The official French Tax bulletin, published on Friday 6 November 2020, announced the end of the VAT lump sum reduction on charters in France. The new rule should have been applied to charter contracts that were signed beyond 30 March 2020; however, its application was delayed in order to stimulate yachting activity during Mediterranean summer charter season, which was significantly impacted by the COVID-19 pandemic.

While it is undeniable that the summer charter season in the Mediterranean was a poor one, it remains unclear the extent to which the delay in implementing the new rules mitigated the negative impact as the major challenges remained logistical. “The lump-sum reduction and the fact that the price on charter contracts dropped helped for the charter season. However, because of COVID, our usual clients did not come this year because most of them are from the USA, Russia or Emirates. The lack of clients had negative effects,” explains Thierry Voisin, director of SOS Yachting France.

The French VAT lump sum reduction is now replaced by an effective reduction in proportion to the time spent outside European waters during a charter. Therefore, only the time spent outside EU waters is exempt from VAT. The owning company, therefore, needs to demonstrate by proper evidence the actual use and enjoyment of the service outside EU waters.

Only charter contracts signed after 1 November 2020 are subject to the new rule. Those charter contracts that were signed before 1 November 2020 will still be able to benefit from the old lump sum rules, amounting to a reduction of 50 per cent for those vessels that cruise outside EU waters.

It is important to note, however, that 70 per cent rule remains in place for those vessels that qualify for a VAT exemption in France under the French Commercial Exemption. One of the conditions the FCE is to perform at least 70 per cent of trips outside French waters. The 70 per cent rule should not be mistaken for the changes made to the VAT due on charter contracts in French waters.

The new system for the reduction of VAT on charters is a step towards a much-vaunted harmonisation of taxation in European waters. While there has yet to be an official announcement, it should be further noted that the new system for reducing VAT on charters is now applicable in Italy for charter contracts signed after 1 November 2020.

For more information on the application of the new VAT system on charters, click here.

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