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12 January 2018 Danish Court ruling gives rise to uncertainty in respect of certain requirements under Danish Tonnage Tax Act In an administrative ruling dated 10 December 2015 (SKM2015.797.LSR), five Danish resident shipping companies were considered to carry out the strategic and commercial management in Denmark of ships that were time-chartered to nonresident group companies, and technically managed by nonresident group companies. According to the administrative ruling, the companies were thus subject to the Danish tonnage tax scheme. The Ministry of Taxation appealed this ruling to the Eastern High Court who, on 3 January 2018, ruled in favor of the Danish tax authorities as a consequence of the five shipping companies relinquishing their cases. It is a requirement for application of the Danish tonnage tax scheme, that the relevant ships are strategically and operationally managed from Denmark. The determining factor is whether the majority of the strategic and operational management functions are placed in Denmark for the individual vessels, and that the fleet as a whole is managed from Denmark. The ships in question were owned by five individual Danish resident shipping companies and time-chartered to nonresident group companies. A third nonresident group company carried out the technical management of the ships under a SHIPMAN agreement. The five Danish shipping companies formed part of a large, Danish-based global shipping group. The group had 300 employees in Denmark, and had substantial, centralized functions in the country from which the five shipping companies benefitted, including i.e., appointment, overview and coordination with technical managers. The strategic management of the entire fleet was carried out in Denmark and the chartered-out vessels with operations and technical management outside of Denmark represented an insignificant part of the fleet as a whole. In the administrative ruling dated 10 December 2015, the Danish shipping companies were considered to carry out the strategic and operational management of these ships in Denmark, thus fulfilling this requirement for application of the tonnage tax scheme. The Ministry of Taxation appealed the five joint rulings to the Danish Eastern High Court claiming that the companies did not qualify for the tonnage tax scheme, as the ships were not considered operationally managed from Denmark. The argument presented in the administrative ruling was, that as vessels were time-chartered outside Denmark and as the technical management was outsourced outside Denmark, too big a portion of the daily operations were carried on outside of Denmark. After the Ministry of Taxation appealed the administrative decision to the Danish Eastern High Court, the Danish shipping companies chose relinquish their cases with reference to the costly and burdensome process in connection with retrieving extensive documentation upon a new documentation request by the Ministry of Taxation for the income year in question (2009). Furthermore, the shipping companies determined that they would economically benefit from being taxed according to the ordinary Danish corporate income tax scheme for the income year in question rather than the tonnage tax scheme. As a consequence of the relinquishment, the Danish Eastern High Court ruled in favor of the Danish Ministry of Taxation. The shipping companies noted, however, that they fulfilled all necessary criteria for their fleet to be subject to the tonnage tax scheme for the income year in question and therefore did not agree to the legal position of the Ministry of Taxation. Based on the relinquishment, the Eastern High Court did not examine the question of the strategic and operational management of the ships. Whether or not vessels are deemed to be strategically and operationally managed from Denmark is determined on the basis of the nature and characteristics of the operations of the shipping company. The Eastern High Court ruling adds little interpretive aid regarding this, as the question of operational management was not examined by the court. The ruling could however have implications for shipping companies who time-charter and outsource technical management of ships to nonresident group companies, since there is now a standing High Court ruling that the companies in question did not qualify for the tonnage tax scheme under the facts at hand. Shipping companies who time charter vessels and outsource technical management to nonresident service providers, should therefore carefully consider possible implications of the ruling.
Document ID: 2018-5122 |
