VAT Treatment of Yacht Leasing

In order for a yacht to sail freely in EU waters, VAT must be paid in any one of the EU countries on the particular yacht, and it must carry a VAT paid certificate. Malta is one of the EU jurisdictions offering substantial tax reductions by means of lease structures with the added notable benefits that there are no conditions that the lessor and the lessee must have a different beneficial owner nor is it imposed that the lessor must be a financial institution.

At the beginning of 2020, the Commissioner for Revenue issued new guidelines regulating the VAT treatment of the leasing of pleasure yachts. These guidelines substantially reduce the VAT payable on yacht leasing depending on the extent of the use and enjoyment of the yacht in question within EU territorial waters.

A short-term lease is said to cover a continuous yacht chartering period of not more than 90 days. The short-term charter of a yacht to be used for leisure purposes is considered to be a supply of a service which falls within the scope of Maltese VAT and thus, which is taxable at the standard rate of VAT (18%), when the yacht is placed at the disposal of the lessee in Malta.

By default, a long-term lease is considered to be a lease covering a continuous period of 90 days. In the case of long-term yacht leasing to non-taxable persons, Malta VAT would be levied where the lessee is established in Malta or where the lessor is established in Malta and the yacht is placed at the disposal of the lessee in Malta.

The general principle with respect to the leasing of pleasure yachts is that the standard Malta VAT rate applies, i.e. that of 18%, with respect to leasing which is deemed to take place in place in terms of the general VAT rules.

Where certain conditions are met, the lessor can adjust the VAT charged to the lessee such that it should only take into account the actual effective use and enjoyment by the lessee of such pleasure yacht within EU territorial waters.

This scheme however, can only be benefitted from where the determination of the actual time within EU territorial waters is possible. In effect, this would entail the possibility of the lessor claiming a VAT refund where the use and enjoyment of the vessel is less than 100% in the EU.

In principle, should a lessee use the vessel completely outside EU territorial waters, no VAT is due on said transactions. The Commissioner for Revenue shall only consider the place of supply of the hiring of pleasure boats, if situated within Malta, as being situated outside EU territorial waters if the actual effective use and enjoyment of the services, takes place outside EU territorial waters and subject to the conditions stipulated within the relevant guidelines being satisfied.

The Commissioner for Revnenue recognises that lessors of means of transport which are pleasure boats will not be able to assess, at the date of each chargeable event, the extent to which the pleasure boat is effectively used and enjoyed by the lessee within and outside EU territorial waters in those situations where lease payments are payable in advance by the lessee to the lessor.

In this regard therefore, the guidelines issued by the Commissioner for Revenue provide for a method of calculating the VAT payable on a preliminary ratio on the basis of which the first VAT returns and payments are to be made and, an adjustment mechanism to ensure that the payment of VAT reflects the actual use and enjoyment of the yacht by the lessee within the EU.

For the purpose of such calculation, the lessor shall utilise such documentary and/or technological data, including logs retained by the master of the pleasure yacht as well as ant GPS/AIS data, as the lessor can reasonably obtain from the lessee.

The criteria which must be present for one to be eligible to benefit under this scheme are as follows:

• the lessor must be a person established in Malta for VAT purposes and holding a Maltese VAT identification number;
• the lessee must not be a person carrying out an economical activity (i.e. using the yacht for pleasure purposes and not in connection with business activities);
• the lease arrangement must be in line with a yacht leasing agreement between the lessor and the lessee which must be for more than 90 days;
• the vessel in question must be placed at the disposal of the lessee in Malta;
• prior approval must be obtained from the Malta VAT department to apply Malta VAT on the real effective use and enjoyment of the yacht by the lessee within EU territorial waters;
• the lessor must first levy provisional VAT on the lease and thereafter use the adjusting mechanisms;
• annual compliance obligations must be met i.e. VAT returns are to be properly submitted and an annual declaration must be filed with the Commissioner for Inland Revenue.

As the lease of a pleasure yacht is a trading activity, all profits will be deemed to be trading income for the company and therefore taxed at 35%. Nevertheless, the law grants an incentive to foreign shareholders of the Maltese Company by allowing them to claim a 6/7ths refund resulting in an effective taxed rate of 5% on all income tax of the company.

The tax treatment of the dividends distributed and the corresponding refund must however be verified in the jurisdiction where the shareholders are tax resident. Nevertheless, it is also possible to incorporate a second Maltese Company for this purpose as a result of which the tax refund and dividends are received by the second Maltese Company.