Ever since I have been involved in this industry, there has always been a sense of entitlement to build, buy, sell, charter and otherwise generally use superyachts tax free. For 15 years, probably the first or second question that I will be asked by an owner in any transaction would be “how do I avoid paying VAT?”, and over the years, we have seen a lot of structures and practices come and go. There were any number of inventive Dutch, Italian and French lease structures, as well as sale and lease back structures based in the Isle of Man — a new incarnation of which has recently emerged in Monaco. Then there was the much heralded French Commercial Exemption, which the European Court of Justice eventually declared illegal last year.
Most recently, the VAT mitigation structures that everyone seems to flock to are the aggressive Maltese and Cypriot leasing schemes. These are currently bizzarely legal because they are Cypriot and Maltese government backed. But question remains: are they truly legal?
These lease structures allow a yacht owner to pay effective rates of VAT as low as 3.4% on yachts over 24 meters in Cyprus, and 5.4% in Malta. These schemes are not without criticism, and using the Cypriot and Maltese lease structure for a UK resident if HMRC are to be believed, is as useful as a chocolate tea pot.
The UK authorities say that where a superyacht has been supplied in circumstances where they think there is a contrived leasing or chartering set up for the ultimate beneficial owner and that same person provides the funds that are used to pay for the superyacht directly or indirectly, they will investigate, as well as where a superyacht is chartered or leased to an individual where no or only a minimal amount of VAT has been paid. And just because your yacht doesn’t come to the UK don’t think HMRC can’t dive into your tax pocket. EU tax authorities all help each other to investigate escaping tax. Tax abusive activity as it applies to VAT, was established in the 2006 Halifax case at the European Court of Justice. If there is no commercial rationale for the VAT avoidance other than the saving of VAT, then you are out of luck. Using the reasoning of the European Court of Justice both Malta and Cyprus would fall foul of Halifax, yet both schemes are “legally” offered.
Malta, Cyprus, and private companies are in a rush to sell as many of their schemes before the curtain comes down and they do fear that show is almost over. Following the European Commission’s battles with France over the French Commercial Exemption, VAT and superyachts are firmly on the EU’s radar. The European Commission is well aware that schemes are being promoted to superyacht owners with the aim of avoiding or evading VAT. This issue is being closely followed up not only by the European Commission but by individual member states in order to tackle, what they say, is fraud and avoidance. This is part of a broader campaign within the European Commission to tackle general VAT avoidance and fraud. Last September, the European Commission reported that EUR 193bn had been illegally avoided or evaded. The Commission says in the report “that tougher action against tax evasion and stronger enforcement at national level is needed”. On 22 May 2013 the European Council proposed that “member states should seek ‘smoking gun’ data on tax evasion from other government maintained registers such as databases on motor vehicles, land, yachts and other assets, and share these with other member states and the Commission”. The European Council has called on member states to implement a general anti-abuse rule to counteract aggressive tax planning practices and to foster an environment where the role of the civil society in exposing cases of tax fraud and tax havens will be fully protected, by setting up effective systems for protecting whistle-blowers and journalistic sources. What are the chances of disgruntled crewmembers handing their owners into the authorities?
On 5 December 2013, a European Commission memo (MEMO/13/1096) stated that “The cross boarder nature of tax evasion and avoidance (…) make it very difficult for purely national measures to have the full desired effect”.
A spectre is haunting the European superyacht community and that is a determined European Commission arming itself to make superyacht owners pay the full rate of VAT on their yachts. You have been warned.