The development of the Shipping Finance sector – Cyprus’ opportunities

The current status of the Shipping Finance Sector

The Shipping Industry has faced enormous changes and challenges over the last years as a result of many factors, such as the consequences of Covid-19 crisis and the subsequent impact on the market demands, the regulatory changes and the shift to the ESG, the substantial increase over the freight rates and the inevitable increase in the cost of new-builds ships.

Inevitably, these radical developments have affected the area of the ship financing as a core sector of the industry. As a result, the area is currently facing the high capital requirements for the shipbuilding or the retrofitting of the ships, the increase in the interest rates of the banking institutions, the market volatility which is further affected by the geopolitical tensions and the subsequent worldwide unsteadiness.

Key Trends and the role of traditional financing

In order to overcome the challenges that have arisen in this ever-changing environment, the Shipping Companies have explored alternative financing options, such as private equity or through the investment of their cash flow, so as to address the rapid increase in the interest rates along with the demands for transforming into a “green area” in order to satisfy the environmental requirements.

The profitability of the Shipping Companies has also increased the investments in the digitalization and technology, a development that has a positive impact on the investors’ and financiers’ interest.

Despite the alternative routes of financing, the anticipated decrease in the interest rates is expected to initiate the return of the Shipping Companies towards the traditional sources of financing, rendering the bank institutions the most common route to financing and simultaneously enhancing the access of the Companies to a lower cost of lending.

However, what derives as a lesson learned from the recent experience, is that the Shipping Industry must maintain multiple sources of financing and rely on a stable structure and sustainable solutions, in order to be in a position to overcome any market disruption and thus safeguard both the owner’s and the lender’s interests.

Cyprus’ case – the opportunities ahead

Cyprus, as one of the leading maritime centres, has developed rapidly in the area of ship financing, safeguarding at the same time a prominent role in the formulation of global shipping policies.

This is attributed to several reasons, which include, inter alia:

1. The location and history of Cyprus as a Shipping Hub
2. The well-developed legal framework and the protection provided to the lenders
3. The attractive maritime and corporate tax regimes
4. The establishment of a dedicated Shipping Deputy Ministry
5. The high quality of professional services in maritime industry

1. 1.Cyprus as a Shipping Hub

Cyprus is a modern, efficient and integrated shipping cluster, with a prominent worldwide position, encompassing a full range of shipping and shipping-related services. As a shipping centre, it combines an international registry, recognised for its prestige and quality, as well as a wide range of shipping and related services, including management, fuelling, technology and shipping agents.

Cyprus currently ranks as the 11th largest merchant fleet worldwide and the 3rd largest fleet in the European Union. As a third-party ship management centre, it is the largest in Europe and amongst the top three worldwide. More than 20% of the world’s third-party management fleet is managed by companies based in Cyprus.

2. The legal framework

Cyprus position in the Shipping Industry is grounded on its well-developed legal framework which provides clarity and certainty to the shipowners, borrowers, bankers and lawyers to operate in a regulated environment. Cyprus’ familiar legal environment is attributed to a large extent to its close connection with the English law.

As it derives from the below brief description of the relevant procedures, Cyprus has formulated a structured framework for ship financing in order to provide the necessary safety nets in this demanding and constantly transforming market of the shipping industry.

The pledge of shares of a Cyprus Company and the mortgage over a vessel are (along with the charge of the bank account), the main security financing tools with which the financing of a shipping company and/or a vessel can be secured in accordance with Cyprus legislation:

A. Pledge of Shares of a Cyprus Company owning the ship

The pledging of shares of a Cyprus Company is a widely used tool as it offers commercial security in Cyprus. It is also used as a security in the shipping finance area in cases where the ship is owned by a legal entity which is incorporated in Cyprus. The pledging of shares is created by the execution of a share pledge agreement, which specifies the terms of the pledge and provides that upon execution specific documentation must be simultaneously provided to the pledgee i.e. the specific security mechanisms that will facilitate the effective out of court enforcement of the pledge.

