A Brief History of Shipping in Cyprus (II)

In his second instalment of his ‘Brief History of Shipping in Cyprus’, Dr Nektarios Michael charts the incredible progress of Shipping in Cyprus

(continued from previous issue of the CIM Business Bulletin)
 By the late 1970s and early 1980s, the world shipping industry initiated a large-scale vessel renewal as the existing WWII carriers became obsolete. Following this massive renewal of the world fleet, a large increase in the number of existing vessels (also supported by various government policies both in Europe and the Far East, aiming at keeping the shipyards afloat) sunk cargo prices. With profit margins narrowing, ship owners sought alternative ways to remain profitable. Perhaps the most important of these ways was to transfer the management of a ship to a company located in another country…

In particular, German ship-owning firms, which sought ways to relieve themselves from the high taxation and the strict employment quotas in their home country, found that their vessels could be considered as residents of another country if they paid a one-off fee to the ship manager. Cyprus, with a tax rate of 4.25% along with long experience in shipping, provided an attractive alternative. Hence, local and foreign firms (mostly ship-owners) began to set up ship management firms in the island, making Cyprus one of the foremost pioneers in the ship management industry.

By the time ship management companies were fully operational in Cyprus, the country lacked well-trained professionals. Excluding lawyers and accountants, the island did not have any domestic workforce suited for working in the ship management industry in the mid-1980s. This continued until the 1990s, when ship management firms started expanding in ship-owning, responding to the increased demand for international sea transport which was driven by large political changes such as the opening of Asia and the fall of the Soviet Union, aided by the containerization momentum. By that time, private universities proceeded with the design of courses which offered an opportunity for the, up to the time, uneducated workforce to gain a deeper understanding of the shipping industry. Courses in shipping became increasingly popular since then, with an estimated 50% of the workforce having attended them.

Another milestone in the history of shipping in Cyprus was set in 2004 when the island joined the European Union. Following preparations and negotiations with the EU authorities from 1996 until 2002, when the chapter for sea transport was considered to be finalised, Cyprus became the only officially approved country within the EU which maintained an open registry. Given the wide variety of ship types which are allowed to be registered in Cyprus and the unlimited EU access it offers, shipping activities further increased in the island. As a result, the Cypriot economy benefited from these developments also because vessels could be registered only if the ship owner maintains an office in the country.

In March 2010, the attractiveness of Cyprus as a destination for shipping and ship management firms increased even further with the passage of the tonnage tax law. In contrast to the usual corporate tax, which stood at 10% at the time (currently 12.5%) of the profits of a firm, the tonnage tax is simply a fixed percentage on the total carrying capacity of a vessel. For example, a vessel which can carry 10,000 tonnes pays a larger amount of tax compared to an equivalent vessel with a capacity of 8,000 tonnes. This approach to taxation has quite a few important benefits both for the firms and the state, the most important of which is certainty in expenses.

In particular, corporate tax is levied on the profits made by a firm (shipping or not); if a company faces losses then it will pay no tax and the state will receive zero income. However, if the tax is levied on the ship’s carrying capacity then the exact same amount of taxation will be paid each year for the remaining life of the vessel. As a result, the levy increases the ability of firms to calculate the feasibility of an investment while it also creates a fixed cash flow to the state, regardless of whether the economy is in a recovery or a boom. Furthermore, this taxation scheme is also available for a wide range of vessels making it more attractive for a variety of shipping companies. An additional important benefit is that companies in the shipping industry can make use of the tonnage tax, even if they are not the ship owners, as long as they are managing it.

Resulting from the above, by 2010 Cyprus boasted a fully attractive package of incentives: an open registry, unlimited EU access, a competitive tax regime and an educated workforce. The country’s image abroad was also rapidly enhancing, an outcome based inter alia on the efforts of the Cyprus Shipping Chamber. Through time, ships registered under the Cypriot flag moved from black lists on various port state control systems to white lists throughout the world, while at the moment the Cyprus flag is considered to be one of the top in the world.

All of these reasons have been paramount to the fact that the shipping industry in Cyprus is still growing, despite the low freight rates in the 2010s, which were caused by a surge in supply due to increased shipbuilding. In fact, the importance of the maritime industry is becoming more and more understood in the island with the Parliament having unanimously passed a bill for the creation of a Deputy Ministry of Shipping in March 2018.

As to the future, shipping will boast of more opportunities following the end of the shipping replacement phase, the second wave after the replacement of the Liberty ships in the 1970s-80s. With the maritime industry expected to expand in the coming years, demand for professionals with a shipping orientation is expected to rise. To this end, there exists great potential for growth in education, both for seafarers and shore personnel, especially because not many educational centres exist in the Eastern Mediterranean region. Cyprus’s ability to provide a combination of theory, through university education, and practice, through hands-on work in shipping firms, offers a huge competitive advantage in the area of education, one which should be exploited as promptly as possible.

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