On 8 March 2018, The European Commission (EC) issued a formal notice of infringement procedures against Cyprus, Greece and Malta. The letter outlined the EC’s stance on Cyprus, Greece and Malta’s failure to levy the correct amount of Value-Added Tax (VAT) on the provision of superyachts. According to the EC, the “issue can generate major distortions of competition and featured heavily in the coverage of last year’s Paradise Papers’ leaks”. Notably, the EC referred to the practices of the aforementioned nations as facilitating “widespread tax evasion,” not avoidance, clearly highlighting the EC’s belief that the practices are illegal.
“The procedure commenced by the EU Commission does not come as a surprise in the wake of Paradise Papers,” starts Anthony Galea, managing director of Vistra, the Maltese law firm. “Indeed, the Maltese yachting community took heed and, during last year, implemented a number of initiatives to improve the practices adopted in Malta in light of the fact that the practice of creating yacht leasing structures started in 2005 and needed some brushing up. Moreover, a number of the European Court of Justice’s recent judgements also affected such practices. As many are surely aware, changes were also introduced to the guidelines issued by the Malta VAT Department in November 2017.”
The letter of infringement procedures concerned two areas in which the EC believes that Malta and the other concerned parties have failed to meet European Union directives. The first issue queries the validity of the structures that allow VAT to be dramatically reduced based on the assumption that superyachts spend the majority of their time outside of the EU. EU VAT rules allow Member States not to tax the supply of a service where the effective use and enjoyment of the product is outside EU, however, they do not allow for a general flat-rate reduction without proof of the location of actual use. “Perhaps the EC was not aware of the new practices introduced [in Malta] last year,” questions Galea.
The second concern questions the use of ‘lease-purchase’ agreements in Cyprus and Malta. According to the letter, the Cypriot and Maltese laws currently classify the leasing of a yacht as a supply of a service rather than a good. This results in VAT only being levied at the standard rate on a minor amount of the real cost price of the superyacht once the yacht has finally been bought, with the rest being taxed as the supply of a service and a greatly reduced rate.
“In fact, Malta has always maintained that the leases administered in Malta are operational leases and constitute a supply of a service. Malta had adopted the practice following practices introduced earlier by France, and later Italy, whose practices continue today, and are an important option for potential yacht owner,” continues Galea.
“The procedure commenced will next follow a formal flow of event which will see the Maltese government defend its position and thereafter we hope negotiations will follow so that the matter may be concluded with a solution that is acceptable to the EC. I believe that leasing solutions are important options for the yachting industry which facilitate ownership at a time when we need to convince owners, especially new entrants to the market, to commit to their new yacht.”
Galea further outlines his surprise, and the surprise of the Maltese yachting community, that the EC’s letter has only been targeted at Malta, Cyprus and Greece. “What is surprising to most local members of the yachting industry is the discrimination evidenced by the press release of the EC, wherein the EU commissioner [Pierre Mosovici] took action against and the little countries, Cyprus and Greece, but left out France and Italy.”
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