In order to understand the relevant context for an analysis of tax for yachting and marina services in the Mediterranean region, it is helpful to provide a brief explanation of the nature of this business.
Services offered by marinas include wet storage and anchorage, boat servicing, repairs and chandlery, accommodation and recreational amenities. The provision of charter services for yachts is another major revenue center for many marinas, as many global yacht charter companies use the region for staging yachts for bareboat charters.
In terms of services for boats, many marinas have installed fuel docks, pump-out and haul-out equipment, and also provide an extensive range of repairs, including electrical services, mechanical and diesel, scraping and painting, sail making and repairs, upholstery, and woodworking.
Analysis of Value-added Tax
Council Directive 2006/112/EC on the common system of value-added tax (the Recast Sixth VAT Directive) was implemented in France. A taxable person for value-added tax (VAT) purposes is any person (individual or legal entity) who independently carries on an economic activity in France, regardless of his legal status, his position with regard to other taxes and the nature or form of his activities. “France” refers to metropolitan France, Corsica and Monaco.
The following is an analysis of the VAT implications for yacht services:
- Yacht charter services—charter services are subject to VAT of 20%. VAT is due in the place of supply, the place where the yacht is made available to the charterer. If the charter started in France, VAT would be applicable in France. There is an argument within the superyacht industry in France that charter hire charges for yachts which include international voyages could be subject to a VAT rate of 10% instead of 20%. In this regard, charter companies that make international voyages could opt for the prorate, if the time spent inside and outside of French internal waters can be demonstrated, i.e. a yacht exits the 12 nautical mile limit from the coastline and enters international waters during the charter. A yacht operator should also consider that 70% of trips must be international trips in a year. There is a mandatory requirement to maintain documents to claim concessional VAT—charter agreement, log book and other supporting documents. The charterer will be required to produce or submit these for verification during a tax audit.
- Boat servicing, repairs and chandlery services—the place of supply of services rendered to a non-taxable person by an intermediary acting in the name and on behalf of another person is in France provided that the place of supply of the underlying transaction is located in France and is subject to VAT of 20%.
- Fuel—Article 265 of the French Tax Code was modified on January 1, 2014 to read that only vessels used commercially by their end-users can benefit from excise duty exemption. Hence, yachts chartered for recreational purposes are excluded from the excise exemption on fuel supplies, as their end users do not use them for commercial purposes. As such, any fuel (bunker) purchased in France will be subject to excise duty of 50% of cost of fuel.
- Anchorage tax of 20 euros ($22.50) per day per linear meter.
- Wet or dry storage services are treated as supplies provided in France, subject to the standard rate of VAT of 20%.
It is necessary to appoint a fiscal agent/representative in France and/or Monaco depending upon where the charters start and to obtain a French/Monaco VAT number.
VAT is applicable on supplies made during the exercise of a trade or business, or an entrepreneurial, artistic or professional activity. Under Article 4(5) of the relevant Italian VAT Law, pure holding companies are excluded from the definition of taxable persons if their activities are limited to owning ships for the private use of shareholders or their families, free of charge or for consideration below normal value.
A supply of services is defined under Article 3 of the Italian VAT Law as the performance for consideration of services for procurement, transportation, shipping, brokerage, warehousing and other services under an obligation to do, refrain from doing, or permit something. The place of supply is Italy if:
- passenger transport in Italy is in proportion to the total distance traveled in Italy;
- short-term vehicle leases in Italy if the vehicles are made available to the client, for vessels up to 90 days.
Short-term hiring out of a means of transport, both to businesses and private customers, derogates from the general place of supply rules. According to Article 7(1)(e) of the VAT Act, the service is taxed in Italy if the means of transport are put at disposal in Italy, provided that they are used in the territory of the EU, or, if the means of transport are put at disposal outside the territory of the EU, when they are used within Italian territory. “Short-term” supplies means over a period of time not exceeding 30 days: for boats, this term is extended to 90 days. So a foreign flagged yacht can qualify for short-term hiring, if it is hired for 90 days for recreational or pleasure trips within Italian water.
Article 7(1)(e) of the VAT Act provides a special VAT regime concerning the supply (i.e. long-term hiring) of pleasure boats—such type of supply is deemed to be carried out in Italy provided that:
- the pleasure boat is made available in Italy by a supplier that is a taxable person established in Italy, and the pleasure boat is used within the territory of the EU;
- the pleasure boat is made available outside the territory of the EU by a supplier established in a non-EU member state, but the pleasure boat is used in Italy;
- the pleasure boat is made available in a country different from the country where the supplier is established, but the principal is established in Italy and the pleasure boat is used within the territory of the EU; or
- the pleasure boat is made available in a country different from the country where the supplier is established, and the principal is established outside the territory of the EU, but the pleasure boat is used in Italy.
Such services are deemed to be VAT relevant in Italy if the ships are used in Italy. The leasing or hiring of movable goods, including means of transport, is a supply of services.
- Yacht charter hire charges—since 2012, all charters starting in Italian waters are subject to Italian VAT of 22%. Nevertheless, according to Circulars and related rulings this VAT rate is reduced depending on the size of the vessel (based on a deemed use outside of EU waters, on the same principles as VAT applicable on Italian leasing schemes). The VAT rate applicable to charter yachts over 24 meters starting their charter in Italy and cruising in and outside of Italian waters is reduced to 6.6%. There are documentation requirements to prove that a cruise is in international waters—the charter agreement, log book, etc.
