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EC opens infringement procedures against Cyprus, Greece and Malta

The European Commission has sent a letter to various legislators outlining how their approach to VAT is not in line with European Union law…

On 8 March 2018, the European Commission (EC) sent a letter of formal notice to Cyprus, Greece and Malta for not levying the correct amount of Value-Added Tax (VAT) on the provision of superyachts. The letter explains that the VAT issue can generate distortions of competition and highlights such schemes’ heavy involvement in the Paradise Papers leaks in 2017.

“In order to achieve fair taxation we need to take action wherever necessary to combat VAT evasion,” comments Pierre Moscovici, commissioner for economic and financial affairs, taxation and customs union. “We cannot allow this type of favourable tax treatment granted to private boats, which also distorts competition in the maritime sector. Such practices violate EU law and must come to an end.”

The letter highlights that, as a result of the Paradise Papers, it has become clear that VAT evasion is widespread in the superyacht sector and that this has been facilitated by national rules and interpretations that do not comply with EU law. As well as launching infringement procedures, the European Parliament has recently indicated that its new committee to follow up on the Paradise Papers will be looking at this issue.

“The announcement means that Malta, Cyprus and Greece now have two months to provide explanations to the EC,” explains Jean-Philippe Maslin of Ince & Co France. “Greece is not concerned with leasing schemes, but instead the latter is targeted because of its interpretation of the ‘use and enjoyment’ rule under the VAT Directive. It is this rule that allows EU Member States to reduce the taxable basis (leading to a lower VAT bill) of an operation, because part of that operation will take place outside the EU territory.”

Maltese and Cypriot leasing schemes operate on a very simple basis: The Lessor supplies a yacht to the Lessee for a period of 1-3 years, with an option to purchase the yacht at the end of the lease.  This supply is treated as a supply of service and, as such, can benefit from a greatly reduced taxable basis because of the fact that the actual ‘use and enjoyment’ of that supply of service will mostly be outside of the EU. At the end of the lease, the Lessee exercises the purchase option and becomes the new owner of the yacht.  This is considered as a supply of goods.  However, the full rate of VAT is only applied on a very residual value of the yacht (1 per cent), meaning that the VAT due is greatly reduced.  In the end, the transfer of ownership of the yacht, over a period of 3 years, is done at a very reduced VAT rate (up to 5.4 per cent in Malta and 3.8 per cent in Cyprus, down from what should be 18 per cent in Malta and 19 per cent in Cyprus).

“This very public announcement means that the industry is now aware that the EU Commission considers the lease structures of Malta and Cyprus to violate EU law,” continues Maslin. “It is likely that the Member States will try to adapt their lease structures to what the EC has in mind. It has no impact on lease operations which are now over, but the future lease conditions may not be as favourable. That being said, leases still have a future in the superyacht market provided they are more in line with a true economic operation.”

In issue 185 of The Superyacht Reportwe explore the continued legitimacy of leasing schemes, owner profiles and best practice. Are you a VIP? Click here to find out whether or not your qualify for a complimentary subscription to The Superyacht Report.


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