With its favourable geographical location and 3794-kilometre shoreline, the Republic of Estonia has the potential to be not only a coastal state, but a maritime state. One distinct feature of a maritime state is a fleet under its own flag, including big cargo and passenger ships engaged in international maritime transport.
History of Estonian shipping
The importance of Estonian cargo fleet among the Baltic nations and also within the European and world context in the second half of the 1930s was impressive. Among the Baltic countries, Estonia ranked third, and seventh in the whole world in terms of the total tonnage of the merchant fleet per 1000 inhabitants. Around the Baltic Sea, only Denmark and Sweden outdid Estonia. (Teele Saar, Eesti Laevanduse Aastaraamat, 2016).
Estonian Maritime Shipping, established in 1940, was one of the major organisations dealing with maritime transport in Estonia during the second Soviet occupation, until its privatisation in 1997. After independence was regained in 1991, the government declared Estonian Maritime Shipping the property of the state, and it was decided to establish the state-owned public limited company RAS Eesti Merelaevandus, which managed to keep most of the fleet it had owned during the Soviet era. On 1 July 1993, the company owned 80 vessels, but soon the decision was taken to divide it into separate enterprises Tallinna Sadam (at that moment comprising only Vanasadam harbour), Muuga Sadam and Loksa Laevaremonditehas.
After privatisation of RAS Eesti Merelaevandus in 1997, the fleet continued to be reorganised and the number of vessels reduced. On the one hand, the older vessels were sold to be scrapped and on the other, the newer ships, built in the 1990s, abandoned the Estonian flag. These days, it is estimated that the technical and crew management and operation of approximately 60 cargo ships that have Estonian owners is arranged in Estonia, but instead of the national flag of Estonia the vessels fly some other flag. This means that:
- we currently do not have a fleet to speak of in order to preserve and ensure the continued development of the shore sector, as well as sustain the maritime know-how we possess;
- Estonia can no longer charge registry fees for vessels that have left our registers, which means no more revenue for the state from this source;
- social tax is paid in the country whose flag the vessel flies and Estonia does not gain anything from it;
- Estonian seafarers cannot work under the Estonian flag and enjoy the benefits of Estonian social insurance.
The last big cargo ship with a gross tonnage of above 500 to fly our national flag, the Kalana, left in April 2014 and that date marks the end of an era in Estonian shipping.
What steps has Estonia taken to restore and enhance the competitiveness of our national flag?
- On 1 July, the “shipping package” entered into force, introducing changes to the register of bareboat chartered ships and providing the possibility for shipping companies to opt for special tax treatment.
- On 18 February, the Riigikogu (the Estonian parliament) unanimously adopted a package of amendments to several laws to raise the competitiveness of the Estonian maritime sector, and the Act was promulgated by the President on 20 February 2020.
- 16 December, the European Commission granted an authorisation for state aid to Estonia.
- 13 November, the first reading of the bill took place in the Riigikogu and a deadline was given for motions to amend legislation.
- 21 October, the Government introduced a bill in the Riigikogu to amend legislation for the purpose of creating favourable conditions for the development of the maritime sector.
- 11 October, the Government of the Republic approved the bill that would harmonise the initial draft act amending several acts aimed at enhancing the competitiveness of the Estonian maritime sector with the EU state aid guidelines, in accordance with the feedback received from the Commission on the notification.
- 10 June, Estonia submitted to the European Commission the pre-notification and on 16 August, the notification regarding State aid.
- 25 March, negotiations began between Estonia and the European Commission regarding a positive decision of the European Commission authorising the grant of State aid.
- 21 February, the Act Amending the Law of Ship Flag and Ship Registers Act and Income Tax Act and Other Related Acts was promulgated by President Kaljulaid. The new Act would enter into force after receiving the European Commission’s positive decision approving granting State aid to maritime transport.
- 13 February, the third reading took place at the Riigikogu.
- 12 February, Estonia submitted to the European Commission the pre-notification of State aid.
- 23 January, the second reading at the Riigikogu took place and the third reading was declared to take place on 13 February.
- On 15 January, the Economic Affairs Committee of the Riigikogu decided to send the Draft Act Amending the Law of Ship Flag and Ship Registers Act and Income Tax Act and Other Related Acts to the Riigikogu for the second reading on 23 January and for passing the bill on 13 February.
- 04 December, the Economic Affairs Committee convened to discuss the draft with representatives from the Estonian Maritime Administration (EMA), the Association of Estonian Deck Officers, the Estonian Seamen’s Independent Union, the Estonian Logistics and Transit Association, AS Baltic Maritime Logistics Group, ESC Global Security, the Estonian Shipowners Association, the Ministry of Economic Affairs and Communications (MEAC) and the Ministry of Finance.
