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UK Tonnage Tax – New Election Window

1. Background
When UK tonnage tax was first introduced in 2000, shipping groups established in the UK had a 12-month period in which to decide to join or remain outside of the tonnage tax regime. Those choosing to operate ships from the UK for the first time had a 12 month “window”, starting from the first day they met the relevant qualifying conditions, in which to elect into tonnage tax. Those choosing not to elect (or who neglected to do so) were then locked out of tonnage tax.

An election window was opened from 1 July 2005 until 31 December 2006.

Shipping groups operating vessels in the UK have been unable to revisit their decisions to stay out of tonnage tax since 2006, but that is about to change.

2. Tonnage Tax? What is that?
Tonnage tax is a special method of calculating the taxable profits of shipping operations. Instead of paying tax on their operating profits, tonnage tax companies pay tax on a deemed daily profit based on the size of their ships. This produces a predictable, stable and usually fairly low corporate tax charge.

Tonnage tax companies must demonstrate an adequate economic contribution to the UK by way of exercising “strategic and commercial management” of their fleet from the UK and ensure the training of UK-resident cadets.

“The new window is part of a series of measures to boost UK tonnage tax and retain the UK’s system’s competitive edge over similar regimes offered in other jurisdictions.”

3. Why do we need a window?
The new window is part of a series of measures to boost UK tonnage tax and retain the UK’s system’s competitive edge over similar regimes offered in other jurisdictions.

The UK authorities were originally keen that groups should not hop in and out of tonnage tax – electing for tonnage tax in profitable years and opting out when the shipping cycle created losses.

The long gap between election windows means there is little risk of such behaviour now. There are groups who, for many valid reasons, historically chose to stay in the mainstream corporation tax regime but would now enjoy the stability and certainty offered by tonnage tax. It is perhaps coincidental, but the introduction of a global minimum effective tax rate of 15% has also caused a number of the largest shipping groups to re-consider their group structures and tonnage tax offers, for many of those companies, a safe haven from the 15% minimum tax rules.

4. What does it mean?
Groups who decided not to go into tonnage tax, who entered but left, or who never really gave it much thought before, now have between 1 June 2023 and 30 November 2024 to elect to join the regime.

There is no impact for groups already in the regime or for groups establishing a ship-operating presence in the UK for the first time.

5. How do we join?
UK tonnage tax offers a pre-clearance process so groups can enter on a confident and secure basis, safe in the knowledge that HMRC should accept it has sufficient presence in the UK to satisfy the very flexible “strategic and commercial management” test. Prior to that, a discussion on the likely levels of UK activity is usually valuable.
Source: Watson Farley & Williams

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