Vessels used by shipping companies as well as pilot boats and dispatch boats which are assimilated to sea vessels can be depreciated using the declining balance depreciation method. This system replaced the old system of accelerated depreciation of ship equipment belonging to sailing companies as of 1st January 1960. It has also been made clear that vessels can be depreciated using the declining balance depreciation method if they are provided with a commercial vessel document under the French Flag (Blue Book) whilst recreational vessels provided with an Orange Book that are operated in exchange for consideration can only be depreciated in accordance with the straight line method.

The declining balance method of depreciation is provided by article 39 A of the French General Tax Code ("CGI") and it applies in principle to equipment used by industrial companies, but its scope has been extended to the management of commercial companies which use fixed assets that are identical to those of industrial companies (Admin. doc. 4 D-221, no. 1).

By way of derogation to the rule whereby only the goods that are not used may benefit from this, it is accepted that second-hand vessels may be depreciated using the declining balance depreciation method (Admin. doc. 4 D-2661, nos. 14 and 22). In principle therefore a vessel may be depreciated using the declining balance depreciation method by each of its successive owners as long as the depreciation period is at least 8 years in each case. The only exception to this rule is that vessels that are subject to a refinancing operation more than 24 months after their delivery (Inst. 4 April 2008, 4 D-1-08) may not benefit from this favourable depreciation method. A refinancing operation is understood as one where a vessel is acquired by a company (often the subsidiary of a financial establishment) from a shipping company to then be leased to this latter company or a company affiliated with it with an option to purchase the vessel.

The vessels enjoy a second derogation from the depreciation rules provided by the CGI. It is accepted (Admin. doc. D-2221 no. 15) that a vessel may be depreciated as soon as the end of the financial year preceding the one where delivery took place upon condition that keel laying of the vessel occurred before the closure date. This depreciation may only be calculated on the amount of expenses incurred and paid on this date. The expenses are deemed to have been incurred when they correspond with work that has actually been carried out, with it being understood that the base calculation for the depreciation can not in any case exceed 50% of the vessel cost price. The starting point for the declining balance depreciation method is fixed uniformly the 1st day of the month of keel laying. If this system is elected it must be used from the closing of the financial year preceding the one where the vessel was delivered.

Application examples

General rule

When the special rule of depreciation from the keel laying date is not used, vessels are depreciated using the declining balance depreciation method in accordance with standard law:
 the starting point for the depreciation is the first day of the month of delivery of the vessel without waiting for its entry into service;
 it is accepted that the depreciation period be of 8 years, with the applicable coefficient therefore being 2.25% so that the depreciation rate is 28.13%;
 in the event of a purchase during the financial year the first annual depreciation amount is reduced pro rata;
 the following annual depreciation amounts are calculated by applying the rate of 28.13% to the residual accounting value of the vessel equal to the difference between the original value and the amount of the previous annual depreciation amounts;
 if at the end of a financial year the annual amount of the depreciation using the declining balance method becomes less than the annual amount that corresponds with the quotient of the residual value by the number of years of usage remaining, the company may make a depreciation which is equal to this latest annual amount;
 for the calculation of the total depreciation period, the financial year of the purchase is deducted as an entire year so that the actual depreciation period is reduced; for a vessel that can be depreciated over 8 years purchased during a given financial year the depreciation normally ends therefore at the close of the 7th financial year.

This way a vessel with a value of 1,000 purchased on 10 September of any given year will be depreciated as follows:
 1st year: 1000 x 28.13% x 4/12 = 93.76
 2nd year: (1000 - 93.76 = 906.24) x 28.13% = 254.92
 3rd year: (906.24 - 254.92 = 651.32) x 28.13% = 182.32
 4th year: (651.32 - 182.32 = 469) x 28.13% = 131.93
 5th year: (469 - 131.93 = 337.07) x 28.13% = 94.82
 6th year: (337.07 - 94.82 = 242.25) x 28.13 = 68.14

However, as the quotient of the residual value at the end of year 5 (242.25) by the number of years remaining (3) is greater than the annual amount under the declining balance method for year 6, it will be possible to deduct an annual amount equal to 80.75 for the financial years 6, 7 and 8:
 7th year: (242.25 - 80.75 = 161.5) / 2 = 80.75;
 8th year: 161.5 - 80.75 = 80.75.

The sum of the allowances from years 1 to 8 does indeed make 1,000.

Derogation through keel laying

If the keel laying of the same vessel with a value of 1,000 took place on 15 September of a given year in order to be delivered in June of the next year, depreciation may be started at the end of the financial year during which keel laying occurred (end of the financial year preceding that of the delivery) in accordance with the following:
 the depreciation will be based on the amount of the expenses incurred and paid that correspond with the work actually carried out at the end of the financial year, but it will be limited in any case to 50% of the value of the vessel;
 if we assume that the amount of the instalments already paid is 600 under these conditions then only 500 will be used as a basis for the depreciation;
 this will be calculated by applying the rate of 28.13% to this base and by reducing it pro rata using a period of 4 months deducted from the 1st day of the month when keel laying took place, i.e. 500 x 28.13% x 4/12 = 46.88;
 at the end of the financial year of the delivery, the depreciation will be calculated on the net accounting value of the vessel equal to the difference between its cost price and the depreciation carried out at the close of the previous financial year, i.e. 953.12;
 the allowances for depreciation for the following financial years will follow the general rule.

Source: study carried out with the assistance of Stéphane Salou and Alain Gautron of Stephenson Harwood - Paris