Following the uncertainty surrounding the end of lump sum VAT reductions on charters starting from France, especially in terms of how VAT reductions were to be granted under the new system, an official French tax announcement has been made by BOFIP that defines how the system will be implemented. BOFIP has confirmed that the new rule is based on the principle that VAT is charged at the full rate (20 per cent) for the time that the yacht is in EU waters, and no VAT is applicable while in international waters or non-EU waters. VAT will be applicable in the country where the charter begins.
“Due to the acceleration in the European Commission’s action against leasing structures in Cyprus and Malta, the commission is now required to apply similar standards to short-term charters, given that leasing is essentially a long-term rental contract,” starts Thierry Voisin, president of the ECPY and partner of SOS Yachting. “Superyachts were able to pay five per cent VAT on the basis that they leased the vessels from outside the EU. However, the majority of these vessels spend most of their time in EU waters. Therefore, the commission has returned to its original principles, whereby you must pay the full rate of VAT while you are in EU waters and no VAT when you are not in EU waters.”
The major clarification concerns how the new rules will be applied. There had previously some discussion about whether or not future reductions would be based on time outside EU waters or the distance travelled outside EU waters. However, given that standard rental contracts are based on time, the same principles have been applied to the reduction of VAT on superyacht charters.
“Time is the usual term applied to rentals,” continues Voisin. “Distance is typically applied to transport contracts, which is the measurement that the Italian industry is trying to get applied to charter contracts and VAT reductions because distance works more favourably for the charter market.”
Imagine, for instance, a weeklong charter that begins in mainland France and ends in Corsica. Assuming that the journey to Corsica requires around 10 hours spent outside of EU waters, the client would be required to pay the full rate of VAT for the other 158 hours of the trip. However, if you calculated the reduction based on distance, the client travels a total of 300 miles over the course of the trip, with around a third of the total distance travelled being in international waters, meaning that relatively speaking there would be a far larger reduction in VAT.
In France, however, this system has been resoundingly rejected. While the BOFIP announcement has clarified how any reductions are to be calculated, there still remains questions over how the system is to be used in practice. With a public consultation process lasting until March 2020, there is still time for the practical elements of the rule changes to be fleshed out and confirmed. It has, however, been confirmed that AIS data will be an acceptable form of proof, provided the system has not been tampered with.
“The final hurdle is to clarify the enforcement rules,” says Voisin. “How, precisely in this case, will time outside the EU be calculated and how will this be checked. What we don’t was to do is assume these things and find out when the change is implanted that many charters aren’t applying the principles correctly.”
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