Chartering out a yacht in EU waters is treated as a supply of services and is therefore a taxable supply for VAT purposes. Genuine yacht charter structures are able to reclaim any VAT paid on the supply of the yacht or may even be zero-rated, but the rules and regulations differ from member state to member state.
EU VAT-registered commercial yachts should be free to trade within EU waters provided they are carrying out a legitimate chartering business and VAT chargeable on acquisition, importation or earnings is duly accounted for in the EU, regardless of flag.
A key step is to decide on a suitable location for the establishment of a corporate structure to own the yacht and act as the charter business. EU companies or a company incorporated in a country or territory that holds a double taxation agreement with the relevant EU member state where the vessel will charter are commonly used to avoid withholding tax on charter income and cabotage restrictions in certain EU states.
The most popular jurisdictions for setting up yacht charter structures operating in the EU are Malta and the Isle of Man.
The commercial aspect of the company is not only important to obtain VAT registration, but also for the on-going operation of the yacht. Conditions for a commercial exemption to apply include:
- The vessel must hold a commercial yacht registration
- Documentary evidence of an operational structure such as a yacht management company, a charter broker negotiating the charter contracts, accounting activity of the charter income and expenditures, along with invoices and a bank account for receiving chartering income.
- The vessel is supplied with a permanent crew and is available for high season charter.
It is acknowledged that the beneficial owner of the company may wish to use the yacht. In such circumstances, a genuine charter contract should be in place and the charter fee should be appropriate to the value of the yacht. Full accounting evidence and records of the payment made by the beneficial owner to the owning company should be kept and reflect the cash flow of the chartering activity, and the duration of the charters undertaken by the beneficial owner should be of a limited time.
Any arrangement that is deemed to have VAT avoidance as its principal purpose, and which lacks an underlying commercial objective, may be challenged by the EU authorities as being abusive. For example, the UK HMRC has issued a guidance outlining features that might indicate an abusive structure, as follows:
- The main user of a pleasure craft is the ultimate owner of the chartering or leasing entity.
- The main user of a pleasure craft funded the purchase of the vessel (directly or indirectly).
- The person who funded the purchase of a pleasure craft (directly or indirectly) uses the vessel for prolonged periods in the peak chartering season.
- The chartering of a pleasure craft to third parties would not, alone, be of sufficient continuity and substance to comprise an economic activity.
- The chartering or leasing entity shows significant ongoing losses in its financial statements.
- Charter fees or lease instalments due from the main user of a pleasure craft are paper transactions only (for example being offset against loans).
- Charter fees or lease instalments are below open market value.
- The terms of a lease differ significantly from normal commercial practice (for example, the duration of the lease is unusually long).
If HMRC concludes that a structure meets the tests for an abusive practice then it will consider appropriate action to restore the situation that would have existed in the absence of the abusive transactions. This might include issuing assessments to disallow input tax and/or deregistration of the entity concerned. Such assessments might also give rise to interest charges and penalties.
Please contact SMS for further information or assistance.