End of joint ownership of a ship and tax aspects: what you need to know

Like any human enterprise or legal structure, ship co-ownership has a limited lifespan. Whether through the will of the co-owners, the force of events or a court decision, the shared adventure around the vessel will one day come to an end. How does this happen in practice? What are the causes that can lead to the dissolution of this very special arrangement? And what are the consequences, in particular the sale of the vessel and the division of any remaining assets or liabilities? The dissolution of joint ownership of a ship can occur for a variety of reasons, whether economic, legal or even personal. For a comprehensive understanding of the rights and obligations associated with this regime, see our essential guide to ship co-ownership. Sometimes, persistent disagreements between the co-owners, who had set up the vessel co-ownership with common objectives, can lead to insurmountable tensions. Finally, once the decision to dissolve has been taken, it becomes essential to carry out an accurate valuation of the vessel and associated assets to ensure a fair division of assets and liabilities. For a complete understanding of the life cycle of this scheme, including its initial stages, we invite you to consult our page dedicated to the creation and operation of joint ownership of ships.

In addition, the tax aspect is inseparable from any economic activity. How is the income (or loss) generated by the operation of the jointly-owned vessel taxed? Who declares what? We will look at the general principles of the tax system applicable to joint owners. We will also look at a specific tax system, the "Pons Law", which marked an era even if it is no longer applicable to new investments, as it may still have echoes in certain situations.

Putting an end to co-ownership: causes of dissolution

The law of 3 January 1967, the reference text in this area, lists a number of causes which can put an end to the joint operation of a ship (article 26). To these must be added other situations arising from legal logic or from other articles of the same law.

The most obvious cause is will of the co-owners themselves. They may decide to sell the vessel and terminate co-ownership. This decision, known as a "voluntary sale", must be taken by a majority representing more than half the value of the vessel (article 27). The majority required here is calculated in terms of value, and not in terms of the number of shares, as is the case for day-to-day management decisions.

Dissolution can also be forced by events or third parties. This is the case when the vessel is "sold by compulsory auction" (article 26). This generally occurs following an attachment by a creditor of the joint ownership (for example, an unpaid supplier) or by the personal creditor of one or more joint owners if the share seized exceeds half the value of the vessel (article 55). Similarly, if the personal creditors of several joint owners seize shares representing a total of more than half of the vessel, the sale of the entire vessel is in principle ordered, unless the other joint owners object on serious and legitimate grounds before the court (article 29).

La court decision may also dissolve the company. We mentioned earlier (Article 13) that the court may appoint a provisional manager in the event of deadlock. If the deadlock persists, if no majority can be reached to ensure normal operation, or if majority decisions are repeatedly overturned (for example on grounds of abuse), a co-owner may ask the court to order the dissolution and sale of the vessel. Case law has confirmed this possibility in the event of a profound and irremediable disagreement between the co-owners over the future of the vessel (see for example Cass. Com. 8 June 1999, DMF 1999. 905).

Finally, other causes logically lead to the termination of co-ownership, even if they are not all explicitly mentioned in article 26:

• La total loss of the vessel (shipwreck, fire, etc.). The very purpose of co-ownership disappears.
• L'due date if the co-owners had stipulated a limited duration in their initial agreement.
• La all the shares (quirats) are in the hands of a single personThis may be through successive purchases, inheritance, etc. There can be no co-ownership with a single owner.

It is important to note, on the other hand, what does not put not automatically terminates the co-ownership. According to article 21 of the 1967 law, neither death, nor incapacity, nor the opening of collective proceedings (receivership or liquidation) against a co-owner automatically results in dissolution. Co-ownership continues with the heirs, legal representative or court-appointed agent, unless otherwise provided for in the initial agreement between the co-owners.

Consequences of dissolution: sale and liquidation

Except in the case of physical loss of the vessel, the dissolution of joint ownership almost always results in the loss of the vessel. public auction. This is a way of transforming the common property into cash so that debts can be settled and any remaining balance shared out.

