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Estonia plans to bring more ships under Estonian flag

Ain Kiisler, Lecturer Estonian Maritime Academy Tallinn University of Technology Estonia, Eero Naabe, Head Development and Innovation Estonian Maritime Administration Estonia, Baltic Rim Economies ISSUE # 3, 07.11.2017.Print version
Estonian government has started a project “Ships under Estonian flag” aimed for restoration of merchant fleet sailing under Estonian flag. At the start of nineties, around 100 merchant vessels with gross tonnage (GT) above 500 sailed under Estonian flag.

In 2003, this number was decreased to 11 vessels and in 2012 to 4 vessels. From April 2014, there are no above 500 GT merchant vessels sailing under Estonian flag in international traffic. This does not mean that cargo ships have disappeared from Estonia. Estonian ship owners are operating around 60 merchant vessels but these are registered in ship registries of other states than Estonia. Most of these vessels are currently sailing under the flag of Malta (ca 20 ships). The law of the state flag of which it sails under, that includes the administration and tax policies, governs vessel.


In Estonia, there are more than 10 000 seagoing seafarers. Of them, ca 4000 are working on ships sailing under Estonian flag. The rest are working on vessels sailing under foreign flags. Estonian government is therefore unable to collect relevant taxes from these 60 Estonian capital owned vessels and more than 6000 sailors. Additionally, many seafarers, sailing on vessels under foreign flags, have no social insurance. The reason of mentioned problem is simple to maritime experts – apart from other Baltic Sea countries Estonian government is not offering any tax exemption for ship owners. In EU, making tax exemptions is allowed only for agricultural and maritime sector. EU Commission allows its member countries to support their maritime industries and, therefore, member states have the right to apply for “state aid” conditions that have been stated in Commission document “Community guidelines on State aid to maritime transport“ [Commission Communication C(2004) 43].


During 2002-2016, the leading coalition partner in Estonian governments has been Estonian Reform Party (EPL), political party representing liberal ideology. Concerning their economic policy, EPL has principally been against creating any tax exemptions, standing up for equable and proportional taxation environment. Simple and equable tax system can be very reasonable in free competition environment, but in the situation of state aided international business, competition may run to serious competitive disadvantage for entrepreneurs being the residents of country not applying fiscal incentives. Therefore, the current tax levels are too high for Estonian ship owners and operators, who are not able to compete with other enterprises operating their vessels under flags with more favourable taxation environment. For clear economic reasons majority of Estonian ships have registered under the flags of other states having notably more advantageous shipping related fiscal policies and better possibilities for retaining international competitiveness. Estonian Maritime Administration has dealt with the development of a plan aiming to bring more cargo ships under Estonian flag already more than five years (since 2012). Currently this has also become one of the priorities of the new Estonian governmental coalition (since November 2016). For fulfilling this task, governmental working group was created connecting representatives from Estonian Maritime Administration, Ministries of Economic Affairs & Communications, Finance, Justice and Social Affairs.


Working group findings and proposals about which changes are needed for increasing the number of ships in Estonian Ship registry and how these will affect state economy and social expenditures both in short and long term perspective were presented to Estonian government in May 2017. On 17th of July 2017 Estonian government decided to bring to effect necessary cardinal changes for shipping sector development. The analysis of the working group has showed that Estonian Republic has expectations to be much bigger flag state and have much more shore sector than today. One average merchant vessel sailing under Estonian flag could bring up-to 20-25 thousand euros yearly to Estonian economy through the register fees, issuance of certificates and other activities. Conditions of Estonian flag state will be made attractive to ship owners and operators in three aspects: ship registry conditions and operations, taxation of maritime labour and simplified use of foreign workforce. Principally, ship registers are divided into two groups. At first, open registers where, in addition to resident ship owners, also foreign ship owners can register their vessels. Secondly, closed registers, registering of vessels that should be administrated by a greater or lesser extent from the territory of the flag state. Currently, Estonia uses closed register system, high workforce taxes and complicated use of foreign workforce, which all make up quite an unattractive package for ship owners. The governments’ decision foresees principal reconstruction of current system so that two ship registers – both open and closed – will be created. Different conditions concerning the ship owners’ residency country, amount of registry fees and tax exemptions will be implemented. Therefore, the ship owners outside Estonia can also register and manage their vessels under Estonian flag.


At the same time, ship(s) owning company should be registered in Estonia. This dissention is solved with the Estonian e-residency, simplifying establishment of companies in Estonia, simultaneously retaining control possibilities for government institutions and retaining the genuine link as required by UNCLOS. In the future, Estonian ship register should be digital, meaning that vessels’ data is available via cloud computing, submitting and processing of registration and survey applications is digital / remotely accessible both for Estonian and foreign clients. This eliminates the need for physical travelling for representatives of ship owner for registration purposes and also having permanent physical representative of ship owner in Estonia is not required.


Additionally, maritime labour taxation will be lowered. The lower level taxable base will be applied. This means, that income and social taxes will be charged only from base ceiling of 750 euros instead of full salary. Employers would not pay for health insurance, only seafarers would be given the opportunity to purchase state health insurance for themselves. In addition to Estonian citizens, these tax changes will also affect seafarers from the other regions of European Economic Area because of EU equal treatment rules. Also the requirements of international conventions regulating rights of seafarers from third countries should be followed. A tonnage tax will be introduced as an alternative to corporate income tax for shipping companies. While this would be exceptional in the current Estonian tax system, it is already commonplace elsewhere in Europe. Shipping companies could thus decide whether to pay the typical 20 percent tax on withdrawn profits or a tonnage tax at yet undetermined rate based on a vessel’s gross tonnage. Estonian regular corporate tax system, where only distributed dividends are taxed, is attractive for the young, rapidly growing companies and tonnage tax system is attractive for mature companies paying regular dividends. These principal decisions of Estonian government will be followed by related legislation and administrative changes. New ship registry and taxation environment is planned to start from 1 January 2019. Proceeding from the fact that each seafarer creates 2-3 jobs on the shore, the enlargement of number of ships sailing under Estonian flag benefits the whole local maritime sector. In longer perspective, planned changes will contribute to increasing labour tax revenues from shore sector and overall development of Estonian maritime sector. 

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