INTM489822 - Diverted Profits Tax: application of Diverted Profits Tax: examples and particular situations: Shipping and Tonnage Tax

Tonnage Tax

The Tonnage Tax rules substitute a notional corporation tax base geared to ship tonnage for one based on profits (see TTM01010). It follows that the effective tax mismatch outcome test, based on expenses or reduction of income, could not give a mismatch outcome in relation to the taxation of tonnage tax activities within the regime. So to the extent that a UK resident company’s activities are properly within the Tonnage Tax ring fence they would not give rise to a DPT charge on that company under section 80.

However, transactions across the ring fence with connected companies are capable of giving rise to a charge on the connected company.

Agency Offices and section 86

Shipping companies resident in countries with which the UK has a treaty based on the OECD Model Tax Convention (MTC) will benefit from the equivalent of Article 8 (Shipping, inland waterways transport and air transport) which allocates taxing rights on profits from international traffic to the country of residence or place of effective management.

However, it is not unusual for such companies to contract with customers through a connected UK company, usually an agent subsidiary, which will be taxable in the UK on the profits from its activities in providing services to the shipping company. Although such arrangements may have features in common with those targeted by section 86, the intention of the relevant treaty article is to ensure that the shipping company is not treated as trading through a UK PE. No particular arrangements involving any form of contrivance are needed to secure that result. As long as the activities of the agency office are within the relevant article the arrangements would not be considered to be designed so that the shipping company was not carrying on its trade through UK PE. Section 86 would therefore not apply.

Ship management

A UK resident company providing services to a number of ship owners that it is not connected with, acting in the ordinary course of its business, would normally be regarded as an agent of an independent status. It would be expected that the exception from section 86 at section 86(5) would apply in relation to any foreign company that the ship management company is not connected with.