Italy has implemented the principle of use and enjoyment (EC Dir 2006/112 art 59b). In contrast to other EU countries, if a charter starts outside the EU (e.g., Montenegro, Turkey) and then enters Italian waters, VAT at the reduced rate of 6.6% (or higher for yachts below 24 meters) will apply only to the portion of the charter taking place in Italy.
- Boat repair services and chandlery services—the place of supply for services performed on movable property is in Italy when they are supplied to taxable persons established in Italy. If the recipient of services is a non-taxable person established in Italy or nonresident person, the place of supply for the services performed on movable property is in Italy when those services are carried out in Italy. As such, any boat repair services are subject to VAT of 22%.
- Fuel—duty free fuel rules are similar to France: vessels used commercially by their end-users can benefit from excise duty exemption. Hence, yachts chartered for recreational purposes are excluded from the excise exemption on fuel supplies, as their end users do not use them for commercial purposes. As such, any fuel (bunker) purchased in Italy will be subject to excise duty of 50%.
The “Spanish VAT territory” comprises the Spanish mainland, the Balearic Islands, the air space corresponding to these territories and 12 nautical miles of territorial waters. Ceuta, Melilla and the Canary Islands are excluded from the geographical scope of the VAT Law. The Canary Islands, however, are part of the Spanish Customs Union.
The general rule is that the place of supply of services to a taxable person acting as such shall be the place where that person has established his business, whereas the place of supply of services to a non-taxable person shall be the place where the supplier has established his business.
- Hire—a hire is treated as a short-term hire if it is for:
- a maximum of 30 days with respect to vehicles; and
- a maximum of 90 days with respect to vessels.
In the case of a short-term hire, the place of supply is the place where the vehicle is put at the disposal of the recipient.
In the case of a long-term hire, the general rule for business-to-business services is applicable. In a business-to-consumer situation, the place of supply is where the customer is established, has his permanent address or usually resides.
However, the place of hiring a pleasure boat to a non-taxable person, other than short-term hiring, shall be the place where the pleasure boat is put at the disposal of the customer. This exception is applicable under the condition that the service is provided by the supplier from his place of business or a fixed establishment situated in the Spanish VAT territory. Boat charter hire charges are subject to VAT of 21%.
- Repair or valuation services provided to a private person are deemed to be supplied at the place where they are physically carried out. The place of supply of these services to a taxable person is the place where the customer is established. As such yacht repair and maintenance services are subject to VAT of 21%.
- Fuel or bunker for yachts is subject to VAT of 21% and additional excise duty of 12%.
Charter Hire Charges
Companies that are resident in any of the offshore jurisdictions and derive income or capital gains from Spanish, French or Italian sources will not qualify for the tax benefits available to nonresidents in general or to EU residents in particular.
Expenses on services related to transactions carried on, directly or indirectly, with persons or entities resident in an offshore jurisdiction, or services paid through persons or entities resident in a tax haven, are not deductible for tax purposes (unless it can be proved that the expense is related to a transaction carried on for valid economic reasons). Withholding tax rates can go up to 33%.
In Spain and the Balearics, withholding tax has been applied since 2014 and is collected by the fiscal agent who has been appointed by the yacht owner as part of the prerequisite arrangements before any yacht can commence charter operations.
The French authorities are currently enforcing this tax when the charter brokers hold funds in a French bank account and funds are transferred to yacht-owning companies from non-tax treaty territories. The responsibility falls to the French management or charter company to pay the withholding tax to the French government; however, most charter brokers bank outside of France.
Tax is rarely straightforward and VAT in relation to yachts is no different. Yacht owners should be aware that each member state has a certain level of discretion as regards the interpretation, implementation, administration and enforcement of the EU legislation regarding VAT.
This can cause difficulties in interpretation and of course, different members may charge VAT differently on various types of yacht services. Yacht owners may check whether they qualify for commercial exemption rules in France or Italy and claim VAT-free supplies such as fuel for yachts. Charterers may also check if they can claim reduced VAT on charter hire for international voyages.
Transport contracts for providing transport services can also be considered as an option.
Yacht operators must maintain detailed documents such as charter agreements, service agreements, log books, invoices, customer details, etc., to claim concessional VAT for submission before the tax authorities during audits.
All yacht-owning companies established in territories that are undertaking charter activity should consider restructuring arrangements. Migration of the existing company, or establishing a new yacht-owning company in a more suitable jurisdiction that does not trigger withholding tax issues, is the preferred option.
There are several other factors to consider in the restructuring arrangements including crew employment and payroll, suitability of flag, the yacht’s “in free circulation” status, financial arrangements and the physical location of the yacht.
Marina businesses can take advantage of the benefit of accelerated depreciation or investment credit, which is deductible or adjusted against corporate tax liabilities.
A leasing agreement can be explored, under which the lessor retains ownership and receives a favorable tax treatment if certain conditions are fulfilled.
Rajeev Agarwal is Head of Global tax with Qatar Navigation QPSC. He may be contacted at: firstname.lastname@example.org.
Disclaimer: The content of this article is intended for general information purposes. You should always seek professional advice before acting. No responsibility is taken for any loss because of any action taken or refrained from in consequence of its contents.