26 June 2024 (Lloyd's List) - THE hard right and hard left political parties leading the polls in imminent elections for the French national assembly are both considering the abolition the country’s tonnage tax system, lawyers have warned.

The move would make France the odd person out among major European economies, who have adopted the tax break to stem an outflux of tonnage to open registries.

Under the scheme — which is used by boxship giant CMA CGM among others — shipping companies are not taxed on their actual profits, but rate pay a nominal rate based on the net tonnage of their fleet.

This is effectively a fixed fee calculated on the volume of cargo a given vessel can transport.

A rough analogy would be a taxi driver exempted from income tax on the fares they earn, but instead paying one euro per day per passenger seat in their cab.

According to the Cour de Comptes, an official audit institution, the loss of tax revenues for 2022-2023 alone runs as high as €9.4bn.

Both the hard right Rassemblement National and the left wing Nouveau Front Populaire have said they may scrap tonnage tax if they win the upcoming national assembly elections. RN and NPF are currently first and second respectively in the polls.

Whether or not the move is electorally popular, it is unlikely to generate as much revenue as proponents hope, according to a briefing written by Paris-based Reed Smith lawyers Benoît Bernard, Romain Farnoux and Antoine Maniglier.

“Immediate consideration is whether such taxable income is ‘captive’. Would the flow of earnings being taxed in France through the tonnage tax mechanism today still be there tomorrow to be taxed at the general corporate tax rate? The answer is likely not.

“Most shipowners in the world have the freedom to choose the jurisdiction where their earnings will be taxed by choosing the vessel flag.”

French tonnage tax does not require the use of the French flag, although registration is encouraged, on the grounds that it strengthens national influence and maritime presence.

Its introduction has significantly boosted the number of ships using the flag, from 313 in 2017 to 421 in 2023.

Most larger European economies including the UK have a tonnage tax regime approved by the European Commission, the trio point out.

It would be straightforward for shipowners currently under French tonnage tax regime to switch to another European flag avoiding French corporate taxation, while still retaining the benefit of French tax leases.

Alternatively, they could easily sign up with open registries that offer even lower taxation of earnings, and sometimes no taxation at all.

Shipowners minded to remain in France would face corporate tax of 25%, which would render then uncompetitive. They would therefore lose market share, with a corresponding reduction in taxable income.

“For these reasons, the predicted fiscal gains may not materialise due to the potential exodus of shipping businesses. The consequences of this could include a loss of associated economic activity.”

The authors predict the loss of thousands of jobs at shipping companies, especially in Marseilles, and many more job losses among suppliers.