As those involved in the marine litigation industry are well aware, the subject of VAT in the world of yachting is undoubtedly a hot one, with temperatures reaching a peak during the summer months with the flurry of chartering activity in the Mediterranean.
The initial ripples leading to a recent spate of activity on the subject were caused by the European Court of Justice judgment on October 22, 2010, in the Bacino Case, where it was unequivocally held that where the charterer is a private person using the yacht for leisure purposes – as opposed to commercial activities – VAT is due on the hire. (‘A focus on the Bacino’, Times of Malta Business, January 19, 2012).
This judgment effectively put paid to any tendency of EU member states to favour a wide interpretation of Article 148 of the VAT directive leaning towards considering yachts chartered by customers for leisure as a VAT exempt supply.
Nevertheless and on the basis of Article 59a of EC Directive 2006/112, member states may consider the place of supply of yachts capable of international travel as being situated outside the Community if the effective use and enjoyment of the services or part thereof takes place outside the Community.
Following similar announcements recently made by France and Italy, the Maltese authorities last week published Guidelines for the VAT Treatment of Short-Term Yacht Hiring. In terms of these guidelines, while the short-term charter of a yacht to be used for leisure purposes is a supply of a service which is taxable at the standard rate of VAT, subject to a number of conditions stipulated by the guidelines themselves and to any further conditions that may be imposed, this supply may be taxed according to the use of the yacht insofar as that portion of its use is within the territorial waters of the EU.
Thus, in the case of charters starting in Malta, the standard rate of 18 per cent would be applied to the estimated percentage of the charter that the yacht would be deemed to spend in EU territorial waters.
As a result of the difficulty in calculating each and every voyage, it was decided that an acceptable measure would be the length of the yacht and its propulsion.
By way of example, sailing or motor yachts over 24 metres in length would be susceptible to taxation on 30 per cent of the hire that is paid on the charter. While it is a fact that the concentration of yacht charters have traditionally and will very much remain scattered along the French Riviera, Malta, as a result of its unique location and proximity to Sicily and Tunisia, undeniably offers a fascinating option as the starting point to a charter holiday in the Mediterranean.
In parallel, Italy has announced that the VAT rate applicable to the charter of yachts over 24 metres starting their charter in Italy and cruising in and outside of Italian waters would be taxed at 30 per cent of its value. (Italy’s VAT rate is currently 21 per cent, which is expected to rise to 22 per cent in October 2013).
In Malta, sailing or motor yachts over 24 metres in length would be susceptible to taxation on 30 per cent of the hire that is paid on the charter
In France, the declaration of illegality by the ECJ on March 21 of the French Commercial Exemption (which essentially permitted zero VAT on charters and which had been under the Commission’s radar for some time) led to the fear of a considerable dent being put in the irresistible combination of its stunning coast and unbeatable tax handling of charters.
The yachting community was last month advised that all charters starting in French waters signed after July 15 could either opt for a pro-rata regime or from a reduction of 50 per cent on the standard rate of 19.6 per cent VAT which is likewise based on Article 59a of the EU directive, which covers the use and enjoyment rules for yachts capable of international travel.
There is currently a predicted increase in the standard VAT rate from 19.6 per cent to 20 per cent in France.
The above developments, coupled with the recent inroads being made by Spain to remove the much maligned 12 per cent matriculation tax payable in addition to the 21 per cent VAT rate which was effectively crippling its charter market, has shed light on coastal states’ efforts to provide certainty in an industry which represents the cornerstone to the economy of most.
While reference to ‘fiscal minefields’ in the industry was made during the Fiscal Management Meeting organised by the Superyacht Group in Brussels on March 7, it is often those who are not conversant with the applicable rules who at times inadvertently contribute towards a murky public perception of the fiscal treatment of charters.
The reality is that obtaining correct guidance from reputable professionals operating in the relative jurisdiction goes a long way in equipping owners and charterers with a correct map.
Alison Vassallo is a senior associate in the Yachting Department and the Marine Litigation Department at Fenech and Fenech Advocates.