Who can take part in these auctions? In principle, anyone: interested third parties as well as the co-owners themselves, who may thus seek to purchase the entire vessel. There is, however, one notable exception: when dissolution results from a voluntary decision by the joint owners (voluntary auction, art. 27), they have the right to organise a "closed auction", i.e. auctions reserved for the joint owners only. On the other hand, when the sale is ordered by the court (judicial dissolution, art. 28), it seems that the court can only set the conditions of the sale (place, date, price) but cannot restrict access to co-owners only. The auction remains open to all.

Once the vessel has been sold and the price collected, it is time to proceed with the liquidation the affairs of the co-ownership. Surprisingly, the 1967 law does not detail this phase. It is therefore up to the co-owners (or their representatives) to agree on the terms and conditions: clear the accounts, pay the remaining creditors according to their rank (preferential, hypothecary, unsecured), then distribute any balance (the liquidation "bonus") among them in proportion to their shares. If the creditors are unable to reach an agreement, the matter may be referred to the court to appoint a liquidator to carry out these operations.

The legal status of co-ownership: a special kind of company?

Before turning to taxation, it is worth briefly reviewing the legal nature of co-ownership of ships. As mentioned above, the majority of legal doctrine and case law today considers it to be a form of sui generis" companyThis is a special type of company, not directly comparable to the traditional forms (SARL, SA, SNC, etc.). It brings together the characteristic elements of a partnership contract as defined by article 1832 of the French Civil Code: pooling of assets (enjoyment of shares in the vessel), intention to collaborate (theaffectio societatis), and to share profits or savings (and contribute to losses).

More importantly, the Cour de cassation has explicitly recognised that co-ownership of ships governed by the 1967 Act is endowed with the legal entity (Cass. Com. 15 April 2008, no. 07-12.487). This means that it is regarded as a subject of law distinct from its members, capable for example of taking legal action, owning certain assets in its own right (even if its assets are often limited), and having its own collective interest that can be defended. This recognition of legal personality also provides a legal framework enabling shipowners to exercise rights and remedies in respect of their collective and individual interests. The rights of ship co-owners are thus protected, enabling them to claim fair use of the common property and to participate in decisions affecting the co-ownership. This situation also encourages better management and more effective defence of the interests of each member against third parties. Recognition of legal personality also helps to structure relations between co-owners and ensure that collective decision-making is more harmonious. The rights of ship charterers are also strengthened by this legislation, giving them the opportunity to assert their specific claims. In this way, not only is the governance of the co-ownership facilitated, but the interests of each individual within the community are also better protected.

Finally, it should be remembered that its nature can be civil or commercial. It will generally be commercial if the activity is a maritime expedition for profit (transport of passengers or goods), in accordance with article L. 110-2 of the French Commercial Code. Pleasure boating, on the other hand, is a civil activity. Fishing may be civil or commercial depending on the case. This distinction mainly has an impact on the jurisdiction of the courts (commercial court or judicial court).

Taxation of co-ownerships and tenants

The tax system for co-ownership of ships is based on the principle of joint ownership. tax transparencyThis is similar to that for partnerships (such as SNCs or non-trading companies that have not opted for corporation tax). This is set out in article 8 of the General Tax Code (CGI). This means that the co-ownership itself is not taxed on its profits. It is the co-owners who are personally liable for income tax (IR) or corporation tax (IS) on the share of profits that corresponds to their rights in the co-ownership.

This personal taxation applies even if the profits are not distributed but placed in reserve. Each shareholder's share is taxed as Industrial and Commercial Profits (BIC).

How is taxable profit calculated? There are two steps (CGI, art. 61 A, 35-1-7° and 39 E):

1. Firstly, at the level of the co-ownership: it must keep accounts and produce a declaration showing the overall result of the business, but it must also be able to demonstrate that it has made a profit. before deduct the technical depreciation of the vessel itself.
2. Secondly, at the level of each shareholder: he is taxed on his share of this result, but he can deduct from this share thedepreciation corresponding to its own share (quirat)calculated on the cost price of the acquisition. They may also deduct the financial costs they have personally incurred in acquiring their shares (loan interest, for example). The Conseil d'Etat has confirmed that each co-owner has his own accounting obligations and may be subject to an individual accounting audit (CE 26 May 2010, no. 304342).