The documentation shall enable the pledgee to enforce the pledge in the event of default without the need for engaging in time-consuming court procedures. Therefore, the documentation provided to the pledgee by the pledgor, enables the pledgee to transfer the shares in his name, if the obligations specified in the share pledge agreement fail to be discharged. Pledged shares should be fully paid up and no other charges should be registered against them.

A pledge is a form of real security providing to the pledgee proprietary rights over the shares belonging to the pledgor. The possession of the pledged property may be actual or it may, more commonly, be constructive. Actual possession of the property brings concerns regarding risk and the duty of care. Therefore, constructive possession is a more commonly used practice.

B. Ship Mortgages

The most common way of security in ship financing are ship mortgages. The relevant Cyprus legislative framework (the Merchant Shipping Law) allows a vessel or a share over a vessel to be registered as security for the creation and/or securitization of a loan. More explicitly, a security over a ship, will be used by a Ship owner as a tool for obtaining the relevant financing for purchase and/or build of a vessel while at the same time a lender will acquire an interest in the mortgaged vessel.

A mortgage must always be accompanied by a collateral deed of covenants where the commercial/ contractual terms of the agreement between the mortgagor and mortgagee are included, which, to a large extent, reflect the agreed provisions between the lender and the borrower, as they have been incorporated in the underlying document (the facility agreement).

The mortgage and the deed of covenants are registrable with the Registrar of Cyprus Ships and where the shipowner is a legal entity registered in Cyprus, is also registrable with the Registrar of Companies.

C. Registration of foreign law security documents

The sections 90 and 99 of the Cyprus Companies law provide that all the security documents, including the foreign law security documents, are registrable with the Registrar of Companies and the internal registers of a Cyprus’ Company.

3.The attractive corporate and maritime tax regimes

Cyprus business environment is grounded on an open, service-based economy supported by a stable and business-friendly tax and legal system.

Undoubtedly its advantageous position for shipping activities benefits from the favorable tonnage tax system and the tax benefits.

A. Corporate Tax Rate:

The corporate tax rate in Cyprus is 12.5% and is one of the lowest in the European Union.

B. Cyprus Tonnage Tax System (TTS):

The TTS is a well-developed and attractive Shipping Tonnage Taxation System which was renewed in 2019, following the approval of the European Commission and has been extended until 2029, rendering Cyprus an “EU approved Open Registry”. It provides long term fiscal stability for Cyprus Shipping.

Qualifying owners of Cyprus and foreign ships, charterers and ship managers who opted and are accepted to be taxed under the TTS are subject to an annual tax, which is calculated on the basis of the net tonnage of the qualifying ships they own. The owners of Cyprus ships fall automatically within the scope of the TTS.

The implementation of the TTS and the approval of Cyprus as an “EU approved Open Registry” has been a popular development for the shipping community. Its positive impact is demonstrated by the increased number of shipping companies registered under this regime (282 – 63% increase) since 2018.

The EU approved “Open Registry” with legally endorsed Tonnage Tax System available to shipowners, ship managers and charterers provides full exemption from corporate taxation of:

– Profits from exploitation of a qualifying ship in a qualifying shipping activity;

– Profits from the disposal of a qualifying ship.

– Profits from rendering crewing and/or technical ship management services to a qualifying ship.

– Full tax exemption of dividends paid out of profits falling within the TT regime.

– Full tax exemption of crew salaries or other benefits of a qualifying shipping activity.

It is noted that Cyprus continues to develop new and progressive programs to support the maritime sector.

Exemption for payment of Stamp Duty: Pursuant to the provisions of 4.3(e), First Schedule of the Stamp Duty Act of 1965, the ship mortgaged documents are exempted from any stamp duty obligation. This parameter is of course an additional incentive for the parties interested in acquiring and registering a vessel under the Cyprus flag.

C. Double Tax Treaties: Cyprus has a wide network of double tax treaties, which can help reduce withholding taxes on dividends, interest, and royalties paid to foreign entities and enhancing at the same time its appeal as a business hub by providing favourable tax treatment.

