Anthony Galea, Managing Director Vistra Malta, and Alison Vassallo, Partner, Fenech & Fenech Advocates outline some very pertinent developments in the application of new leasing models in Malta

Last Friday the Maltese authorities published new, much anticipated Guidelines, which outline the manner in which the place of supply of yachts is to be taxed. These Guidelines apply to leases commencing on or after the 1st November 2018 and pave the way for the application of new leasing models offering owners and lessees concrete workable solutions.

Essentially, the previous Guidelines, which since 2006 were in place in Malta relating to the VAT treatment of yacht leasing, ceased at the end of last year. It is to be highlighted that all leasing structures which were approved under the previous Guidelines, remain subject to the previous Guidelines and will continue to operate under the terms of such Guidelines. Therefore, it needs to be made amply clear that nothing has changed with regard to the leasing structures that were approved and are subject to the previous Guidelines and they remain unaffected by the new Guidelines.

Further to the receipt of the Letter of Formal Notice in March 2018, the Maltese authorities proceeded to submit a detailed reply in May of 2018 to the EU Commission on the points that the EU Commission required clarification on.

Alison Vassallo, partner at Fenech & Fenech Advocates

The Maltese authorities have now undertaken a review of the entire concept with a view to implementing new models which are compliant with EU and Maltese law and best practices, as well as with industry practices. The models themselves are based on current EU and Maltese laws, and the Guidelines were published to address instances where the law needed to be interpreted subsequent to discussions with and guidance received by the Commission. 

A number of principles have not changed as the new models focus on yacht leasing arrangements. As a starting point, in order to be able to make use of the Guidelines one needs to ensure the applicability of Maltese laws and EU VAT laws and be in possession of a Maltese VAT number. General principles relating to intra community supplies and importations at the time of acquisition of the yacht by the Lessee, and place of supply rules at the time of the supply of the yacht to the Lessee by the Lessor will still apply.

The new models will require operational leases to be contracted by the Lessor and the Lessee for any period of time, the main criterion being the commercial considerations of the parties.  It is expected that these leases would range from 5 -10 years, which is usually the term after which a person using a yacht would normally consider changing it.

Anthony Galea, managing director of Vistra Malta

The yacht would need to come to Malta to properly account for VAT in Malta at the time of acquisition by the Lessor, and the yacht would be made available by the Lessor to the Lessee in Malta. We envisage that the lease instalments will reflect the value fixed by the Lessor and the Lessee for the use and enjoyment of the yacht each year. This depends on the intended use of the yacht and is an arbitrary commercial exercise by the parties What the parties will need to respect is the general arm’s length rule,  so the value of the lease cannot be lower that the depreciation of the yacht per year. VAT would be due on the monthly instalments paid by the Lessee to the Lessor in Malta.

The new Guidelines address the manner in which the supply of yachts is to be taxed on the basis of the application of the principle of effective use and enjoyment that is found under Article 59a of the VAT Directive. While the previous Guidelines provided for a schedule of deemed percentage of use of yachts within EU waters based on their type and size, the new Guidelines contemplate a system of actual use and enjoyment of yachts based on distances travelled. In practice, this means that clients availing themselves of these Guidelines would monitor the actual use of the yacht. If the Lessor is able to prove that the yacht has been used and enjoyed outside EU waters by the Lessee on the basis of available records, logbooks and records of GPS coordinates, then the relative adjustments can be made to the VAT returns as explained in the Guidelines so that VAT during this period will not be due.

From our first discussions with the VAT Department, it results clearly that the authorities will adopt a strong stand to ensure that the Guidelines are implemented correctly and with the utmost transparency. To this end, a number of anti- avoidance measures will be adopted which Lessors will be expected to adhere to, such as the filing of an annual return in relation to the calculations made by the Lessor to arrive to the declared tax charge. Furthermore, the authorities will each year expect to see a realistic percentage of use and enjoyment of the yachts in EU waters, subject to exceptions such as where the Lessors can demonstrate that the yacht spent the year outside the EU as would be the case for yachts navigating in the pacific whilst undertaking a voyage around the world

What happens to the yacht at the termination of the leasing arrangement?

A leasing arrangement may be terminated by the passage of time (expiry), or by the parties in accordance with the terms of the lease agreement, eg, in the case of the occurrence of a specific event such as the sale or total loss of the yacht. In such case the possession of the yacht would revert back to the Lessor, who would be free to contract a new lease or to sell the yacht.  Alternatively, the lease may be renewed should the parties decide to do so on expiry. It is also not uncommon (based on the experience in other industries) that the Lessee would consider purchasing the yacht prior to the termination of the lease, or on its expiry. 

In the latter scenario, if the yacht is physically sold to the Lessee in Malta at its market value, a VAT paid certificate can be requested from the VAT department. This would be obtained in so far as it would be possible to prove to the authorities that all transactions occurred on an arm’s length basis, that all the VAT due to be paid in Malta was paid and that the yacht was sold at its correct market value. In this respect the industry has already last year requested guidance from the authorities with respect to the manner in which the market value of a yacht is to be determined for income tax and customs purposes, and we are currently expecting guidance on this point which we trust can be extended for VAT purposes also.

We are not expecting the Maltese authorities to cater for these various exit options outlined above in a new piece of legislation or guideline, but rather, the Maltese authorities will to allow the  market and the parties themselves to regulate their relationship as they wish and in accordance with Maltese and EU regulations. It remains open to advisors to guide clients in these various options and ensure that these options are workable and make commercial and legal sense in the context of yachts.

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