BOFIP 12.05.15: Changing the game but for the long-term good

The Bulletin Officiel des Finances Publiques-Impots (BOFIP) of May 12, 2015 which integrates the existing French Commercial Exemption (FCE) has already generated a lot of chatter and some concern.

The scope of the amendment is far reaching and will impact the industry in a number of ways, mostly for the good. Also, given the intricacy of EU VAT regulations (which the yachting industry has been bemoaning for the past few years), it introduces one welcome element: clarity.

In the long term, although it will take some time to fully incorporate the changes into industry practices, the rules governing commercial vessels will enhance rather than hinder yachting in France.

So what is it all about?

The amendment concerns the commercial status of yachts and further clarifies which criteria commercial yachts must meet in order to enjoy VAT exemption on the supply of goods and services purchased in France.

Although we are talking about VAT, the amendment to the exemption does not concern the VAT due on charter fees which must be paid by the end user. VAT regulations in place for charter in France remain the same as before.

What are the new criteria?

Since 2004, in order to enjoy the benefits granted by the French Commercial Exemption, commercial yachts had to comply with the following three requirements:

• The yacht must be registered as commercial and this status must appear on registration documents

• The yacht owning company must employ permanent crew on board

• The yacht must be used exclusively for commercial purposes, i.e. under a charter agreement. (BOD n°6603 of 24.06.2004 also provides that the vessel may be used by her beneficial owners but only under a charter agreement and on condition that charter fees are paid at market rate. Moreover, the vessel may not only be used by her beneficial owner/s but must also be chartered to genuine third parties on a regular basis).

The changesof 12.05.2015 introduce one further requirement: “70% of cruising must be outside French waters”. Outside French waters means either EU waters, foreign waters worldwide and international waters.
This new “70% rule” sounds daunting at first. In reality, it will be easy for most commercial yachts with an ongoing charter program to meet the requirements.

Let’s clarify immediately that the 70% rule entails two conditions:

The first is that a yacht must perform more dynamic charters than static charters.
The second is that 70% of the trips must have a cruising itinerary outside French waters.
And all trips count. Any trip carried out from Jan 1 to Dec 31 in any given year in whatever waters worldwide outside France’s jurisdiction (Monaco counts as France in this case) can be counted towards the requirements imposed by the 70% rule.

It is also important to remember that static charters do not count towards meeting the requirements of the 70% rule. However, a Nice-Nice charter complies as long as the itinerary includes other EU and/or international waters as proven by the yacht’s navigation records (GPS, AIS for instance).

The Bulletin also makes a very important point with regards to ‘trips’ mentioned above (trajets). The text states that “70% results from the ratio between the number of trips during which the yacht leaves French territorial waters in the calendar year preceding the VAT exemption and the totality of trips carried out during the same period of time”.

The text defines what trip means. “Bytrip we mean all commercial navigation carried out between two ports where operations of embarkation/disembarkation of passengers are carried out and if navigation has included national, EU and international waters”.

This means that each charter contract will include at least one trip – but can include more than one.  Each time charter guests embark and/or disembark at any point during the cruise this de facto triggers the beginning of a new trip (under the same charter contract) which counts towards the 70% rule.

How does this work in practice? If a yacht performs twelve charters during the season, two of which are static, the percentage calculation will be done on the number of dynamic charters only, in this case ten. During five of the ten charters, some guests disembark and other guests embark halfway into the cruise. So we are looking at ten charters which include fifteen trips.

Since dynamic charters constitute the majority of business, the first condition is met.

To comply with the second condition, 70% of trips must be outside French waters. This means 70% of the above fifteen trips, i.e. 10.5 trips.

The correct computation of the number of trips included in each charter contract is critical since it impacts the overall number of trips and affect the yacht’s right to benefit from the French exemption. The yacht’s logbook and charter guest lists must be accurately maintained to reflect the exact itinerary and changes in guests.

If just one of the conditions is not met, the yacht will lose its right to benefit from the French VAT exemption. This does not mean a yacht cannot charter, it simply means that it will have to pay VAT on the purchase of all goods and services purchased in France.

With regards to new-build yachts, the sale of pre-owned yachts, and/or yachts carrying out charter activities in French waters for the first time, yachts will be VAT exempt for the first year during which they must fulfill the conditions imposed by the 70% rule if they want to benefit from the VAT exemption.

The impact of losing the exemption is significant since, in addition to VAT on the purchase of goods and services, VAT would be charged on all works carried out in French shipyards as well as on supplies.

The provisions included in the Bulletinwill come into effect in 2016. The 2015 cruising itineraries will provide the basis for the assessment and only yachts that meet all conditions of the 70% rule will be granted an exemption for 2016. However, if a yacht loses the exemption in France for one year and having the exemption is a priority, it can work out a charter schedule which will enable it comply in the following year. Meanwhile, input VAT is computed against output VAT and, if the balance is a credit, the owning company can request a refund from the authorities.

As we have seen, this can be tricky and depends on existing bookings, which might have been made months ago without knowing about the new rules that will impact the yachts’ VAT situation for 2016. Some yachts may have booked charters with alternating guests and trips mainly in French waters. This might create an obstacle to compliance. Ultimately, it will mean that yacht owning companies will pay VAT on all supplies and services in 2016, or until they qualify for the exemption under the new rules, offsetting input and output VAT. The commercial status lasts for one calendar year (Jan 1-Dec 31) and is renewed on a yearly basis.

In addition to static charters, navigation for sea-trials or to a shipyard may not be included in the percentage calculation since the voyages are not related to a charter contract.

While providing much-welcomed clarity, for owning companies wishing to retain the commercial exemption for 2016 and years subsequent, the provisions of the May 12th, 2015 Bulletin will entail careful calendar checking as well as planning by owners and charter managers to ensure charters and subsequent navigation comply with the 70% rule.

One final point. It is important to remember that the changes have been driven by EU rather than French law. Historically, the French authorities have been pro-yachting and well aware of the substantial direct and indirect revenues it generates.

In 2013 the European Court of Justices ruled that France did not comply with article 148 of the VAT Directive 2009/112 since the commercial exemption was not limited to yachts navigating on high seas. The European Commission forced France to review and rectify their current regulations. However, under this ruling, the exemption could be applied to commercial vessels ‘effectively’ and not ‘exclusively’ dedicated to navigation in the high seas.

So the French authorities looked to the aviation industry for inspiration. If at least 80% of the aircraft activities take place abroad, a number of services are VAT exempt (supplies, maintenance, to name a few). This principle has been adopted for yachting, with twist: we have a 70% (not 80%) rule.

Increasingly precise parameters will be established across the EU in the coming years. It is only to be hoped that they will be as well-crafted as the French Commercial Exemption. 

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