The Court of Appeal, presided over by Madame Justice Edwina Grima, on July 9, 2014, in the case ‘S&D Yachts Limited v MY Nautonnier’ held, among other things, that a commercially registered yacht qualified for VAT exemption on the provision of supplies and other items in connection with the maintenance of the yacht. As defendant yacht failed to apply for an exemption prior to the transaction, it was ordered to pay the VAT suffered.

The facts in this case were as follows.

On November 2, 2010, S&D Yachts Ltd requested the Court of Magistrates to condemn the motor yacht MY Nautonnier the sum of €6,610, representing the balance of a bigger sum due for provisions, supplies and necessary items to the yacht, and which were provided at its request.

During the proceedings, the yacht paid for the supplies and the remaining balance was €3,888, the amount of VAT suffered by S&D Yachts, which the defendant yacht said that it was not obliged to pay since it was a commercial yacht and not subject to VAT.

On January 27, 2012, S&D Yachts presented a note whereby they reduced their claim to €3,273 as a result of the payment.

At issue was whether the yacht was bound to pay VAT and whether the yacht should be considered as a commercial vessel, which benefited from exemption from VAT. From the records of Malta Transport, the yacht was registered as commercial but had a non-operational certificate as its certificate of compliance to trade as a commercial vessel which was issued on April 20, 2007, had expired on July 27, 2010.

The yacht was also subject to two arrest warrants, filed against it in July and September 2009. According to the Fifth Schedule of chapter 406 Part I article 6, vessels were exempt if (a) they were used on the high seas and carried passengers for payment or used for commercial, industrial and fishing purposes or (b) used to provide assistance at sea or for fishing in local waters or (c) they were ships of war.

Although initially the VAT Department accepted to exempt vessels from VAT, provided they presented a copy of a Charter Party Agreement, after the decision of the European Courts of Justice in the case ‘Felten o Bacino Charter Party (C116/10)’, if the yacht was used for pleasure/personal purposes, it was subject to VAT and this in line with the decision of the ECJ.

The defendant yacht was asked to file a copy of the Charter Party several times to obtain exemption from VAT, but it failed to do so. In addition it was evident from the relative Charter Party Agreement that the yacht was used for recreational purposes.

On May 3, 2013, the Court of Magistrates held that pursuant to the decision of the ECJ, the VAT Department started to insist that VAT had to be paid on every service granted to a yacht, (which was used as a pleasure yacht). The court said that commercial yacht status expired on July 27, 2010, and had not been renewed by the owners of the yacht.

The First Court noted that this case was filed on November 2, 2010, after its commercial certificate expired and in this respect, it said that the yacht could not be considered as ‘commercial’. It concluded that S&D Yacht was correct to request payment of VAT. The First Court dismissed the pleas of the defendant yacht and ordered it to pay S&D Yacht €3,273.

Aggrieved by the decision of the First Court, the defendant yacht entered an appeal. It submitted that the First Court based its decision on incorrect facts and failed to consider the affidavit of a representative of defendant yacht. Its principal grievance was that the First Court wrongly decided that the defendant yacht had to pay the VAT suffered by S&D Yachts and that it was not entitled to an exemption according to law and this pursuant to the decision of the ECJ in the Bacino case dated December 22, 2010.

The defendant yacht claimed that the First Court incorrectly held that it was not a commercial yacht once its certificate lapsed and once it was used only in the Mediterranean. It argued that the First Court gave an incorrect interpretation of “used for navigation on the high seas” in article 6 Part 1 of V Schedule of chapter 406.

It maintained that the First Court based its decision on the Bacino case, when the facts in this case took place prior to this case. It pleaded that the First Court did not consider the fact that the owner of the yacht was a Bermuda company, and that it was not entitled to recover the VAT suffered.

This court pointed out that the defendant yacht had to bring proof that it was entitled to such an exemption. No proof was brought, it said, that it carried out a commercial activity at the time of the transaction.

The First Court felt that the yacht did not qualify for a VAT exemption.

To qualify for VAT exemption it had to satisfy the criteria under article 6 Part 1of Schedule V of chapter 406. The condition imposed by law was that the yacht had to carry commercial/industrial/fishing activities or used to provide assistance or help at sea or if it as a warship.

In the Felten v Bacino case, it was decided by the ECJ in Luxembourg that if a yacht was chartered for the personal enjoyment of a private individual (the lessee), the lease payments were subject to VAT. This ruling applied even if the owner of the yacht used it for commercial purposes on the high seas.

The court noted that article 6 of our VAT Act was a word-for-word restatement of article 15 (5) of the European Directive 77/388. The ECJ stated as follows when interpreting this directive: “Article 15 (5) of Sixth Council Directive 77/388/EEC of May 17, 1977, on the harmonisation of the laws of the member states relating to turnover taxes-common system of value added tax: uniform basis of assessment, as amended by Council Directive 91/680/EEC of December 16, 1991, must be interpreted as meaning that the exemption from value added tax provided for by that provision does not apply to services consisting of making a vessel available, for reward, with a crew, to natural persons for purposes of leisure travel on the high seas.”

The court said that it followed that a yacht which was registered as a commercial vessel and used on the high seas would qualify for the VAT exemption. The defendant yacht had to prove that it qualified

While in the Bacino case, the court gave a restrictive interpretation to the directive in the sense that VAT was due on the charter payments, as the yacht was used by private persons for their personal leisure, no mention was made of the provision of services and maintenance to such vessels, used in such way.

The court said that it followed that a yacht which was registered as a commercial vessel and used on the high seas would qualify for the VAT exemption. The defendant yacht had to prove that it qualified as a commercial vessel, used on the high seas, in order to obtain the VAT exemption.

In the court’s opinion, it was up to the defendant yacht to prove this to the VAT Department. Applicant S&D Yachts did not have the burden of proof in the circumstances. The exemption applied provided there was proof of ‘commercial registration of the yacht’ and this as regards the provisions, supplies and other items in connection with the maintenance of the yacht.

As regards the certificate of registry from Transport Malta, it results that in the period between October 2009 and April 2010, the vessel had a valid certificate of registration, and the certificate expired on July 27, 2010. This meant that one of the elements in article 6 was satisfied.

The court said that this requisite was met and the transaction between the parties qualified for an exemption. It was up to defendant yacht to obtain the exemption from the VAT Department.

The defendant yacht failed to do so and chose to be inactive and claimed that S&D Yachts had the duty to bring proof. As a consequence S&D Yachts had to pay the tax in question, in particular after the VAT Department insisted incorrectly, after the Bacino decision, that such transaction did not benefit from the exemption.

This necessarily meant that the amount claimed by S&D Yachts was due from the defendant yacht. The fact that the vessel did not qualify for a refund of VAT, as its owner was a Bermuda company, did not justify for it its lack of action, during its dealing with S&D Yachts.

For these reasons on July 9, 2014, the Court of Appeal gave judgment by declaring that the First Hall of the Civil Court correctly condemned the defendant yacht to pay S&D Yachts, the amount of VAT it suffered and this as a result of its inactivity to obtain a VAT exemption before the conclusion of the transaction. The court dismissed the appeal of the defendant yacht and confirmed the decision of the First Hall of the Civil Court.

Dr Karl Grech Orr is a partner at Ganado Advocates.

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