The New Spanish Tax Lease
The new Spanish tax lease for the construction and acquisition of new vessels implemented by the Spanish Act 16/2012 of 27 December has received a decisive endorsement from the EU Court of Justice which dismissed back in December 2014 the case brought by Netherlands Maritime Technology against the European Commission’s (“EC”) decision on 20 November 2012 to approve the Spanish tax lease scheme. Parties in the shipping industry expect the main consequence of the EU Court of Justice’s decision is likely to be an immediate increase in the number of new building orders for Spanish shipyards. In addition, the long-expected Spanish Shipping Act which came into force on 25 September 2014 might also have a positive impact on the confidence of banks and investors regarding new possibilities/opportunities for the Spanish shipping market.
On the other hand, the issue of recovery of state aids from 2007 to 2011 following the decision of the EC in July 2013 still needs resolving, and apparently is spreading scepticism among banks and investors which were actively involved in the old scheme. Indeed, the ongoing negotiations between the EC and the Spanish government about when, how and what amount (initially estimated by the tax authorities in 126 million euros) of tax benefits will be refunded by investors may create an environment of legal uncertainty which might discourage banks and investors from participating in the new scheme.
The New Scheme
In 2011 the Spanish government conceived a new Spanish tax lease scheme with a similar structure to the STL but which limited the EIG’s (“Economic Interest Group”) accumulation of tax benefits. Despite opposition from some European shipyards, in 2012 the EC confirmed that this new scheme was compliant with EU competition rules.
Generally speaking, the STL is a combination of tax measures which provide an anticipated and accelerated depreciation of the vessel compared to the depreciation permitted by ordinary corporate rules.
The anticipated and accelerated depreciation is based on a privileged regime in the Spanish Corporate Tax legislation, according to which companies can create a form of joint venture for tax purposes, incorporated under Spanish Law (“EIG”) to invest in new vessels to be built by Spanish shipyards. The EIG is organised by a bank which offers shares to interested investors, even where the investors are not involved in shipping activities.
In the STL structure, the EIG is the initial beneficiary of the tax benefits. The accelerated depreciation (3-5 years) artificially increases depreciation costs in the first years of the project and leads to a loss for the EIG. Since the EIG is tax transparent, the losses incurred by it is directly passed to its members, normally large Spanish taxpayers, reducing their tax base and consequently resulting in a tax saving for them.
Although the STL was organised by a bank in order to generate tax benefits for the members of the EIG, it transfers part of these benefits to the shipping companies in the form of a significant discount in the final price of the vessel.
- With certain variations, essentially the process of the STL is as follows:-
A shipbuilding contract is entered into between the shipyard and the shipping company. The yard then contacts a bank in order to organize the STL structure and the EIG.
- The bank then signs a replacement shipbuilding contract with the shipyard through a leasing company which, in turn, leases the vessel and sells her to the EIG.
- Once the construction of the vessel is completed (3- 4 years), the shipping company and the EIG enter into a bareboat charter which coincides with the duration of the leasing.
- The EIG changes into a Spanish limited company. The shipping company agrees to buy the shares of the Spanish limited company.
- The Spanish company and the shipping company enter into a time charter including the Buyers’ option to purchase the vessel up to the end of the scheme.
In practice, the main difference between the old and the new scheme is that, under the new scheme, the EIG would benefit from the accelerated depreciation of the vessel but not from the combined benefits of the Tonnage Tax System (TTS). The Spanish Limited company (formal owner of the vessel) must be owned by a shipowner so the EIG cannot accumulate benefits from the accelerated depreciation and the Spanish TTS resulting from the aggregate tonnage of the fleet operated by the shipping company.
The hope of the industry is that this new tax system will enable shipping companies to acquire vessels from Spanish shipyards at competitive prices competitive. However, most of the parties involved in the market consider that the efforts of the Spanish government will be useless unless and until the government solves the ongoing doubts and legal uncertainty regarding the old scheme.