Ship management and other opportunities for Maritime Malta

In June 2009, the European Commission published its communication providing guidance on state aid to ship management companies. This communication presents opportunities for Malta in the ship management sector. Appropriate steps need to be taken to align our legislation with the communication, thus creating the favourable environment that will serve to attract foreign ship managers to operate in the form a Maltese corporate structure.

Malta has, over the last decades, grabbed opportunities and developed its maritime flag for the ship-owning and the ship-operating sectors. In more recent times, Malta has also developed, with great success, the financial services sector. Opportunities in the ship management sector, however, remain unexploited. Cyprus, which like Malta has a services-oriented economy, penetrated this market years ago and is, today, the global leader.

The Maltese legislator has been aware of the possibilities presented by this sector at least since 2000. Legislative amendments passed at that time already envisaged the possibility of utilising Maltese companies for the purpose of ship management activities. The idea at the time was to extend the benefits enjoyed by shipping organisations that owned and operated Maltese ships to companies involved in ship management. Although legislation was passed, it was never brought into force because it was seen, at the time, as falling foul of state aid prohibitions under the EU acquis.

The doubt that may have existed in the past as to whether the extension of benefits, consisting principally in tax relief, to ship management companies ran afoul of EU state aid rules has now been addressed in the communication. This document is a follow-up to the Commission's Guidelines on State Aid to Maritime Transport that was published in January 2004. The guidelines serve as an aid to member states of the EU in drawing up their legislation, whereas the communication provides further guidance on the question of state aid afforded specifically to ship management companies.

In a nutshell, for ship management companies established in the community, the guidelines and communication make an exception to the EU rule that prohibits "state aid". Tax relief is a form of state aid and is, otherwise, strictly prohibited in a context of a free market. This exception afforded to ship management companies mirrors the exemption granted to community-based shipping companies which are being described in the guidelines as "the natural recipients of tax incentive schemes".

Given Malta's maritime tradition, it is now the opportune time to deploy the exemptions allowed in the guidelines and the communication to Maltese ship management companies - and we should do this without further ado. Unlike Cyprus, during its negotiations for accession to the EU Malta did not press for any concessions for ship management because the industry, in Malta, had not yet been developed.

Admittedly, following membership of the EU, Malta managed to retain and even went on to strengthen its international status as one of the top maritime flags, not only in terms of size but perhaps, more importantly, in terms of quality and profile. But here again, Maltese legislation, as it currently stands, does not exploit the full extent the opportunities presented in the guidelines. This because the tax relief benefits that are envisaged in the guidelines have been applied legislatively only to companies that own Maltese ships. These benefits could easily be extended to Maltese companies that own ships that are not flagged in Malta but in other member EU states. In point of fact, there is an obligation under the EU acquis to extend the said benefits on a pan-EU level.

The Maltese legislator has now been enabled to go ahead and implement the legislative changes necessary for Malta to commence its attempts to attract foreign ship managers to start using Maltese corporate structures for the operation of their businesses.

The management companies that have been targeted by the guidelines for an exemption from the state aid rules are those companies that provide services to ship owners, such as technical surveys, crew recruiting and training, crew management and vessel operation. Tax relief will apply to companies that provide either crew management services or technical services or both, provided that certain conditions are fulfilled.

The raison d'être for the position being taken in the communication is that, unlike other maritime-related services, ship management is a standard, core activity of maritime carriers, traditionally provided in-house. Nowadays, ship management is often outsourced to third-party ship management companies. Ship management companies share the same background as ship owners, although segmented according to their specialisation. Ship-owners are the only customers of ship management companies. Against this background, the Commission concluded that it does not make sense to extend benefits to ship management carried out in-house and not to do the same when outsourced.

It is now up to Malta to take the initiative and pass the necessary legislative changes required to absorb the opportunities that have been presented to us.

Dr Scerri-Diacono and Dr Grech Orr work with Ganado and Associates.