697E Requirement that not more than 75 per cent of fleet tonnage is chartered in

Summary

This section imposes a limit on the net tonnage of qualifying ships which can be chartered in and operated by a tonnage tax company. For this purpose “chartered in” means chartered on terms other than “bareboat charter terms”. The limit only applies where the company charters in ships without having the right to provide for such things as the master and crew, the direction of the ship and bunkering and provisioning, etc. The limit does not apply where the company charters in ships on the basis of bareboat charters or where the company provides ship management services. In the case of a group, the limit only applies to the aggregate net tonnage of qualifying ships chartered in.

NOTE: Removal of the 75% limit is under consideration in line with the liberalisation of EU State Aid rules. Provisions have been made allowing for the deletion of section 697E and certain consequential amendments. However this is subject to a Commencement Order which has not been made to date. Accordingly section 697E remains in place pending the making of this Order.

Details

The rule

(1) It is a requirement of entering and remaining within tonnage tax that a company must not have chartered in more than 75 per cent of the net tonnage of the qualifying ships operated by it. In the case of a group, the limit is 75 per cent of the aggregate net tonnage of all the qualifying ships operated by group members which are qualifying companies.

Counting of ships in group context

(2) A chartered in ship is not to be counted more than once in a group context. This ensures that chartered in ships which are re-chartered within the group are not double counted.

Limit breached where election made in initial period

(3) If the 75 per cent limit is breached in respect of the first accounting period the company is within tonnage tax, the election will be treated as never having had effect. This only applies where the election is made within the initial period (i.e. the period of 36 months beginning after the commencement date – paragraph 2 of Part 1 of Schedule 18B refers). The consequence of this is that normal corporation tax computational rules would continue to apply for all periods after the election. This provision does not apply to a renewals election– see note below.

Limit breached where election made after initial period

(4) Rules are provided for the consequences where the 75 per cent limit is exceeded in the first, second and third accounting period for which an initial election has effect. These rules apply where the election is made after the expiry of the initial period. They do not apply in relation to a renewal election – see note below. Where the 75% limit is exceeded in each of the first 3 accounting periods the election will be treated as never having had effect and the normal corporation tax computation rules continue to apply. Where the 75% limit is exceeded only in the first accounting period or only in the first and second accounting periods, the election does not have effect for the one and/or two “exceeded” accounting periods. Effectively entry to tonnage tax is deferred until the first period that the limit is satisfied.

Definitions

(5) A meaning for the first, second and third relevant accounting periods is provided for the purposes of the application of the two rules set out above.

(6) Also provided for is a means for determining when the 75 per cent limit is exceeded.

Limit breached in other circumstances

(7) A company is excluded from tonnage tax where the 75 per cent limit is breached in any two or more consecutive accounting periods. The power to exclude is a permissive one. If there are mitigating circumstances (e.g. the loss at sea of a vessel and its temporary replacement by a chartered in vessel) the company need not be excluded. Conversely, if there is evidence of an attempt to engineer an early exit from tonnage tax, then Revenue may decide not to exercise the power of exclusion.

Relevant Date: Finance Act 2019