Article by Alberto Genovesi, Chairman and Marco Moschen, Vice Director, Fidinam & Partners SA
On February 24th, 2021 the Swiss federal government launched a consultation procedure in order to evaluate the draft law on tonnage tax.
More than 90% of goods manufactured worldwide is shipped at least once and Switzerland is such an attractive and efficient location for shipping that Swiss based companies manage the 9th merchant fleet in the world and the 4th in Europe, with more than 900 vessels. In this peculiar ranking, all other better-placed (but not only) countries provide for a tonnage tax or other shipping incentives regimes, while currently in Switzerland, and especially after the last tax reform, profits form shipping activities are taxed ordinarily. This is why the above-mentioned draft law aims to grant a competitive tax environment, compared to other countries, but it could also foster incorporation of shipping newcos and/or relocation in Switzerland of existing ones.
Indeed, at international level, profits from the operation of ships are taxable where the enterprise is tax resident. In other words, this is where the place of its effective management is located. Now, the dynamism of this kind of multinational enterprises is well-known and relocating the place of effective management would not be that difficult. Furthermore, shipping companies in Switzerland can benefit from synergies with excellences in commodity trading, considering the Swiss leadership in this field.
According to a 2020 survey by the University of Lausanne (CREA Institute), countries where a tonnage tax has been implemented had an average raise in tonnage greater than 160%, during the 10 years following the implementation. According to specific estimates regarding the Swiss market, the same survey refers about potential additional CHF 180 million in tax and social security contributions coming from additional 3’200 new direct jobs, compared to an alternative without tonnage tax.
Who is impacted by tonnage tax?
According to the Swiss draft law,any enterprise, regardless of the chosen legal form (i.e., limited companies, individual companies, etc.) operating maritime vessels can benefit from tonnage tax, subject to certain conditions as follows.
What does it affect, exactly?
Tonnage tax would affect profits from operating (and/or selling) a vessel used for: freight, passengers, rescue, setting of pipes and cables, off-shore special purposes, scientific research and profits from related activities on board as well, provided that they do not exceed 50% of the total profit form the vessel.
How does it affect?
According to the Swiss draft law, tonnage tax provides for an alternative method of calculating the taxable net profit. Not the ordinary P&L accounting method, but a forfeit based on the net tonnage of the vessel, multiplied by a decreasing tariff and actual exercise days during the tax period:
Each 100 NT up to 1’000 NT: 1.09 CHF per day
Each additional 100 NT up to 10’000 NT: 0.80 CHF per day
Each additional 100 NT up to 25’000 NT: 0.52 CHF per day
Each additional 100 NT above 25’000 NT: 0.26 CHF per day
The amount calculated thanks to this method is then taxed applying the ordinary federal and cantonal tax rates on enterprise profits.
The taxable base can be further reduced, up to 20%, if the propulsion systems of the vessel meet some ecological standards, that will be duly defined by the ordinance to the law.
No matter how profitable the business is then, tonnage tax remains unchanged. That would be clearly attractive for profitable enterprises and from a business planning perspective as well.
Tonnage tax would apply on a voluntary basis only, upon request by the tax payer (ordinary taxation would apply otherwise).
The application can be “per vessel”, or rather, there is no obligation to apply for the entire fleet. If the tax payer applies only for some vessels and/or it carries out other activities (subject to ordinary taxation), the enterprise must keep analytical accounts.
If the application succeeds, the tonnage tax option would last 10 tax periods and can be renewed. The taxpayer can renounce to the tax option before the end of the above-mentioned 10 periods, but in that case, it cannot apply again, before a 6 years lock-up period.
In order to be eligible for tonnage tax, at least 60% of the fleet tonnage managed by the tax payer must sail under Swiss or European Economic Area (EEA) flag, on the last day of the tax period.
A tonnage tax could be a real game changer in the history of Swiss shipping and commodity trading, therefore for the Swiss economy as a whole. In light of that it is crucial to have a public debate on the topic and not to waste a once in a lifetime opportunity.
Waiting for a favourable development of the consultation procedure, in Switzerland we are ready to assist existing enterprises with the conversion to tonnage tax and to welcome new enterprises choosing our country as first-class location for shipping and commodity trading.