“Just because you get away with it, doesn’t make it legal.” When these words are proffered by one of the industry’s most respected lawyers, owners should probably heed them. According to Clyde & Co’s John Leonida, this statement is particularly true when it comes to the utilisation of protracted leasing schemes and aggressive tax avoidance structures for the sale and purchase and registration of commercially operated superyachts.
In recent times scrutiny of tax avoidance schemes has become more focused within EU jurisdictions. With a wave of public pressure on fiscal authorities to clamp down on such practices, the assets of UHNWIs have become targets for the taxman, and as one would expect their superyachts are somewhere near the top of the list.
Using protracted legal mechanisms to reduce the cost incurred may be an age-old practice. But the emergence of ‘leasing’ schemes in Malta and Cyprus, whereby the vessel is effectively sold from the holding company to a company specifically established in one of the aforementioned jurisdictions to reduce the rate of VAT incurred on the transaction, has attracted unwanted attention from EU member states under pressure to balance their books. “These schemes are not commercial leasing schemes by definition and they are bringing the industry into disrepute,” says Albert Levy, partner at Ince & Co. “By not making [owners] pay anywhere near what normal people pay, it ruins reputations.”
In response to these schemes, HMRC has published a note on its website, stating that, for those who fall under its auspices at least:
Where there is evidence to suggest that a vessel has been supplied through one of these schemes we shall carry out a full investigation of the facts surrounding the supply and take any necessary action.
Under the Mutual Assistance Programme, EU member states are required to detain a vessel at the request of another member if there is due cause to believe there has been an infringement of some kind. Therefore, although only a handful of vessels enter UK waters, UK-based owners could still find themselves the target of a detention if HMRC decided to pursue these schemes more determinedly.
“There is nothing illegal about either of these structures yet,” says Leonida, “but they should come with a huge health warning.” He feels it is the responsibility of the industry’s bevy of advisers to make owners aware of the underlying question marks that surround protracted leasing and ownership schemes in the eyes of tax authorities. “If owners are going to pursue these aggressive structures then they must do so with their eyes wide open,” he says. “And they should have all the consequences laid out for them; they can’t assume that because a tax adviser says it’s OK, the relevant tax authority will take the same view.”
It’s true that the new information sharing initiative implemented by Europe’s major powers “will test your own veracity”, as Levy says. “If an EU resident is operating their vessel in EU waters they should have paid VAT on their vessel,” he stresses. “The rules are relatively easy, and whereas before people tried to reduce their VAT bill by going commercial, now [the relevant authorities] need to see that you’re actually operating a profitable business.” It seems increasingly apparent, and altogether legitimate, that if some yachts rarely ever make a profit, they cannot be classified as businesses, and as such will be subject to VAT charges.
As has been well documented across The Superyacht Group’s portfolio, interest in the application of tax to superyachts has piqued in Brussels and the structures that have reduced tax burdens in the past are now under much greater scrutiny on the part of customs authorities. And with this in mind, Leonida believes that the significant portion of the global fleet that wishes to operate with commercial status within EU waters will soon have to do so under one of the EU state flags. “If Greece and Spain are saying ‘you have to have an EU flag’, where does that leave the Italians?” he proffers. “You have your main ports of destination – Italy, Greece, France, Spain – all of which are directly or indirectly anti-non-EU flag for commercial purposes, so why would you fly anything other than an EU flag?” Ironically, considering the widespread criticism of the Maltese leasing scheme, if there were an exodus away from non-EU flags in the medium term, one would imagine the major beneficiary would be the Maltese flag.
Registering in tax-exempt jurisdictions and purchasing the vessel through artificially constructed leasing schemes are unquestionably means of tax avoidance and fiscal authorities in Europe now take a very dim view of such practices. And while they are in no way illegal, and do not themselves restrict cabotage within the EU, a prudent owner should be thinking about the long-term lifecycle of his vessel, rather than short-term cost reductions.
“I don’t want to be alarmist about these matters,” Leonida says, “but an owner should now be asking, ‘Am I entitled to this particular tax break, and if someone deems that I’m not, what are the consequences of that?’”
For Simon Cardiff, whose private client division of Carey Group Marine Services has taken a ‘business lifecycle’ approach to the management of his clients’ assets, including superyachts, the savvy owner does not opt for the structure that simply facilitates the purchase of the yacht, but the structure that controls all of the corporate activity of the yacht.
“When owners take advice on structuring they need to do so from a professional with indemnity insurance covering that advice,” he says. “Owners may want to mitigate VAT but they need to ask themselves ‘why?’ Does it allow them to do what they want to do with their yacht?”
For Cardiff, “taxable persons must pay tax on their taxable assets”, and that is a fundamental starting point that owners have to start accepting. The protracted structures that have emerged to reduce the initial cost are, if nothing else, antagonistic, and invite greater pressure on the fleet as a whole from legislators. The onus of responsibility, though, falls upon the specialist advisers that are guiding owners towards ownership structures; it is their responsibility to make their client aware of the likely interpretation of such a scheme, and the possible implications of pursuing it.
“Anyone can set themselves up as a CSP [corporate service provider], and they’re essentially administrators who can publicise a leasing scheme and offer to set it up for you,” Cardiff explains. “But they’re not the people owners should be going to; they should be speaking to lawyers, who are the experts, because they are the ones who can provide answers on these issues.”
While the writing may not yet be on the wall for these ‘aggressive’ ownership structures, their long-term durability is certainly under question from the legal fraternity. So it seems only prudent for potential owners to consider the advantages of structuring the yacht’s entire lifecycle, and not just the benefits of reducing the initial purchase price.
This article originally appeared in The Superyacht Owner.