There were no specific EU flag requirements at that time in the UK rules. Now the UK will be forced to introduce flag rules, which will change the conditions under which UK based Tonnage Tax owners operate.

'As the tonnage tax election is for the long term, the UK Government has so far left the rules unchanged, with the exception of certain anti-avoidance legislation.

However, there is now uncertainty with regard to flagging. Moreover, it is clear that despite the fact that owners have made a ten year commitment, significant changes may be made to the rules after a commitment has been made.

This EU move may not be good for the owners, may not be good for UK shipping and may not be good for the future of the UK tonnage tax regime. The outcome will depend on how the UK authorities implement the final EU Guidelines.'

The EU's new guidelines on State Aid to Maritime Transport were issued in January 2004.

Tonnage tax regimes in the EU are regarded as State Aid to Maritime Transport. The guidelines include new rules which would require the UK Government to change the UK Tonnage Tax Regime.

Dredging activities are not eligible for tonnage tax.

However, the guidelines say that tonnage tax regimes may be applied to dredgers whose activities include 'maritime transport', ie, the transport at deep sea of extracted materials for more than 50% of their annual operational time. UK aggregates dredgers would therefore be able to enter the tonnage tax scheme.

Towage activities may be included in tonnage tax only if more than 50% of the towage activity carried out by a tug during any given year constitutes 'maritime transport'.

The guidelines emphasise that towage activities which are carried out in ports or which consist of assisting a self propelled vessel to reach port are not regarded as 'maritime transport'.

MJ Information No: 19832