What happens if some of the joint tenants are not subject to income tax (for example, companies subject to corporation tax) or if the tax authorities do not know the identity or address of some of the joint tenants with unlimited liability? In this case, the portion of the profits corresponding to their shares is taxed in the name of the "company" of joint tenants itself, subject to corporation tax (CGI, art. 206-4).

When the shares are sold, the shareholder will be taxed on any capital gain. This is calculated by deducting from the sale price the cost price of the shares, less any depreciation deducted for tax purposes during the holding period.

The historic case of the "Pons Law" (Law of 5 July 1996)

It is impossible to discuss the taxation of ship co-ownership without mentioning, albeit for the record, the tax incentive scheme known as the "Pons Law" (named after the minister at the time). Passed in 1996 (Law no. 96-607), it was designed to combat the decline in the French merchant fleet by encouraging private investment.

Its main mechanism (introduced in Articles 163 unvicies, 217 nonies and 238 bis HN of the CGI) allowed subscribers to shares in co-owned ships to deduct the sums invested from taxable income (for individuals) or taxable profits (for companies subject to corporation tax). It was a very attractive tax advantage.

However, the scheme was subject to very strict conditions:

• It only concerned vessels armed with trade (new or used with sufficient useful life), beating French pavilion.
• The subscribers had to be private persons domiciled in France or companies subject to corporation taxBut not those whose business was already shipping or chartering.
• L'operator of the vessel (manager or charterer) had to be a company subject to corporation tax and had to undertake to hold at least 20% of the shares himself.
• The operation was to receive a prior approval from the Ministry of the BudgetAfter consultation with the relevant ministries (Merchant Navy, Naval Equipment), the project's economic interest and normal cost will be demonstrated.
• Subscribers had to undertake to keep their shares for a minimum period (generally 4 years after delivery of the vessel).

This "Loi Pons" regime has proved costly for public finances and has been abolished for investments for which no application for approval was made before 15 September 1997. It was replaced by other support mechanisms, in particular the "fiscal EIG". However, operations approved before this date were still able to benefit from the scheme if the shares were subscribed before the end of 2000. Although it is no longer possible to launch new operations under this scheme, it may still be relevant in the event of disputes over old operations or if eligibility for this scheme had been considered an essential feature at the time of the sale of units (the Court of Cassation recently accepted that a mistake about eligibility for a tax scheme could vitiate a sale if the parties had made it an essential quality - Com. 22 June 2022, no. 20-11.846).

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Anticipating the end of a co-ownership or understanding its tax treatment requires careful legal and tax analysis. To help you through these stages, and with any questions you may have about maritime and river commercial lawWe're here to help.

Sources

• Law no. 67-5 of 3 January 1967 on the status of ships and other sea-going vessels (relevant articles, in particular 13, 21, 26, 27, 28, 29, 55)
• Transport Code (Provisions potentially recodifying certain articles of previous texts)
• Civil Code (in particular article 1832 on the definition of a company)
• French Commercial Code (in particular article L. 110-2 on commercial acts)
• General Tax Code (relevant articles, in particular 8, 35, 39 E, 61 A, 206-4)
• Law no. 96-607 of 5 July 1996 on tax incentives for ship co-ownership (for historical reference, articles 163 unvicies, 217 nonies, 238 bis HN of the CGI as issued by this law)
• Relevant case law (e.g. Cass. Com. 8 June 1999, DMF 1999. 905 on dissolution for disagreement; Cass. Com. 15 April 2008, no. 07-12.487 on legal personality; CE 26 May 2010, no. 304342 on individual tax audits; Cass. Com. 22 June 2022, no. 20-11.846 on errors relating to tax eligibility).