Following the recent dissolution of the French National Assembly, the country is preparing for early legislative elections. The political climate is tense for shipping companies with the two leading political parties in the polls considering abolishing the French tonnage tax regime.
By way of reminder, the French tonnage tax regime offers a favourable tax framework for shipping companies, meeting certain conditions. Instead of being taxed on their actual profits, companies elect to be taxed based on the net tonnage of their fleet. In other words, instead of paying a percentage of the rentals for their vessel, shipowners pay a fixed fee calculated on the volume of cargo a given vessel can transport. By analogy, a cab driver would not pay income tax on the fares they earn, but instead, let’s say one euro per day, per passenger seat in their cab.
According to the French Court of Auditors, the loss of tax revenues has been estimated at 9.4 billion euros for the period 2022-2023. Opposition parties believe that abolishing the French tonnage tax regime could significantly increase public revenues, but is it as simple as that? Would abolishing this tax regime result in France’s tax revenue going up by nearly 10 billion in two years?
Immediate consideration is whether such taxable income is “captive”. Would the flow of earnings being taxed in France through the tonnage tax mechanism today still be there tomorrow to be taxed at the general corporate tax rate? The answer is likely not. Most shipowners in the world have the freedom to choose the jurisdiction where their earnings will be taxed by choosing the vessel flag. Generally, earnings for a given vessel are taxed in the jurisdiction of that flag.
So, if your shipowner has a chance to avoid taxation in their home jurisdiction, what are their alternatives? Most European countries have a tonnage tax regime approved by the European Commission. It is reasonable to believe that shipowners currently under French tonnage tax regime would consider changing flag to another European flag avoiding French corporate taxation, whilst still retaining the benefit of their French tax leases. Other jurisdictions, sometimes referred to as “flags of convenience”, have even lower to non-existent taxation of earnings.
Then, for the shipowners staying in France, the final question would be how viable their business would be with a 25% taxation rate in the long run? Bear in mind that recent years of considerable profits in the shipping industry cannot always be guaranteed and long-term trends suggest a high degree of volatility. It is questionable how a French shipowner taxed at 25% would compete and not lose market share (with a corresponding reduction in taxable income) in a global industry that is generally lightly taxed.
For these reasons, the predicted fiscal gains may not materialize due to the potential exodus of shipping businesses. The consequences of this could include a loss of associated economic activity.
It is beyond dispute that the French tonnage tax regime is very favourable to shipowners, but this is essentially consistent with the global industry. On the other hand, French tonnage tax does have multiple direct and indirect benefits to France’s economy:
Jobs: allowing operators to enjoy in France comparable taxation to that in other jurisdictions allows them to flourish and employ a large number of people. Companies in Marseilles, without naming names, employ thousands of people. And these are just the direct jobs, and do not include the brokers, technical advisers, lawyers, financers and other service suppliers.
Jobs (again): the benefit of French tonnage tax is subject to the shipowner technically and commercially managing the vessel in France. Recently this led to the establishment of new companies or branches of key European shipowners setting up in France, notably in the LNG sector.
Jobs (and again ): French tonnage tax does not require the French flag, but it has synergies with it. The French flag means jobs aboard the vessels for French crew members. The number of ships flying the French flag has risen significantly, from 313 in 2017 to 421 in 2023. This growth is largely due to the tonnage tax regime, which encourages shipping companies to register under the French flag, strengthening national influence and maritime presence.
To summarise, while the tax advantages of abolishing the French tonnage tax may seem attractive, the economic implications are far-reaching, and the strategic disadvantages of abolishing the tonnage tax call for restraint. The regime not only supports the maritime industry, it also aligns with France’s strategic interests as a leading maritime nation.
Source: Reed Smith