- 07 November, the Riigikogu discussed the “shipping package” bill at its regular sitting.
- 05 November, the Economic Affairs Committee had a meeting to discuss the “shipping package” bill.
- 11 October, the Government approved at its meeting the Draft Act Amending the Law of Ship Flag and Ship Registers Act and Income Tax Act and Other Related Acts, aimed at enhancing the competitiveness of the Estonian maritime sector and restoring a merchant fleet flying the Estonian flag.
- 03 October, the MEAC sent the Draft Act Amending the Law of Ship Flag and Ship Registers Act and Income Tax Act and Other Related Acts to the Government of the Republic.
- The draft act to amend legislation in order to enhance the international competitiveness of Estonian shipping was sent to several ministries for coordination in May and in September the EMA submitted the draft to the MEAC.
- 17 July, the Government took decisions which meant that the project to enhance the international competitiveness of the Estonian maritime sector was given the green light to go ahead. The EMA organised five working groups consisting of representatives of the shipping sector and ministries, to deal with the project.
- 25 May, the working group finished its work and sent a report to the MEAC, which was then forwarded to the Government.
- 15 June, a working group was put together by the Minister of Economic Affairs and Infrastructure, in order to analyse the competitiveness of Estonian shipping and suggest alternative solutions aimed at amending the system of taxation of the shipping sector. Proposals had to be drafted to be submitted to the Government of the Republic for amending the taxing of the shipping sector, including considerations regarding the rates of income tax, social tax and unemployment insurance benefits of crew members, and the possibility of introducing a tonnage tax regime.
- The Head of Development of the EMA was appointed the head of the working group, and representatives from the EMA, the MEAC, the Ministry of Finance, the Ministry of Justice, the Ministry of Social Affairs and the Ministry of Rural Affairs became members.
Years before the last big cargo ship abandoned the Estonian flag, the maritime sector warned that this would happen soon if the economic affairs continued in the same way
- January 2012 - as one of the most important missions of the EMA, in addition to ensuring the safety of water traffic, is contributing to the development of the maritime sector in Estonia, the EMA officials prepared the first document that provided a vision that suggested enhancing the international competitiveness of Estonian shipping.
- Then, an analysis was carried out by the EMA, which was presented to the MEAC in 2013, leading to the formation of an interministerial working group, headed by the MEAC. The group included as members representatives from the EMA, the Ministry of the Interior, the Ministry of Social Affairs, the Ministry of Finance, the Ministry of Agriculture, the Ministry of Justice, the Estonian Shipowners Association, the Estonian Maritime Chamber, the Maritime Affairs Support Group of the Riigikogu, Malsco Law Office, Enterprise Estonia (EAS) and the Estonian Development Fund, etc.
The objective of the working group was to analyse the current situation of the Estonian shipping and maritime sector and prepare an action plan to improve the situation.
As the first step, the working group identified the main reasons why all vessels engaged in international maritime transport left the Estonian flag:
- the difficult process of hiring foreign seafarers to work on Estonian-flagged vessels;
- the ineffectiveness of the Estonian ship registers;
- high labour taxes regarding crew members, in comparison with other European countries and the rest of the world.
The working group presented its first findings on 15 September 2014.
The changes accompanying the enforcement of the “shipping package” for shipping companies and crew members
- The objective of the package of legislative amendments is to encourage big cargo and passenger ships engaged in international maritime transport to opt for the Estonian flag. This would mean registering the vessel in Estonian ship registers, accompanied by the right to fly the national flag of Estonia, which would extend Estonian jurisdiction over the vessel.
- On the basis of the package of amendments, the process of registration of vessels in the register of bareboat chartered ships is simplified, and special tax treatment is established for corporate income tax with regard to eligible vessels (the tonnage tax scheme) and employment taxes for crew members.
- Special tax treatment can be applied to cargo ships of at least 500 GT engaged in international maritime transport and also passenger ships of at least 500 GT operating outside the European Economic Area, as well as tugboats and dredgers, under certain conditions. Due to the restrictions imposed by the EU rules, the “shipping package” does not include fishing vessels. In Estonia, there were no tax incentives established for fishing vessels prior to the accession to the European Union, either.
- In order to be eligible for the tax incentives, a vessel must, as a rule, fly the flag of Estonia or another EEA Contracting State (a partial exception in case of the tonnage tax scheme – in order to apply the tonnage tax scheme, at least 60% of the ships of a company and the undertakings belonging to the same group must be registered under the flag of an EEA Contracting State, i.e. this requirement does not apply to the rest of the fleet), the tax obligation must arise in Estonia, the vessel must be engaged in the activities defined in legislation as activities related to international maritime transport, and other prerequisites prescribed by law need to be fulfilled (see below).
