Plans to sink favourable VAT regime for large yachts

The European Commission has signalled its intention to crack down on VAT evasion in the maritime sector, by opening infringement procedures against Cyprus, Greece and Malta for not levying the correct amount of VAT on the provision of yachts

The move follows revelations in the Paradise Papers of widespread VAT evasion in the purchase of ‘private boats’, which the EU believes is facilitated by national rules which do not comply with EU VAT law.

The European Parliament has recently indicated that its new committee to follow up on the Paradise Papers would also consider this issue.

The Commission is looking at two areas in particular. The first is a reduced VAT base for the lease of yachts provided by Cyprus, Greece and Malta. While current EU VAT rules allow member states not to tax the supply of a service where the effective use and enjoyment of the product is outside the EU, they do not allow for a general flat-rate reduction without proof of the place of actual use.

Malta, Cyprus and Greece have established guidelines according to which the larger the boat is, the less the lease is estimated to take place in EU waters, a rule which greatly reduces the applicable VAT rate.

The second is the incorrect taxation in Cyprus and Malta of purchases of yachts by means of what is known as 'lease-purchase'. The Cypriot and Maltese laws currently classify the leasing of a yacht as a supply of a service rather than a good. This results in VAT only being levied at the standard rate on a minor amount of the real cost price of the craft once the yacht has finally been bought, the rest being taxed as the supply of a service and at a greatly reduced rate.

Pierre Moscovici, commissioner for economic and financial affairs, taxation and customs union, said: ‘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 three member states now have two months to respond to the arguments put forward by the Commission. If they do not act within those two months, the Commission may send a reasoned opinion to their authorities.

Philip Munn, VAT partner at RSM, said: ‘Clearly, many European tax authorities are under significant pressure to address the revelations contained in the Paradise Papers.

‘The language being used by EU commissioner Pierre Moscovici leaves no room for doubt. The European Commission believes that Cyprus, Greece and Malta have facilitated VAT evasion by endorsing these arrangements.

‘Brexit already cast doubt on the EU VAT paid status of yachts in the UK, for some buyers these changes are likely to create more uncertainty.’

Report by Pat Sweet

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