On the 8th of March, 2018, the European Commission has sent a letter of formal notice to Cyprus, Greece and Malta with regards to some controversial aspects on their application of national VAT within the yachting sector.

This issue starts with the leak of the “paradise papers”. The European Commission has decided to follow-up on VAT evasion within the yachting sector, facilitated by national rules that do not comply and are more advantageous in respect to the EU law.

The Commissioner for Economic and Financial Affairs Pierre Moscovici has declared; “In order to achieve fair taxation we need to take action wherever necessary to combat VAT evasion. We cannot allow this type of favourable tax treatment granted to private yachts, which also distorts competition in the maritime sector. Such practices violate EU law and must come to an end”.

The infringement procedures concern, in particular the VAT scheme provided by Cyprus and Malta applied when purchasing a yacht through an ad-hoc leasing contract for owners that actually have the same “role” both as lessor that purchase the selected yacht and as lessee (the user) who will use the yacht for a certain period of time and for a periodic correlated payment, with the option of purchase the yacht at the end of the lease.

Through the general principle of the VAT Directive 2006/112/CE that assimilates the leasing contract to a supply of services and not as a transfer of goods, and can benefit from a reduced taxable basis released by the EU law when navigating in and out of the Union waters, where VAT will be applied only on a small part of the value of the yacht.

At the end of the leasing contract, usually with a duration of less than 3 years (that for the Cyprus Authority can be also 18 months) the lessee exercises the option to purchase the yacht and obtain a VAT paid certificate released by the national Tax Authority.

The VAT rate in Malta is currently 18% but can be reduced by up to 70% to 5,6% if the yacht navigates in international waters and has a higher length than 24 meter. In Cyprus the VAT rate is today 19% but can be reduced by up to 80% to 3,8% if the yacht navigates in international waters and has a higher length than 24 meter.

The 3 Member States now have two months to respond to the arguments put forward by the European Commission. If they do not act within two months, the Commission may send a reasoned opinion to their authorities.

The position of the Italian leasing scheme.

The European Commission has however not made any notification toward Italy, as the Italian nautical leasing scheme is substantially different from the above-mentioned schemes in Cyprus and Malta, also with regards to the “independent” role of the Leasing Company that participates to the operation that should act as a financial institute.

Dott. Ezio Vannucci

VAT – infringement agains Cyprus, Greece and Malta

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