VAT and the tax police. There is never a right time to deal with these two elephants that sit quayside in the harbours of Europe. If you are legitimately operating in the EU, you should be free to pass without let or hindrance, but, without clear pan-European guidance on VAT and yachts, mistakes are bound to happen, and will continue to occur until the European Commission issues a definitive legal opinion on the subject.
When our client’s yacht was arrested in Italy in February, we were called by the ship managers to assist with its release. We dutifully supplied all the papers proving that it was lawfully chartering in European waters in accordance with the relevant VAT rules, that she was VAT accounted for and that she was in free circulation. That should have been the alpha and the omega of the yacht’s brush with the Italian legal system.
The yacht, which was built and delivered in 2009, is a wonderful example of what Italian yacht-building is capable of. We were proud to be associated with Italy. There have been a lot of rumours about the case: let us set the record straight. The yacht was owned by an Isle of Man company. She was built to Cayman Island-supervised LY2 and flagged in the Cayman Islands. On delivery she was subject to a legally authorised and regulated intra-community transfer from Italy to the Isle of Man and because she was immediately entering a charter, the yacht didn’t have to actually visit the Isle of Man.
Following the arrest, we were regularly told that it was impossible for an Isle of Man owner to own a Cayman Island-flagged yacht. This is false. We were told that a Cayman Island-flagged yacht had to be exported f rom Italy on delivery, and even if it had not been exported, it would be deemed to have been exported. Again, wrong.
The charges
The charges of VAT evasion were criminal and technically filed against the captain of the yacht. Technically, the captain was charged with firstly illegally importing the yacht into Italy in breach of temporary importation rules, and secondly, trading illegally. The captain specifically was charged with smuggling contraband. The yacht was the contraband. To illustrate the bizarre nature of the case, our client did not qualify for temporary importation and had never applied for it! It is worth noting that the appeal case we filed with the assistance of our colleagues in Italy at the Criminal Court of Cassation in Rome was to all intents and purposes the same case that we filed and was rejected several times by the Court of First Instance. The owner was getting increasingly frustrated.
On the flimsiest of evidence, the public prosecutor argued in the Court of First Instance that because the yacht was flying a Cayman Islands flag and because in their opinion tax had not been paid on the yacht and there was a likelihood the offence could be recommitted, the yacht had to be detained. He said he would ask for the imposition of Article 301 of Presidential Decree 4373, which provides for compulsory confiscation in case of conviction. In other words if we lost, the yacht would be confiscated.
Our defence
We argued that the yacht was built in Italy and VAT on purchase was cleared in the Isle of Man at the time of delivery. The owner was a company established in the Isle of Man which is part of the EU custom territory. Since from the date of delivery the yacht had always been chartering in European waters it was never exported, and as a consequence, it was never imported either. Despite the fact that the yacht was registered with the Cayman Islands, for the purposes of determining the nationality of the yacht, at least in terms of fiscal, tax and customs issues, what was relevant was where the company owning the yacht was established and whether the yacht was cleared by the EU tax authorities in relation to its purchase and its subsequent charter activity. All our customs obligations had been complied with, hence the yacht had to be considered a European yacht. Also, it was wrong of the public prosecutor to argue that we had breached EU temporary importation rules simply on the grounds that it is not possible to import assets that are already community assets.
The verdict
In upholding our appeal at the Court of Cassation, the judges started by saying that for there to be a breach of the rules of temporary importation there must be an infringement of the regulation. The court said that the offence of smuggling as provided for by customs law is prejudicial to a state’s financial interests, and can only happen if someone clandestinely or fraudulently transports an asset subject to customs duties beyond the control of the customs agents. The judges said that the public prosecutor gave scant review of the facts. The court said simply flying the flag did not by itself prove that the yacht has been exported and then reimported. It closed by saying that because the crime was impossible to commit, the yacht had to be released.
What was particularly frustrating was that what took the Court of Cassation a few minutes to understand had been ignored for months by the authorities and The Court of First Instance, as was mountains of evidence.
The consequences of this case are far-reaching. In Italy, there is now absolutely no bar on flying a non-EU flag when chartering within Italian waters if you are commercially operating and have established yourself appropriately in the EU and have legally dealt with VAT. This may be persuasive elsewhere in the EU. A breach of the temporary importation regime can only happen if you have exported the yacht from the EU in the first instance. There is no deemed exportation. The court also reconfirmed intra-community transfers are legitimate.
So where next for Italian and the other EU customs authorities? I venture to surmise that they will look at the preconception that non-EU flags are ‘bad’ from a tax perspective and they have to accept that non-EU flags can have an EU tax nationality that puts them on a level playing field with EU flags. What started as a simple arrest may have opened up a whole range of issues the Guardia di Finanza and others were not expecting.