Purchasing a vessel through a company is often seen as a tax-favorable solution, but in practice this isn’t always the case. Many entrepreneurs assume that all maintenance, mooring, servicing, or depreciation costs will automatically be tax-deductible; however, the Corporate Income Tax Act sets out very clear conditions that must be met.
If these conditions are not satisfied, depreciation and all costs related to the vessel become non-deductible expenses and increase the corporate income tax base.
Tax Treatment of Vessel Costs as Company Assets
Under Article 12, paragraphs 16–19 of the Corporate Income Tax Act, costs related to vessels are not automatically recognized as tax-deductible expenses. For depreciation and other vessel-related costs to be tax-deductible, the vessel must serve the company’s registered business activity, and the company must achieve a prescribed revenue threshold.
In other words, the mere fact that a vessel is recorded as a company’s long-term asset is not sufficient for the costs to be recognized for tax purposes.
Conditions for Tax Deductibility
For depreciation and related expenses to be recognized for tax purposes, a company must cumulatively meet two key conditions.
The first condition relates to the registered business activity. The company must be registered for vessel rental, vessel transport, or another appropriate activity related to the commercial use of vessels. The vessel must be genuinely involved in the regular conduct of that activity, not merely formally recorded in the company’s books.
The second condition relates to achieving minimum revenue. For vessels, the revenue generated from their use during the tax period must amount to at least 7% of the vessel’s acquisition value.
For example, if a vessel’s acquisition value is EUR 800,000, the company would need to generate at least EUR 56,000 in revenue from its use during the tax period. Only if both conditions are met can depreciation and other vessel-related costs be tax-deductible.
Consequences of Failing to Meet the Conditions
If a company fails to meet the prescribed conditions in a tax period, it is required to increase its tax base by the amount of the vessel’s depreciation and all associated costs incurred in connection with its use.
This includes, for example, maintenance costs, servicing, spare parts, insurance, mooring, hauling and launching the vessel, fuel, and other costs related to the vessel’s use.
These expenses remain recorded in the company’s books, but for corporate income tax calculation purposes they are treated as non-deductible expenses.
Fully Depreciated Vessels
It’s important to note that these rules don’t apply only to depreciation. If a vessel has already been fully depreciated, the company may still incur significant costs from its use, such as servicing, engine maintenance, mooring, insurance, registration, safety equipment, lifting equipment, cleaning, and other related expenses.
These costs are also only tax-deductible if, during the current tax period, revenue of at least 7% of the vessel’s acquisition value has been generated.
Vessels Under Business Lease or Leasing
If a company does not own the vessel but uses it under a business lease or leasing arrangement, a special rule applies. Lease costs and all costs related to using the vessel are tax-deductible only if the company generates revenue from using the vessel at least equal to the lease cost.
If this condition is not met, the tax base is increased by the lease cost and the associated costs of using the vessel.
First Year of Acquisition and Year of Sale
In the first year of acquisition and in the year of disposal of the vessel, the revenue threshold does not need to be assessed for the full year. Under Article 22 of the Corporate Income Tax Regulations, the minimum revenue can be determined proportionally, based on the number of months during which the vessel was in use.
Mandatory Record-Keeping
A taxpayer that has a vessel recorded as a long-term asset is required to maintain a separate record for each individual vessel. This record must include, in particular, the acquisition value, revenue generated from the vessel’s use, calculated depreciation, all costs related to the vessel’s use, and the data needed for the corporate income tax return.
Such a record must be attached to the corporate income tax return.
Vessel Tax
Regardless of the tax treatment of depreciation and usage costs, vessel owners may be liable for an annual vessel tax under local tax regulations.
Taxpayers are natural and legal persons who own vessels. The tax is assessed by decision of the competent tax authority based on the vessel’s place of registration, and is payable within 15 days of the decision being served.
The amount of the annual tax is not determined based on the vessel’s value, but depends on several criteria:
- vessel length (for vessels longer than 5 meters),
- vessel type (vessel without a cabin, motor-powered vessel with a cabin, or sail-powered vessel with a cabin and engine),
- engine power expressed in kW.
The prescribed amounts vary depending on these criteria, ranging from several tens of euros for smaller vessels to several hundred euros for larger vessels with more powerful engines.
It’s important to note that the annual vessel tax is a separate tax obligation and does not affect the right to recognize depreciation and other expenses under the Corporate Income Tax Act. In other words, the fact that a company duly pays the annual vessel tax does not automatically mean that maintenance, depreciation, or usage costs will be tax-deductible. To have these recognized, the conditions prescribed under Article 12 of the Corporate Income Tax Act must be met.
More information on the annual vessel tax is available on the official website of the Tax Administration.
Common Mistakes in Practice
In practice, the most common situations involve companies that are not registered for the appropriate activity, do not track revenue generated against the 7% threshold, automatically recognize all vessel costs as tax expenses, or fail to maintain the required records of vessel revenue and costs.
Such mistakes can result in tax corrections during audits, an increase in the corporate income tax base, and additional tax liabilities.
Conclusion
Vessel costs are not automatically tax-deductible simply because the vessel is recorded as a company asset. To recognize depreciation and other expenses, the conditions prescribed by law must be met — above all, being registered for the appropriate activity and generating minimum annual revenue equal to 7% of the vessel’s acquisition value.
Timely monitoring of revenue generated, proper record-keeping, and correct application of tax regulations are key to avoiding tax corrections and additional costs.
CONEO Croatia’s experts can analyze the tax treatment of your vessel, check whether you meet the legal requirements, and help with properly recording costs and preparing your corporate income tax return. Contact us for professional tax advice.
