case before the Supreme Court regarding the interpretation of the destination requirement in the Tonnage Tax Act (Da. Tonnageskatteloven).

The Tonnage Tax Act, that the shipping industry can opt for on income from transport of passengers and goods between destinations, offers a calculation of a hypothetical taxable income based on net ton without the right of deduction instead of calculating taxable profits based on taxable income and deductible costs. This result in lower tax payments in years with a profit if using the regular method of calculating taxable income whereas the tax according to the Tonnage Tax Act would be a higher cost in years with losses.

The relevant question in the appeal was whether transport of bunker oil to ships at sea at an agreed GPS destination (supply shipping) fulfils the condition in the Tonnage Tax Act section 6 (1) (1) that activities covered by the tonnage tax scheme must take place “between different destinations”.

Initially, the National Tax Tribunal held that the transport in the income years 2010-2013 of bunker oil to ships at sea was to be considered transport of goods between different destinations, thus covered by the Tonnage Tax Act. However, the Danish Ministry of Taxation maintained that 'the destination requirement' meant a fixed geographical destination (ports or facilities/structures on the continental shelf) and not for example, delivery to another ship at a pre-agreed location at sea.

Fearing that there could be a risk of the EU Commission initiating proceedings for recovery of illegal state aid, the Ministry brought the case before the Western High Court, who affirmed the position taken by National Tax Tribunal. The ruling is published in SKM2023.43 VLR. The Western High Court found that according to the preparatory works to the Act the main purpose of the Act is to ensure the international competitiveness of Danish shipping companies. Additionally, the Court stated that there is no basis for assuming that supply shipping should not be covered by the Act. Moreover, the Court reasoned that the EU Commission's decision to view the original Danish tonnage tax rules as compliant with EU state aid regulations did not imply a limitation that excluded supply shipping from the Tonnage Tax Act.

Nonetheless, the Danish Ministry of Taxation appealed the case to the Supreme Court, again due to a risk of the EU Commission viewing this as illegal state aid. The Ministry requested the Supreme Court to obtain an opinion from the Commission on the interpretation of the 2002 authorisation of the tonnage tax scheme. However, the Supreme Court dismissed the request, and the Ministry therefore requested the opinion directly from the Commission. The Commission opted not to provide such an opinion to the Ministry, as uncertainties regarding the interpretation of EU law need to be inquired to the Court of Justice of the European Union and submitted by the national courts. Nonetheless, the EU Commission informally indicated that it will not open a case on the question whether the application of the tonnage tax regime in income years commenced before 1 January 2017 constitutes illegal state aid.

In the announcement in March, the Danish Ministry of Taxation states that that supply shipping is covered by the Tonnage Tax Act for income years commencing on or after 1 January 2017.

Despite this, the new clarification is very important for the industry for the previous income years. Had the Ministry been successful in their case, ship-to-ship transfer operations would have been out of the scope of the Tonnage Tax Act, enabling two rather significant consequences to arise as described below. Especially in the tanker industry where central actors are Maersk Tankers, Norden, Torm, Hafnia etc., it would have had large consequences, and it would have implicated massive pressure on the competitiveness of sailing under the Danish flag.

Firstly, the consequences of the Tonnage Tax Act not applying would mean that the calculation of the taxable income should be based on the regular principles (net taxation) which in general would imply much larger tax payments.

Secondly, as another unfortunate consequence would be that shipping companies would no longer be able to apply the unique tax regulations for seafarers on vessels i.e. the regime of Danish International Ship Registry taxation (referred to as the “DIS-taxation”) (Da. Dansk Internationalt Skibsregister beskatning) as set forth in section 5 of the Law on Taxation of Seamen (Da. Sømandsbeskatningsloven). These rules only apply on ships that can opt for the Tonnage Tax Act. The tax regime in section 5 implies that the seaman's salary is tax-exempt. Essentially, seafarers receive a net salary equivalent to what they would have received after taxes, resulting in significant cost savings for the shipping company as the costs are merely a net salary expense.

As of today, Denmark boasts the seventh largest maritime industry globally with over 100,000 employees working within the maritime cluster. We are therefore pleased to see that this uncertainty regarding the application of the Tonnage Tax Act has finally ended.