VAT on commercial yachts

The Court of Magistrates (Malta), presided over by Magistrate Francesco Depasquale, on May 3, 2013, in the case ‘S&D Yachts Ltd vs MY Nautonnier’, held, among other things, that a vessel registered as a commercial yacht was not automatically entitled to an exemption from VAT.

Vessels which were utilised for recreational and or personal use, were not ‘commercial’ and exempt from VAT.

In line with the decision of the European Court of Justice in Luxembourg, vessels which were utilised for recreational and/or personal use, were not ‘commercial’

The facts in this case were as follows:

The company S&D Yachts Ltd filed legal proceedings in rem on November 2, 2010, against the motor yacht Nautonnier, which was registered in Malta as a commercial yacht.

It asked the court to condemn the yacht to pay the sum of €6,610, which was the balance outstanding for provisions, materials and necessary objects which were furnished at its request.

The vessel accepted to pay €3,888 but disputed to pay the remaining amount, which consisted in the VAT amount on the price of the provisions and supplies.

It contested having to pay VAT on grounds that the vessel was a commercial yacht.

A representative for the yacht claimed to have been surprised that this suit was presented, when negotiations were underway with the competent authorities.

On January 27, 2012, S&D Yachts Ltd filed a note to reduce its claim to €3,273, as it had received a payment, from the vessel. The court noted that at issue was whether the yacht was to be considered as a commercial vessel, exempt from the VAT provisions. Article 6 of the Fifth Schedule, chapter 406 part 1, provides:

(1) The supply of vessels:

(a) used for navigation on the high seas and carrying passengers for reward or used for the purpose of commercial, industrial or fishing activities;

(b) used for rescue or assistance at sea or for coastal fishing;

(c) ships of war.

A vessel was exempt from VAT insofar as it complied with this article. A vessel was exempt from VAT:

(a) if it was used to carry out voyages by sea to transport passengers against payment or if it was used to carry out commercial or industrial activities;

(b) or fishing;

(c) or ships of war.

The court noted that a representative of Malta Transport informed the court that according to its records, no charter party was ever registered with the authority in Malta.

Malta Transport confirmed that the vessel was documented as a commercial yacht. This was evident from its non-operational certificate, certificate of compliance to trade dated April 20, 2007, where the vessel was described as a ‘commercial yacht’.

This certificate, however, expired on July 27, 2010.

A VAT officer testified in court that the vessel was exempt from VAT only if a Charter Party Agreement was produced.

Reference was made to the decision of the European Court of Justice in Felten a Bacino Charter Company Case (C-116/10).

Following this case, the VAT Department started to apply VAT on vessels which were chartered for recreational or personal use. In line with the decision of the European Court of Justice in Luxembourg, vessels which were utilised for recreational and/or personal use, were not ‘commercial’.

It resulted that in the circumstances, no Charter Party Agreement was produced to show that the vessel was VAT exempt.

It appeared from the Charter Party Agreement that the use of the yacht was recreational in nature. The term ‘cruising area’ was loosely described and no specific reason was given other than for cruising, generally in the Mediterranean.

The court considered that after the decision of the European Court of Justice in the Felten a Bacino Charter Company case, the VAT Department started to insist on payment of VAT on any service granted to a vessel which was used for recreational purposes.

The court maintained that at the time the lawsuit was filed, on November 2, 2010, the vessel was no longer registered as a commercial yacht.

Its certificate of registry as a commercial yacht expired on July 27, 2010, and was not renewed by its owner.

On May 3, 2013, the Court of Magistrates gave judgment by accepting S&D Yachts Ltd’s requests, and by ordering the vessel to pay the unpaid VAT of €3,273 with interests and costs. The court held that VAT was chargeable and that the VAT exemptions were not applicable. It said that S&D Yachts Ltd was correct to request payment of VAT in respect of the vessel.

Dr Karl Grech Orr is a partner at Ganado Advocates.