407 Restriction on use of losses and capital allowances for qualifying shipping trade

Summary

This section prevents the set-off of losses or capital allowances arising in respect of a shipping trade against non-shipping income, and as respects leasing, ensures that where a ship is leased for use in a shipping trade the capital allowances in respect of that ship can only be set against the income arising under that lease, but not against other leasing income. Subject to certification by the Minister of the Marine and Natural Resources, capital allowances and losses may be offset against all leasing income in certain circumstances.

Details

Definitions

(1) & (2) “lessee” includes the successors in title of a lessee of a ship.

“qualifying ship” is a seagoing vessel which —

• has majority Irish ownership or is leased from a foreign lessor without crew,
• complies with all the requirements of the Merchant Shipping Acts, including Irish standards as to ship safety and the manning of such ships with seafarers having Irish Certificates of Competency or Certificates recognised as equivalent by the Irish Authorities, and
• is of adequate size to engage in reasonable commercial operations with a modern means of propulsion.

However, whether or not the above criteria are satisfied, fishing trawlers (other than a factory ship which would otherwise be treated as a fishing vessel), tugs (other than certain ocean-going tugs), dredgers, floating rigs, working platforms of any kind, and vessels used for servicing offshore installations such as oil-rigs, platforms, factory ships and the like, are not treated as qualifying ships. Also excluded is any other vessel, not specified above, which is of a type not normally used for “qualifying shipping activities”.

“qualifying shipping activities” are trading activities carried on by a company which come under 6 headings related to the use of a qualifying ship. These are —

• the basic activity of a shipping company – the carriage of passengers or cargo for reward (that is, on a commercial basis) by sea;
• the provision by the company using the qualifying ship for the purposes just described of on-board services such as the operation of cinemas, bars or restaurants ancillary to the carriage of passengers and cargo;
• the contracting-out to specialist operators, by the company operating the qualifying ship, of the on-board services just described;
• the subjecting of fish to a manufacturing process on board a qualifying ship. If a process is considered to be a manufacturing process when carried on onshore it is also to be treated as a manufacturing process when it is carried on in a factory ship. Processes treated as manufacture would typically involve 2 or more of the following processes – filleting, mincing, cooking, smoking, quick freezing and packaging (each claim should be examined by reference to the details of the process involved);
• the “wet leasing” of a qualifying ship for use for the purpose of the carriage of passengers or cargo for reward or the subjecting of fish to a manufacturing process aboard a qualifying ship. Under a “wet lease” or “non-demise” charter the lessor provides the ship, crew, fuel, provisions, etc and is responsible for the direction and control of the ship and the crew throughout the period of the charter. This is in contrast to a “dry lease” or “bare-boat” charter under which the lessor provides the ship only and the lessee is responsible for the provision of the crew and the direction and control of the vessel and crew.
• the transporting of supplies or personnel to, or providing services in respect of, a mobile or fixed rig, platform, vessel or installation of any kind at sea.

“qualifying shipping trade” is, in effect, a trade, carried on by a company in “the relevant period”, which consists exclusively of qualifying shipping activities. Where, however, a company carries on a mixed trade, the qualifying shipping activities are treated as a separate trade under subsection (3).

“relevant certificate” is a certificate issued by the Minister for the Marine and Natural Resources with the consent of the Minister for Finance. It relates to the lease of a ship and certifies on the basis of a business plan and information supplied by the lessee that the ship being leased will result in an upgrading and enhancement of the lessee’s fleet. It must also state that the ship has the potential to create additional employment or to assist in maintaining employment and that it meets current environmental and safety standards. Before issuing a certificate the Minister for the Marine and Natural Resources must be satisfied that the lease of the ship is for bona fide commercial purposes and not for the purposes of tax avoidance.

“the relevant period” is the period from 1 January, 1987 to 31 December, 2010.

“specified capital allowances” are, effectively, wear and tear allowances under section 284 in respect of a qualifying ship in use for a qualifying shipping trade. Capital allowances in respect of a qualifying ship are “specified capital allowances”, liable to the restrictions imposed under subsection (4), even if they cannot be used in computing the income of a qualifying trade.

Separate trades

(3)(a) Where a company carries on in the course of its trade qualifying shipping activities and other activities, the qualifying shipping activities are to be treated as a separate trade for all taxation purposes and receipts and expenses are to be apportioned as necessary in order to ascertain the income of the separate trade. The creation of the separate trade, which is an artificial device necessary to isolate the income and expenses of the trade, is not, however, to bring into play the provisions for the computation of profits where a trade commences or ceases.

(3)(b) Provision is made, however, to protect the existing right of such a company under section 396(1) —

• to carry forward losses incurred effectively in its overall trade, before the creation of the separate trade, against income arising in the separate trade, and
• when the span of relevant period ends on 31 December, 2010, and effectively the separate shipping trade ceases to exist, to carry forward losses incurred before that date against the income of its normal trading activities.

Ring-fence

(4) In general, the set-off of losses incurred in a qualifying shipping trade or specified capital allowances relating to a qualifying ship is restricted to relief against income from a qualifying shipping trade.

(4)(a) Specifically, the specified capital allowances can be set off only against income of a qualifying shipping trade, either of the company incurring the expenditure relating to the specified capital allowances or of a fellow group member by way of group relief. In the case of specified capital allowances relating to a ship which is provided for use in a qualifying shipping trade by a lessor under a “bare-boat” charter or “dry lease” (that is, where the ship only is leased and the lessee provides the crew and is responsible for the direction and control of the ship and the crew), the lessor is entitled to set the specified capital allowances against leasing income which, because the ship is not chartered on a “wet lease” basis (that is, the letting is not a qualifying shipping activity), would be chargeable on the leasing company at the standard or reduced rate of corporation tax.

(4)(b) In the case of trading losses arising in a shipping trade the operation of section 396(2) is restricted by confining the relief under that section to the amount of shipping income included in those profits. A similar restriction is applied to group relief under section 420(1). Losses of a member of a group from a shipping trade liable can be availed of by way of group relief only to the extent that a fellow member of the group has shipping income against which to offset those losses.

(4)I Where the set-off of specified capital allowances relating to a “dry-leased” qualifying ship against the resultant leasing income is permitted, the provisions of section 403(1)I are overruled so that the chartering of the ship is to be regarded as a trade of leasing for the purposes of that section and, accordingly, section 403 (which relates to the “ring-fencing” of capital allowances in respect of leased assets) applies to the specified capital allowances relating to a leased ship. In addition, a further ring-fence is imposed on the use of specified capital allowances by invoking section 403(2) so as to deem the trade of leasing of a qualifying ship for use in a shipping trade to be a separate trade of leasing.

Relaxation of ring-fence where relevant certificate produced

(5) In the case of a ship on “dry-lease” engaged in qualifying shipping activities, the provisions which confine the offset of losses and capital allowances in respect of the leased ship to the leasing income from the ship are not to apply where the terms of the lease comply with clauses (I) and (II) of section 404(1)(b)(i) and where the lessee produces a relevant certificate to Revenue. This applies where a contract to acquire or construct a ship is concluded on or after 1 July, 1996.

Tax based leasing

(6) A qualifying shipping trade is not entitled to avail of tax-based leasing. Although this facility is normally available to companies entitled to the 10 per cent rate of corporation tax, it is denied to shipping companies on the grounds of Exchequer cost.

Relevant Date: Finance Act 2019