D. Merchant Shipping Bilateral Agreements: Cyprus has signed 25 Merchant Shipping Bilateral Agreements, demonstrating the status of Cyprus’ Flag in the global Shipping Industry.

Cyprus’ attractive tax system contributed to the stability and further improvement of the competitiveness of Cyprus shipping industry, as it constitutes a significant incentive for the companies that choose Cyprus as the their corporate and business centre.

It also increases the profitability while providing to the company the benefit to fulfil its legal obligations towards its financiers / lenders or any equity investor who is interested in the timely repayment of their investment.

4. The establishment of a dedicated Shipping Deputy Ministry

The establishment of a Shipping Deputy Ministry in 2018, demonstrates Cyprus’ commitment to constantly develop, safeguard and further support Cyprus shipping as a safe, socially responsible and sustainable industry. This structural change has contributed to the progress of the sector and has provided the pathway to follow speed up and high-quality customer-oriented processes.

Cyprus maintains physical representation in the main maritime locations such as Piraeus, London, Hamburg, Rotherham, New York and Brussels. Cyprus has a prominent role in the formulation of global shipping policies with a strong presence in maritime fora and international organizations. Cyprus flag is a top-quality sovereign flag which duly adheres to all safety and security standards deriving from the Paris and Tokyo MoUs and is in the “White List” of both MoUs.

5. Quality of professional services in maritime industry

Undoubtedly, the establishment of a country as a commercial and shipping hub, requires the corresponding quality from its workforce, in order to be able to follow the high-standards of services. Cyprus has a high availability of highly educated, multilingual, motivated individuals specialized in a variety of areas including shipping, finance, insurance and law.

The high level of expertise gained through the years in the field of shipping industry, ensures the provision of an advanced and wide spectrum of services, encompassing the full range of shipping and shipping-related issues along with the continuous development of the sector and the substantial protection of the parties involved.

The way forward

As it derives from the aforementioned, Cyprus has developed a comprehensive, well-structured nexus in the shipping industry in general and subsequently in the sector of the shipping finance and it has shown resilience over the years.

However, the challenges the industry faces as a global sector within a competitive and volatile environment, derive from several fields and are always increasing. The continuous upgrading and the strengthening of the level of the services provided is one of the main pillars that will ensure Cyprus’ prominent presence in the sector. The aim should be to expand new global opportunities, emphasizing on investments as these are the driving force for further growth of the sector.

In this respect, Cyprus’ competent authorities have adopted, as part of this evolving process, the “SEA Change 2030”, a long-term strategic vision for Cyprus shipping. The strategy aims to further improve the Cyprus flag’s competitiveness in international shipping, as well as to simplify the procedures and the operating regime of Cypriot shipping companies owning Cyprus-flagged vessels. The Strategy focuses, amongst others, on digital transformation, as this is an area that affects substantially the sector’s operational level and it has a direct effect on investors’ and financiers’ decisions.

A notable action implemented within the context of the Strategy is the formulation of an ad hoc regulatory and administrative framework for the incorporation of Shipping entities. In this respect, a legislation has been introduced, namely the “Shipping Limited Liability Company Law” of 2022 (the “SLLC Law”), which includes a comprehensive set of rules and procedures covering a spectrum from the establishment of an entity to its liquidation. The scope of the new legislation concerns exclusively the shipping companies, in an attempt to increase the clarity of the system, simplify the procedures and thus to reinforce the competitiveness of the Cyprus’ flag. The aim of the law is the establishment of a one-stop-shop for the shipping owners, under the authority of the Shipping Deputy Ministry, distinguishing the shipping companies from the companies that fall under the authority of the Cyprus Registrar of Companies. Undoubtedly, the enactment of this legislation marks another step forward and demonstrates Cyprus’ continuous efforts for the evolvement of the industry.

The successful implementation of concrete initiatives will create the conditions for Cyprus shipping to become more resilient and sustainable, maintaining its role as a leading maritime hub. Within this context, Cyprus has the required tools and the ability to play a decisive role in the transforming market of the Shipping Industry, by offering attractive, secure and convenient solutions to both financiers and shipowners looking to develop or update their fleet.