- Only ships complying with international and national requirements will be entered in the Estonian register.
- The registration of ships engaged in international maritime transport in the Estonian register will not increase the number of ships operating in Estonian waters and in the Baltic Sea, because the legislative amendments do not affect carriage of goods through these areas.
- The amendments are a necessary part of a package of measures aimed at promoting Estonia as a maritime state and, through increasing maritime know-how, enhancing the development of the shore sector in Estonia, thus creating more jobs. These measures will boost the economic development in Estonia.
- Shipping and maritime affairs are by nature a global area of business. Competitiveness in the international business environment is created through efficient e-government services and information systems which enable shipping companies to save costs.
The main aspects of the “shipping package” for shipping companies
The special tax regime
- Only the following vessels are eligible:
- merchant vessels of at least 500 GT engaged in international maritime transport;
- passenger ships of at least 500 GT engaged in international maritime transport outside the EEA sea areas to the extent of at least 50%;
- towage and dredging vessels (additional requirement) if at least 50% of the work time of the dredger or tugboat during a calendar month comprises maritime transport.
- The special tax regime will be applied in regard to corporate income tax and employment taxes with regard to vessels opting for the special tax regime and to the international maritime transport activities performed by eligible vessels. As far as other activities are concerned, the ordinary tax regime will be applied.
- Maritime transport of cargo and passengers will be deemed international in terms of the special tax regime if more than 50% of the voyages take place:
- between an Estonian port and a foreign port;
- between an Estonian port and a facility located outside the territorial sea of Estonia;
- between the ports in a foreign country or in foreign countries;
- between a foreign port and a facility located off the shore.
- In case of seafarers working on eligible vessels:
- the income tax rate applied to all crew members is 0%;
- the social tax rate is reduced from 33% to 20% (the employer will only pay the pension insurance part, not the health insurance part) and this is paid on a 750-euro tax base, not on the actual earnings;
- unemployment insurance premiums and funded pension contributions are also paid on a tax base of 750 euros. Resident seafarers from third countries are exempted from unemployment insurance premiums.
- Shipping companies have an alternative to opt for taxation of the income earned with eligible vessels on the basis of the tonnage tax scheme instead of the regular tax regime. The special tonnage tax regime only applies to income earned by transport of goods and passengers and the activities directly related to it.
- When applying the tonnage scheme, the company’s tax liability is calculated on the basis of the net tonnage of the vessel used by the company, and the actual income earned by the company will not be taken into account.
- The tonnage tax scheme can be applied by companies engaged in the international carriage of goods or passengers by sea, including, under certain additional conditions, companies providing crew management and technical management services.
The registers of bareboat chartered ships
- In addition to the existing register of bareboat chartered ships, a second register of bareboat chartered ships has been established at the EMA.
- A shipping company can choose in which register its ships will be entered, but in case of the first register there is the additional requirement of having a shore-based ship management company in Estonia.
- If the shore-based ship management company is located in Estonia, a vessel can be entered in the first register of bareboat chartered ships and, as a result, a smaller amount of state fees will be paid.
- For the second register, a lump-sum registry fee must be paid, which will cover all main services of the Flag state.
- Pre-inspection for registering ships in the Estonian registers will be improved – additional grounds will be created for refusing to enter a ship in and deleting it from the register.
The main aspects of the “shipping package” for crew members
Although the legislative package is aimed at developing the shore sector and shipping companies and boosting Estonian economy, it also improves the situation of Estonian seafarers in general.
Regardless of whether or not the seafarer works on a ship subject to the special tax regime, all seafarers resident in Estonia now have the opportunity to enter into a state health insurance contract with the Estonian Health Insurance Fund (EHIF), under which they will receive the same health care services through the EHIF as those who have public health insurance through the employer. In order to conclude a contract with the EHIF, a seafarer must have worked as a crew member during the previous twelve months. Other conditions and fees for concluding a contract shall be published on the websites of corresponding agencies.
The 0% income tax rate on wages can also be used by seafarers working on ships that fly the flags of the EEA countries (see above) and meet the requirements of the special tax regime, who have an obligation to pay income tax in Estonia and whose employers have not withheld income tax from their wages.
Despite the fact that the income tax rate is 0%, according to the applicable law, all seafarers who are Estonian residents are required to declare in full in Estonia their income and other proceeds earned abroad.
The legislative amendments that established the special tax regime in Estonia entered into force on 1 July 2020. More specific information can be found on the websites of relevant governmental agencies.
The overall objective of the “shipping package” is to make Estonia as a maritime state attractive to shipowners and encourage big merchant and passenger ships engaged in international maritime transport to opt for flying the Estonian national flag.